Musings on Kenya's proposed Motor Vehicle Tax

The National Treasury through Finance Bill 2024 has proposed introduction of a Motor Vehicle Tax at 2.5 percent of a unit’s value with the minimum amount set at Sh5,000 and the maximum set at Sh100,000. Through this new tax, the exchequer will be looking to raise Sh58.0 billion in the first full year of implementation.

Motor Vehicle Tax is not a Kenyan peculiarity. Some of the jurisdictions where a tax of this kind can be found, or have been in place at one time, are Belgium, Austria, Brazil and Argentina. ?

Whereas I have voiced my opposition to this proposed tax, the more pragmatic issue that should preoccupy Kenyans now that we are in the Finance Bill 2024 public participation phase is how best the tax should be structured should the proposal in Finance Bill 2024 be retained and the tax finds its way to the Income Tax Act starting July 2024.

A few thoughts from me.

First, global best practise around Motor Vehicle Tax is that it is structured not on ad valorem but ad quantum basis. This is to say that the determination of the amount of tax to be paid should be based not so much on the price/valuation of the motor vehicle (ad valorem) but on the basis of adverse effects and negative externalities such as environmental pollution, weight, fuel efficiency and mileage (ad quantum). This is one area where the proposal in Finance Bill 2024 misses the mark because the provision hinges on 2.5 percent of the value of the unit.

Going this route would mean that Kenya looks at the Motor Vehicle Tax fundamentally as a Carbon Tax anchored on disincentivizing consumer behaviour that adversely affects the environment. Making the proposed Motor Vehicle Tax a Carbon Tax would of essence demand that the proposal in the Finance Bill 2024 be amended to exempt electric vehicles.

Second, subsection 4 of Section 12H of the Finance Bill 2024 provides that an insurer of a motor vehicle shall collect and remit Motor Vehicle Tax within five working days after issuing insurance cover. This provision needs to be re-looked at and amended to create a window through which insurers will be allowed to collect the tax on a bi-monthly, quarterly, semi-annual basis as opposed to a one-off upfront collection because of the burden this will inflict on vehicle owners in the country. Whereas the government is out to look for its liquidity management and thus demanding that the remittance be made within five working days, the reality is that layering the new tax above insurance premiums will be strenuous for most Kenyans.

Third, there is a key lesson to borrow from Belgium where a supplementary circulation tax is imposed on Liquefied Petroleum Gas powered automobiles to serve as a substitute for excise duty. The key point to note here is that it serves as a substitute for excise duty. Ideally, Motor Vehicle Tax should provide an offset. This is to say that the tax as envisioned in Finance Bill 2024 should help the final consumer ease the burden of the indirect taxes and other statutory levies that inflate the cost petroleum product used to power the vehicle they use.?

To introduce Motor Vehicle Tax as envisioned in Finance Bill 2024 while retaining Excise Duty, Road Maintenance Levy, Petroleum Development Levy, Petroleum Regulatory Levy, Railway Development Levy, Merchant Shipping Levy, Import Declaration Fee (which by the way is going up from 2.5 percent to 3.0 percent of customs value per Finance Bill 2024) and Value Added Tax on petroleum products will be a grave mistake that could trigger demand destruction and loss of the targeted Sh58.0 billion.

Fourth, the provisions for Motor Vehicle Tax as provided for in Finance Bill 2024 need to be amended to include a clear explanation as to what happens in the event that one has paid the year’s tax as required and the vehicle ends up being written off due to an accident. Will this create a scenario where the vehicle owner is eligible to file for a tax refund given that they will not have enjoyed the full value?

Finally, the provisions of Finance Bill 2024 need to give guidance as to what happens in instances where one takes insurance cover for periods that do not cover 12 months. Logic dictates that the Motor Vehicle Tax will equally be prorated accordingly but this being Kenya, we need that made explicitly clear in black and white.

That's all for now...Happy reading of Finance Bill 2024!