President Uhuru Kenyatta has proposed to cut by half the unpopular fuel tax following concerns and protests by Kenyans.
The President, during a State of the Nation address on Friday, said he recommended an eight per cent VAT on petroleum products, down from 16 per cent.
He said had listened to Kenyans' concerns over rising fuel prices and the impact on the cost of living.
"Should Parliament accept this proposal, the price of super petrol will drop from Ksh127 ($1.27) to about Ksh118 ($1.18), and the price of diesel will drop from Ksh115 ($1.15) to about Ksh107 ($1.07)," he said, adding that "just as business owners took the new VAT rate as an opportunity to increase the cost of goods and services, I expect them not to take advantage of weary citizens, and to lower their prices commensurately and without delay."
The controversial levy came to effect on September 1 despite Parliament's bid to delay its implementation by two years.
The Finance Bill 2018 was sent to the President to sign it into law, but he declined.
"The purpose of this tax was simple. We have to pay for the new constitutional order, and the public services on which Kenyans depend alike. These cost money. Further delay in the implementation of the tax would compromise our ability to deliver basic services to Kenyans, and to maintain the trajectory of our development," he said.
VAT tax reforms were first introduced in the 2013 VAT Act. Certain goods including petroleum products where exempted to allow for the gradual implementation of the levy. The exemption was set to expire in August 2016 but was extended by Parliament for a further period of two years, to August this year.
The tax has been the subject of public uproar for the last two weeks as the cost of fuel and other goods and services increased.
"As your President, I have a constitutional duty to ensure that legislative instruments presented for my signature conform to our national aspirations, fulfil government’s basic obligations to our people, and are implementable," Mr Kenyatta said, adding that the Bill "fell short of this threshold."
He said the Bill "protected the status quo and sacrificed the bigger vision. It took the easy path, instead of rising to the challenges of our time. It was good politics, but bad leadership."
The President said he returned the Bill to Parliament "with a number of modifications, designed to cure these shortcomings."
Parliament will hold a special sitting on September 18 to reconsider the Finance Bill.