Finance Bill: Vehicle Owners To Pay Annual Tax

Vehicle owners will start paying an annual tax of up to Sh100,000 depending on the value of their cars if Parliament endorses the proposal that looks set to increase motoring costs amid costly fuel and spare parts.

The Finance Bill 2024 proposes the introduction of a 2.5 per cent annual tax on the value of vehicles, with the deduction set at a minimum of Sh5,000 and a maximum of Sh100,000.

The deduction, called motor vehicle tax, will be paid on each vehicle at the time of issuing an insurance cover.

This means second-hand cars like the Toyota Harrier and Mercedes Benz C-Class that were in February averaging between Sh4 million and Sh4.4 million in many yards in Nairobi will attract the maximum tax of Sh100,000, with the value only falling if valuation declines in subsequent years.

“The rate of tax in respect of motor vehicle tax charged under section 12H (which introduces the tax) shall be 2.5 per cent of the value of the motor vehicle,” reads the bill in part.

Engine capacity

“The value of a motor vehicle shall be determined on the basis of the make, model, engine capacity in cubic centimetres and year of manufacture of the motor vehicle.”

The only exemption from the 2.5 per cent tax includes ambulances, or motor vehicles owned by the national government, county government, Kenya Defence Forces, National Police Service, National Intelligence Service or a person exempt from tax under the Privileges and Immunities Act.

Insurance cover

The tax looks set to increase the cost of operating motor vehicles in Kenya, in addition to insurance cover, fuel and servicing costs. The State had last year mulled introducing a congestion charge —a fee charged on cars and motor vehicles being driven within zones marked as heavy traffic areas. The proposed tax in the Bill has not made it clear if this is linked to environmental protection.

There are global efforts to introduce special taxes on vehicles running on diesel or diesel due to their pollution.

Official data shows Kenya has witnessed a nearly doubling of registered motor vehicles in the past five years to 2.19 million in 2022 compared with 1.27 million in 2013. The number of newly registered motor vehicles in the same period hit 512,779, translating to an average of 102,556 every year.

The Finance Bill makes insurers the agents of the Kenya Revenue Authority (KRA) and they will be required to collect and remit the tax within five working days after issuing a motor vehicle insurance cover.

Escape the tax

The Insurance Act makes it mandatory for every car on the Kenyan public road to have a minimum of a third-party motor insurance cover in place.

Tying the motor vehicle tax with insurance means it is going to be difficult to escape the tax.

The bill proposes a penalty of 50 per cent of the uncollected tax on insurers who fail to collect and remit the motor vehicle tax to KRA. They will then be required to remit the actual amount of the uncollected tax.

The planned tax is in line with last year’s proposal to introduce an annual wealth tax for car owners, depending on the engine capacity and also roll out a gradual rise in the excise duty on cars running on fuel.

The Treasury had said it was going to assess the viability of introducing the motor vehicle circulation tax as a form of wealth tax. It had indicated that this was going to be paid at the point of acquiring an insurance cover.