According to the Economic Survey 2024, the number of newly registered motor vehicles, and motorcycles declined by 16.7 percent to 195,656 in 2023 from 234,879 in 2022. This points out to a potential decline in discretionary spending by the citizenry that led to lower acquisitions of motor vehicles and motorcycles.
The Economic Survey, however, quips that manufacturing, agriculture; forestry and fishing, and wholesale and retail trade; and repair of motor vehicles and motorcycles were the leading industries in the provision of wage employment in the private sector accounting for 15.9, 14.1 and 12.6 percent of the total private sector employment, respectively, in 2023.
This indicates the critical role that the automotive industry plays in creating employment opportunities in Kenya.
The Finance Bill, 2024 appears to have placed a key focus on the automotive industry and, indirectly, the cost of owning a motor vehicle in the country. An array of taxes and levies have been proposed which will have a direct impact to existing and new motor vehicles owners.
Notably, the Government, a few years ago, set out the growth of the automotive industry as a key driver in the expansion of the manufacturing industry in Kenya. This is to be achieved through the promotion of the local assembly of motor vehicles and motorcycles.
The current tax proposals in the Bill are, however, not aligned with the overarching objective of growing the automotive industry.
The Bill proposes to introduce motor vehicle tax at a rate of 2.5 percent of the value of the motor vehicle provided that the tax payable shall not be less than Sh5,000 but shall not exceed Sh100,000. The value of the motor vehicle shall be determined based on the make, model, engine capacity in cubic centimeters and year of manufacture of the motor vehicle. The KRA is expected to issue guidelines for purposes of determining the value of a motor vehicle.
Motor vehicle tax will be collected by insurance companies and will certainly lead to an immediate increase in the annual cost of motor vehicle ownership. Ultimately, this will in the long run discourage potential citizens from acquiring new motor vehicles or replacing the existing ones.
In a rather counterproductive move, the Bill proposes the imposition of VAT at the standard rate of 16 percent on specially designed locally assembled motor vehicles for transportation of tourists. The proposal goes against the Government policy to promote local assembly of motor vehicles.
Owners of motorcycles are not spared either with the Bill proposing to exempt the supply of motorcycles of tariff heading 8711.60.00 as opposed to the current zero-rated status.
The Bill also proposes a new excise duty structure for motorcycles, with a rate of 10 percent of the value or Sh12,952.83 per unit, whichever is higher. This is in addition to the proposed introduction of export and investment promotion levy on the importation of motorcycles with internal combustion as well as electric motorcycles at 3 percent.
The Bill has also trained its focus on car maintenance with the proposed introduction of eco levy at Sh750 per kg on batteries or dry cells of Chapter 85.
With all batteries being subject to the levy, this will negatively impact the nascent electric mobility industry, which is highly dependent on lithium-ion batteries. The supply of solar and lithium-ion batteries will also be subject to VAT at the standard rate of 16 percent.
Additionally, rubber tires of Chapter 40 will be subject to eco levy at Sh1,000.
In another major hit to the electric mobility industry the Bill proposes the imposition of VAT on the supply of electric bicycles at the standard rate of 16 percent. Public transportation is also likely to be negatively affected with the proposed imposition of VAT on the supply of electric buses of tariff heading 87.02. at the standard rate of 16 percent.
By and large, the tax proposals in the Finance Bill 2024 present an economic challenge to the automotive industry in Kenya. It is imperative that the Government, members of the National Assembly and other relevant stakeholders evaluate the wholesome impact of the proposals to the industry.
Robert Maina is an Associate Director at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.
