Too easy to tax: Why motorists are an easy target for Treasury

Nearly two decades ago, the government scrapped the annual road licence.

This would have been to the delight of motorists were it not for the fact that the then Finance Minister Amos Kimunya transferred the levy that motorists were paying to the pump price. The fees that were being paid for the road licence were now factored into the Road Maintenance Levy, which motorists have over the years paid whenever they fuel their cars.

And despite Kenyans having been indirectly paying this levy for years, the government appears intent on reintroducing it through the proposed motor vehicle tax in the Finance Bill 2024. This, according to renowned lawyer Paul Mwangi, could amount to double taxation, making what the Treasury has proposed unconstitutional.

“Since 2006, we have been paying a road licence that is charged through fuel consumption. The attempt to levy yet another motor vehicle tax in the Finance Bill 2024 is double taxation and unconstitutional,” said Mwangi on his social media pages. 

The Road Maintenance Levy currently stands at Sh18 per litre of super petrol and diesel, raking in nearly Sh100 billion annually. It has in the last decade and a half doubled from Sh9 per litre 2010. It was initially adjusted in 2014 to Sh12 then to Sh18 per litre in 2016. The government has in recent proposals suggested increasing this to Sh22 per litre.

In introducing the motor vehicle tax, analysts note Treasury is trying to grow the tax base. If the proposal goes through, motorists will pay the tax when renewing their insurance cover at a rate of 2.5 per cent of the value of the motor vehicle. The tax will however be subject to a minimum of Sh5,000 and a maximum of Sh100,000.

Analysts note that this will be heavy on the people that the Kenya Kwanza regime has romanticised as hustlers. It will, however, be forgiving for the rich, who will only pay the ceiling of Sh100,000 even in instances where 2.5 percent of their guzzlers and other high-end cars could have been hundreds of thousands of shillings.

The new tax will add to the already heavy costs that vehicle owners have to contend with. The likely outcome, analysts note, is that the new cost will be passed on to consumers, which might be seen in the higher costs of transport as well as goods that transporters ferry to the market.

“This will have a negative impact on the transport and logistics industry who may opt to pass through the additional cost to their customers this escalating cost of living through multiplier effect. It is also important to note that the motor vehicle tax, unlike advance tax on commercial vehicles, cannot be offset against income tax payable,” said KPMG in an analysis of the Finance Bill.

“This comes against the backdrop of revised insurance premium rates and high fuel prices, inevitably shoring up the cost of operating motor vehicles in Kenya.”

Motor vehicle owners, who range from Kenyans using their cars for daily commute to matatu operators and cargo transporters operating fleets of trucks, have been grappling with last year’s hike in fuel prices following the increase in Value Added Tax (VAT) on petroleum products. This had the effect of pushing pump prices to a historical high of Sh217 a litre of super petrol in Nairobi last November.

Kenya last year increased the import duty on cars to 35 percent from 25 per cent, increasing the cost of motor vehicle ownership. Car dealers in Kenya have raised concern over continued dead stock as a result of the increased taxes, making it harder for buyers to afford their preferred vehicles - whether new or second-hand.

Last year’s Finance Act increased advance tax paid by public service and commercial vehicles. The advance tax for passenger vehicles will increase to either Sh100 per passenger per month or Sh5,000 per year, whichever is higher, form a rate of Sh60 per passenger or Sh2,400 per year.

Advance tax for cargo vehicles will double to Sh3,000 per tonne per year or Sh5,000 per year, whichever is higher, from the current rates of sh1,5000 and Sh2,400 per year. Advance tax is paid by owners of commercial vehicles and includes passenger vehicles such as matatus, taxis and tour vans as well as cargo vehicles such as pick-ups, lorries, prime movers, trucks and trailers.

Insurers will be required to collect the motor vehicle tax and remit the tax collected to KRA within five working days after issuing a motor vehicle insurance cover. The Bill further proposes a penalty of 50 percent of the value of the uncollected tax as well as the actual amount of unpaid tax on the insurer for failure to remit the tax. A punitive measure, analysts noted, to ensure insurance companies are in compliance.

KPMG noted that the proposed tax also presents a challenge as to who will bear the valuation costs for motor vehicles. “The motor vehicle tax will be applicable on the insurable amount which is largely based on the value of the motor vehicle as determined by a third-party qualified valuer. It will be interesting to see the Commissioner’s guidelines on the valuation of motor vehicles, especially for third-party insurance policy covers,” said KPMG’s analysis. 

Alex Kanyi, tax partner at Cliffe Dekker Hofmeyr (CDH), faulted Treasury, noting that in most instances, motorists do not get any income from their vehicles.

“The introduction of the motor vehicle tax through the ITA however appears misplaced because there is no income that is derived by merely owning a vehicle,” he said. He added that the tax is likely to have a huge impact on the auto sector in the country. “As currently drafted, the proposal offers little certainty on how the value of each motor vehicle will be determined, and who shall bear the attendant costs,” he said. 

“While the motor vehicle tax may enable the Government to collect additional revenue, another implication of the introduction of motor vehicle tax is the likelihood of a reduction in the trading volumes within the automobile industry in Kenya.”

Insurers have warned that the proposed tax would push insurance products out of reach of many motorists. Majority, according to the Association of Kenya Insurers, could end up taking the third-party only (TPO) cover that offers little protection to car owners. It could mean in case of incidents, vehicle owners would have to dig into their pockets for repairs as third-party insurance only covers third parties.

“With motor vehicle insurance being compulsory in Kenya, we anticipate a major shift towards third-party motor insurance if this tax is implemented. Consequently, motorists will face higher risks, as they will essentially only be covered for third-party liabilities, leaving their own vehicles unprotected in the event of accidents,” said Association of Kenya Insurers (AKI) in a statement.