NAIROBI, October 31 – The government has reduced the Value Added Tax (VAT) on electricity from 16 percent to 12 percent.
Acting Finance Minister Mr John Michuki announced on Friday that VAT had also been reviewed by the same margin, at the electricity generation and supply levels and this would translate to a 35 percent reduction on the overall cost of power.
“With effect from today, the VAT has been removed at the supply side of oil and also at the second tier that is in production. The VAT which is also charged on the bills has also been revised so everybody in the chain will benefit,” he explained adding that this would amount to total savings of Sh308 million per month.
Officials from Treasury and Energy ministries have in the last few weeks been in discussions to work out the levels of tax reduction on electricity tariffs as per President Mwai Kibaki’s directive to ease the burden of high energy costs on consumers and manufacturers.
“The government therefore expects that the reduction in VAT and the resulting reduction in the cost of electricity should be reflected across the board to the benefit of all Kenyans,” said the Minister.
Mr Michuki said he had invoked the VAT Act to implement a cut on the tax on energy and industrial oils which also include all residual fuel oils used by industries.
He said domestic consumers who use between 201 and 1500 units of power will save about Sh1000 per month while those who consume over 1500 units will save Sh4, 300 on their power bills.
“Both KenGen and the Kenya Power and Lighting Company will benefit and so will the consumers. This will in turn promote business competitiveness and reduce the burden on households,” he said adding that medium enterprises would save about Sh120, 000 per month while large industries would save approximately Sh4.8 million during the same period.
This will be welcome news to consumers who in July saw their bills go up by over 55 percent after the Energy Regulatory Commission announced a new tariff structure, which was aggravated by the high fuel costs.
The fuel cost which went up from Sh9.43 per kilowatt-hour in September 2007 to Sh19.05 per Kilowatt-hour in September 2008, also contributed to the increase in the costs. This caused an increase in the cost of thermal generation which went up form Sh2.95 per kilowatt hour to Sh7.78 per kilowatt hour over the same period.
Consumers can expect more reprieve as the pass-through fuel cost in their bills will be significantly reduced following the continued drop in the global oil prices.
He urged the manufacturers and suppliers to reflect the ‘good gesture’ by the government by lowering the prices of their goods to the consumers.
“They should be able to read our lips. It would be immoral for them to continue (with their old prices) when they in fact justified the increase on the basis of tax. Now that the taxes have been cut, they have no excuse any more,” the Minister said.
Mr Michuki reiterated the government’s commitment to turn to alternative renewable sources such as hydro-power, geothermal, wind and solar in order to reduce the country’s reliance on expensive fuel generated electricity.
“In this regard, a strategy to shift from thermal power sources to alternative ones, will soon be implemented,” he said disclosing that his Energy colleague Mr Kiraitu Murungi would be making the announcement to that effect soon.
He expressed confidence that the cut on the taxes would not impact on the shortfall in the budget for this financial year. Mr Michuki added that the government had plans to cover the deficit which is close to 5.3 percent of the GDP, which translates to Sh127 billion.
“It will be covered in the course of the year and we will call you to tell you how,” he said when pressed by journalists to disclose whether the gap would rise following the cut on the VAT.