Brace for high pump prices: Kenya’s shrinking subsidy budget forces 90-day tax relief extension
Government heavily subsidised pump prices between April and June this year in the wake of the US-Iran war.
The State is seeking to extend the eight per cent Value Added Tax (VAT) on diesel, petrol and kerosene from today to mid-December this year to cushion consumers from costly fuel amid escalation in the Middle East war.
This is through the State-sponsored Tax Laws (Amendment) Bill, 2026, which, if approved, will see the current VAT of eight per cent extended by 90 days. The current rate was set to lapse today (October 14,2026), the day when the State will announce new pump prices for the month to November 14.
But a re-escalation of the US-Iran conflict last month sparked a rally in global prices of Brent crude, setting the stage for a spike in local prices unless the State intervenes in the form of a subsidy or extension of the eight per cent VAT rate.
Local oil marketers had warned that consumers should brace for costly fuel in the new prices to be set on October 14 unless the State intervened, adding that prices of petrol rose by $87 (Sh11,286.51) per cubic metre and $57 (Sh7,394.61) for diesel in the first nine days of last month.
Prices of Brent crude have oscillated between $101.21 (Sh13,130.99) and $106.65 (Sh13,836.77) since start of last month, setting the stage for a rise in prices of refined fuel.
Brent crude is the primary international benchmark used to price roughly two-thirds of the world's traded crude oil, underscoring why the current price rally will hit Kenya and other countries that are net importers of refined fuel.
“Notwithstanding the provisions of sub section (2), the rate of tax for the following items shall be eight percent of the taxable value,” the Bill, sponsored by Majority Leader Kimani Ichung’wah reads in part.
“The object of the Bill is to amend the VAT Act to provide the rate of Value Added Tax on petroleum products at eight percent. This is a tax measure intended to continue cushioning citizens from the rising global prices of fuel.”
It is likely the State will extend the rate of eight per cent when it announces the new prices for the month to November 14, before Parliament passes the Bill to regularise the extension.
A litre of diesel is currently retailing at Sh217.86, while that of petrol at 214.03 in Nairobi, prices that will lapse at midnight on Wednesday.
The quest to cushion consumers via a lower VAT rate on fuel has come at the expense of revenue collections, with the Kenya Revenue Authority saying that the government forgo Sh9.1 billion in April and May or an average of Sh4.5 billion a month.
Extension of the eight percent to December this year could see the government potentially forgo upwards of Sh36 billion in VAT collection.
A near depletion of the subsidy kitty has made a lower VAT rate a critical cog in the State’s effort to avert steep rises in pump prices.
The Ministry of Energy and Petroleum had in June this year warned that the subsidy kitty was running low due to steep subsidies applied since the start of the Middle East war, making it difficult to cushion consumers in the coming months.
For example, the State applied a record-high subsidy of Sh34.07 per litre of diesel to prevent prices of the commodity from rising in the monthly cycle to July 14 this year.
Without the record high subsidy, a litre of diesel would have jumped to Sh252.86 in that monthly cycle from Sh222.86, triggering a surge in the cost of services and goods.
The subsidy kitty is funded via the Petroleum Development Levy (PDL), which is charged at Sh5.40 per litre of diesel and petrol and Sh0.40 for every litre of kerosene.
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