Negative effects of proposed Motor Vehicle Tax

The National Treasury has put forth a proposal to implement a new tax aimed at vehicle owners. This tax, known as the Motor Vehicle Circulation Tax, would be required to be paid annually by vehicle owners when they purchase insurance cover, pending approval by parliament.

According to the proposal outlined in the draft 2024 budget, the Motor Vehicle Circulation Tax would be calculated based on the vehicle’s value, taking into account factors such as make, model, engine capacity, and year of manufacture. The Treasury has classified this tax as a wealth tax, with payments to be made on an annual basis.

If the proposal is accepted, the government plans to use the renewal of insurance policies as a means to enforce the implementation of the tax. Under the proposed legislation, insurance providers who fail to collect and remit the motor vehicle tax within five working days of issuing insurance cover would face penalties amounting to fifty percent of the uncollected tax, in addition to the outstanding tax amount.

Exceptions to the Motor Vehicle Circulation Tax include ambulances and government-owned vehicles, as stipulated in the Privileges and Immunities Act. This tax would be implemented alongside a carbon tax, which aims to reduce the use of fossil fuels and combat air pollution.

Should the proposed tax law be enacted, vehicle owners in Kenya would be required to pay 2.5 percent of their vehicle’s value to the government annually. Additionally, the Finance Bill of 2024 seeks to introduce Value Added Tax (VAT) on bank transactions and increase excise duty from 15 percent to 20 percent.

A significant number of first-time car owners in Kenya rely on borrowing to acquire vehicles, as indicated by the latest FinAccess Household Survey conducted by the Financial Sector Deepening (FSD) and the Central Bank of Kenya (CBK). The survey revealed that 67 percent of vehicles in the country are financed through loans.

Overall, the proposed Motor Vehicle Circulation Tax and other tax reforms outlined in the 2024 budget.