Effect of value-added tax on the economic performance of the downstream petroleum energy sector in Kenya

Abstract

The issue of Value Added Tax (VAT) on petroleum products has emerged as an important fiscal and market question in Kenya due to the effect of the price of fuels on transport, production, and household welfare. This article analyzed the impact of VAT on the economic health of the downstream petroleum energy industry in Kenya, using consumption of motor gasoline premium, light diesel oil, and illuminating kerosene as indicators of industry performance. The study was based on the Economic efficiency theory of taxation and employed secondary time series data for the quarterly period between 2006 and 2023. A descriptive and explanatory design was used, and the Autoregressive Distributed Lag methodology was used to estimate short-run and long-run relationships. The article narrowed down the analysis of the original multivariate petroleum-tax model to the VAT results, but it retained the excise duty, the Petroleum Development Levy, inflation, the exchange rate, and Murban crude oil prices as covariates. The bounds tests indicated level relationships for all three product models. At the 5% significance level, VAT had no significant short-run effect on gasoline or diesel consumption, but the lagged VAT policy shock significantly reduced kerosene consumption (coefficient = -0.1329, p = .0193). VAT was statistically insignificant in the long run for gasoline, diesel, and kerosene. Granger-causality results further showed that the VAT policy shock predicted kerosene consumption (p = .0053) but not gasoline or diesel consumption. The results provide evidence that a uniform VAT policy can have heterogeneous effects on the market for petroleum products. Changes in Petroleum VAT should be predictable, product-sensitive, and come with a measure of protection and cleaner-energy alternatives for price-sensitive households.