The rollout of a new tax regime for imported used cars last month has caused a massive retail price inflation that is expected to depress the motor vehicles market in the coming months, dealers said.
The new taxes, which came into force last December following the amendment of the excise duty law, have increased the prices of smaller motor vehicles and cut the cost of the luxury ones by up to Sh1.27 million.
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Those looking to purchase popular budget car models valued at below Sh1 million have been hit hardest following a near doubling of excise duty chargeable on the vehicles with the amendment of the law last year.
A KRA schedule released ahead of the coming into force of the new law shows that duty on a Toyota Vitz – one of the smallest cars on Kenyan roads – has jumped from Sh180,069 to Sh345,842, a 92 per cent increase.
Duty on the popular models, Toyota Belta (1290cc), Toyota Premio (1490cc) and Honda Fit (1290cc) is up by Sh98,001, Sh124,000 and Sh145,291 respectively.
Top-of-the-range models such as the Range Rover V8 (5000cc), Toyota Landcruiser V8(4,600cc) and Mercedes Benz V12 (6000cc) have, however, won huge price cuts of Sh523,999, Sh344,000 and Sh1.27 million respectively.
The Kenya Auto Bazaar Association (KABA), the lobby for used car dealers, said it expected the price increases to depress demand in the first quarter of the year as the market adjusts to the new pricing.
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“It will mostly affect bottom-end-of-market vehicles and is likely to have a negative impact on demand in the first quarter of the year as buyers absorb the new prices,” said Charles Munyori, the KABA secretary-general.
The new excise duty law came into effect in December but its full impact has only begun to emerge in the new year with fresh importation of used cars.
Under the new laws, imported vehicles aged more than three years are required to pay Sh200,000 while newer cars pay a lesser fee of Sh150,000 — a change from the previous 20 per cent duty charged on a vehicle’s value.
The changes mean that a used five-year-old vehicle worth Sh750,000 is being charged a Sh200,000 levy as opposed to Sh150,000 based on the previous calculation of 20 per cent its value.
The effect on luxury vehicles is the exact opposite. A five-year-old vehicle valued at Sh6 million is now required to pay a Sh200,000 charge instead of Sh1.2million based on the previous 20 per cent its value.
The revised rates have effectively reduced the huge pricing gap that existed between luxury and ordinary cars.
The changes have also affected locally assembled vehicles and dealers are expected to increase the prices of the small capacity cars in line with the increase in tax charges.
“All vehicle under the Act are subject to it, including locally assembled cars whose prices are bound to increase,” said General Motors East Africa managing director Rita Kavashe.
Used cars are generally charged import duty, excise duty and valued added tax, payable cumulatively and in that order. The import duty is charged at 25 per cent, VAT at 16 per cent while excise duty is now based on the age of the car.
The KRA uses the year of first registration to determine the depreciation of a motor vehicle and to arrive at the duty chargeable.
Kenya has capped the age of used imported cars at eight years, making most importers to ship in seven-year-old vehicles that attract the lowest taxes.
But the change in the method of calculating excise duty chargeable means the importers must go back to the drawing board and weigh whether it makes sense to pay less import duty on an older car and contend with high excise duty or ship in newer cars that attract higher import duty and pay less excise tax.
Carbon emissions
The new taxation based on age is meant to reduce carbon emissions, which are deemed to be higher in older cars.
The new rates are based on the understanding that older cars pollute more, and therefore aim to encourage importation of newer models that are less detrimental to the environment.
The Energy Regulatory Commission also introduced an emissions levy on used motor vehicle imports beginning July last year. Owners of cars with carbon emissions in excess of the benchmark are required to pay a fee on top of the purchase price.
Cars whose emissions are below the benchmark get a rebate depending on how far the emissions fall below the set limit.
Official records show there are about 2.02 million vehicles on Kenyan roads, growing at the rate of at least 10 per cent annually or nearly double the country’s economic growth rate of 5 per cent.
Data from the Kenya National Bureau of Statistics show that between January and September 2015, 183,573 motor vehicles were registered. Used cars accounted for 34 per cent of the total, having registered 62,823 units.
A total of 157,856 motor vehicles were discharged in 2014 compared to 136,915 units cleared the previous year, an increase of 20,941, according to the Kenya Ports Authority (KPA) data. In October 2014, the Kenya Bureau of Standards (Kebs) tightened rules on second-hand car imports, warning that it would destroy vehicles not adhering to the eight-year rule.
Importers adjusted the prices of specific vehicles by between Sh50,000 and Sh200,000 in 2014 following the KRA’s review of base prices.
The reference prices for some Toyota Prado, Honda Accord and Honda Civic, among other models, rose by between 10 and 20 per cent as the taxman increased the base price used to calculate the import duty on the vehicles.
The KRA publishes a list of current retail prices for over 2,100 car models to help importers of second-hand cars compute taxes due.
The list is updated by the taxman with changes to some models’ base prices, which alters the taxes due on the cars up or down depending on the review.
A higher reference price, therefore, has the effect of inflating taxes and the ultimate yard prices of second-hand cars.
The latest list published came into effect last October.
The growth in use of private motor vehicles has continued to put pressure on existing infrastructure with the cities becoming synonymous with traffic jams.
This feature was first published in the Business Daily.
