Motor vehicle tax unfair and ill-advised, Parliament team told

PWC Tax Policy Lead Edna Gitachu and Association of Kenya Insurers CEO Tom Gichuhi when they appeared before the National Assembly Finance Committee during the public participation on the Finance bill, 2024 at Hilton Garden Hotel, Mombasa road on June 3, 2024. [Boniface Okendo, Standard]

The introduction of the motor vehicle tax in the Finance Bill 2024 through amendment of the Income Tax Act has been criticised by stakeholders who argue the levy is not only misplaced but also it's proposed is not scientific based.

The stakeholders among them Association of Kenya Insurers(AKI) opine that setting a minimum of sh5,000 and a maximum of sh100,00 for the tax favours individuals with more expensive cars compared to the majority who own relatively affordable vehicles.

This new tax has been viewed by a majority of Kenyans as an alternative as the government seems to have run out of ink on what new levy to introduce in the petroleum sector.

This is considering just a few months ago, the Petroleum Regulatory Levy was increased to sh0.75 a litre adding more pain to motorists who are yet to recover from high prices at the pump.

Petroleum Regulatory Levy is one of the almost a dozen being imposed by the government with the motor vehicle tax mimicking the same formula of implentation.

The motor vehicle tax is slowly becoming the poster child of the Finance Bill 2024 as Affordable Housing Levy, which is still being fought in court, was for the Finance Act 2023.

While some stakeholders presented suggestions to scrap it out, others are of the opinion that the 2.5 per cent payment on the value of the car is based on the wrong premise.

Kenya Private Sector Alliance(Kepsa) in it's memorandum to th Finance and National Planning Committee suggested the amount be reduced to one per cent.

The private sector lobby also suggested the cap of the tax be set at sh20,000 and not sh100,000 as the Bill has proposed.

However, the can of worms in this newly introduced levy is it's placement in the Income Tax Act. This is because the Motor Vehicle Circulation tax is not an income per se type of tax.

It is an issue picked out by Kepsa who said it will likely be contested in court.

"The tax is not on income to be subject to income tax and may give fertile grounds for court disputes and argued as unconstitutional," reads the memorandum by Kepsa.

Kepsa said if this tax is implemented then commercial and agriculture vehicles should be exempted.

"Subjecting commercial and agricultural vehicles to the Motor Vehicle Tax will increase the operating costs of manufacturers and their suppliers who utilize vehicles for commercial (logistics) and agricultural (planting, harvesting, logistics) purposes and the cost of food items," said Kepsa.

It added: "These additional operational costs will make businesses less profitable and result in higher prices for consumers."

In the memorandum, Kepsa proposed instead to have the tax removed from Income Tax Act and introduce a levy under Miscellaneous Fees and Levies Act to be charged at sh1 for every litre of fuel.

Such a minimal charge as Kepsa describer will not be punitive and will be paid in small amounts over a whole year as opposed to paying together with the insurance policy.

Alternatively, the amount could be reduced to one per cent of the value of the motor vehicle and have the ceiling capped sh20,000 or introduce motor vehicles license fee to be based on engine capacity and managed under National Transport Safety Authority.

The proposed cap of sh20,000 is necessary for equality. Kepsa said this is because a person whose car is valued at sh150,000 will have to pay sh5,000 as the minimum prescribed in the tax yet this is more than the sh2.5 per cent value of the car.

The same is if someone has a Sh20 million car they will pay sh100,000 as the maximum prescribed in the Bill which is way below the 2.5 per cent rate proposed.

Kepsa said some vehicles pay for third party policy and do not require valuation. The new law will therefore force them to undertake vehicle valuation which is also an addition to the new tax.

"The new tax will adversely affect insurance business as many vehicles and especially motorcycles will operate without insurance
policies," said Kepsa.

The Association of Kenya Insurers(AKI) has the same submission before the Committee arguing that the tax will only favour individuals with cars that are valued highly.

AKI said the motor vehicle tax is discriminative and regressive given that it is capped at KES 100,000 adding a that people with equal income could own motor vehicles of difference value.

"Owners of motor vehicles whose value is below sh4 million will have to spend a larger proportion of their income on motor vehicle insurance as compared to those owning motor vehicles whose value exceeds sh4 million. This will lead to increased inequalities and discrimination in taxation," reads the memorandum.

If implemented as is, the tax will also lead to reduction in demand for comprehensive insurance as costs of motor vehicle ownership increase.

"To offset the increase in costs associated with the insurance of motor vehicles, policyholders will shift to third party insurance covers which will significantly reduce the premiums and income earned by insurance companies. This will ultimately lead to financial constraints, cash flow problems and pressure on the solvency of insurance companies and eventually loss of jobs," said AKI.

Tax payments from insurance firms as corporate income will also reduce. This amount stands at sh5 billion.

AKI notes that if implemented, Insurers will also be forced to upgrade or amend their financial systems in order to accommodate this new tax as well as train staff on the same.

"These costs are in addition to the substantive budget set aside by insurance companies for the implementation of the recent International Financial Reporting Standards (“IFRS”) 17," said AKI. "The motor vehicle tax is regressive."