Economy
Kenyan car buyers were hit by 35 per cent import duties in the EAC deal
Tuesday 04 July 2023
Used cars at the yard of Eyre Motors in Mombasa County. file image | Wachira Mwangi | NMG
Kenyan car buyers have been hit by 35 percent import duties after the East African Community (EAC) approved a request by Kenya to raise duties on cars under the Common External Tariff, adding pressure on a sector battered by currency depreciation.
A revision of the import duties from the current 25 per cent, which has since been approved by the EAC Council of Ministers, will result in double-digit increases in the price of imported vehicles including those carrying 10 or more passengers, station wagons, racing cars and sedans. . involved in the transportation of goods among others.
Effectively, this means that cars imported into the country will now fetch a higher price domestically than they would in regional counterparts such as Uganda and Rwanda.
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The increase in customs duties on imported cars will translate into a 14% increase in the cost of importing cars. Robert Warweru, Managing Partner of Ichiban Tax and Business Consulting and Chair of the Institute of Chartered Accountants of the Kenya Public Finance Commission, said:
“In the meantime, local collectors may feel a tailwind to change this policy even as second-hand importers feel pressure, particularly on volatile exchange rates.”
The EAC also approved a request by Kenya to keep high taxes on household items such as mobile phones and televisions for another year as part of efforts to shore up tax measures by the William Ruto administration to raise Sh211 billion in additional revenue this fiscal year.
The notice was published in the newspaper on Friday by Burundi’s Minister of East African Community Affairs Ezekiel Nibigira, who chairs the EAC Council of Ministers.
Dealers said the application of the new 35 per cent import duty on used and new imported cars would see the prices of cars increase by hundreds of shillings, adding to already high prices as a result of a weak shilling and the high cost of credit.
In addition to import duties, vehicles attract an excise tax ranging from 25 percent to 35 percent depending on engine size and a value-added tax of 16 percent, payable cumulatively and in that order.
This means that the change in the import duty affects the excise and the VAT fee as the value is doubled for tax purposes.
The new fee will see total taxes on a vehicle with a customs value of KES 998,621 – including cost, insurance and freight (CIF) costs – rise by MYS 129,821 to Shs 996,124, according to one trader’s account.
This includes import declaration duty and railway development tax, which are levied at rates of 2.5 and 1.5 percent of the customs value, respectively.
According to official data, Kenya imports an average of 81,791 fully built vehicles each year and has an installed assembly capacity of 34,000 units.
Charles Munyori, general secretary of the Kenya Automotive Bazaar Association, which represents used car dealers, said the new measure would slow sales further.
“It (higher import duties) will have a multiplier effect because you add that when you do excise tax and value-added tax at the end of it all,” Munyori said over the phone.
“We’re really struggling in terms of sales as we still have inventory that’s been with us for one year. I don’t know how long we’re going to go on this because the new mission is going to hit us harder.”
Car dealers had earlier raised car prices due to the devaluation of the shilling and higher borrowing costs.
They said in April that they were not only grappling with a decline in the value of the domestic unit against major international currencies but also a US dollar shortage that had affected timely payments to overseas suppliers.
The increasing cost of the process has prompted dealers and assemblers, who depend largely on imports, to adjust prices upwards to recover expenses and protect margins.
“For (a rising dollar) strength, we are responding with rate adjustments. The changes have increased by 10 percent,” said Gabriel Kanyenji, General Manager, Trade Finance, Isuzu East Africa. The daily business in April.
The impact of all this will be seen in the second half of the year. Higher prices are likely to dampen demand. If the situation is not reversed, we will face a reduced order pipeline which will affect production volumes as well.”
And, in a move aimed at preserving tax revenues from mobile phones, Kenya was also given a one-year extension to continue imposing tariffs of 25%, which are higher than Uganda’s 10% and CET rate of zero percent.
This comes on top of the 10 percent consumption tax, also introduced last year, which increased the cost of cell phones by more than 35 percent when taxes and fees are factored in.
Tax experts say continuing higher import duties and taxes on the purchase and use of mobile phones are more aimed at increasing revenue than protecting the proposed establishment of a low-cost smartphone factory.
“The approach that Kenya is using is protectionism, but economically how many mobile phone manufacturers do we have in Kenya that need protection?” Posted by Hadija Nanyumu, Tax Partner at EY.
You are making it difficult for Kenyan traders to compete with traders in Uganda and Rwanda. What you are doing is forcing a mobile phone merchant in Kenya to consider being based in Uganda and Rwanda where it is more profitable.”
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Industry players have argued that higher taxes will drive most phone buyers into the black market, leaving authorized dealers with mostly corporate customers.
Parallel imports are smuggled into the country without paying taxes and traded on a cash basis but lack the guarantees or after-sales services offered by licensed sellers.
Additional reporting by Julian’s Ambuco.
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