The government has proposed new tax cuts for motor vehicle assemblers, expanding the incentives that are designed to encourage local production.
The Finance Bill 2023 has provisions to halve the corporate tax rate from the standard 30 percent to 15 percent for companies starting new operations of putting together completely knocked down (CKD) parts at a local plant.
The lower tax rate will last for five years. Those already in the business –Isuzu East Africa, Associated Vehicle Assemblers (AVA) and Kenya Vehicle Manufacturers (KVM)— could also see their corporate tax rate halved to 15 percent if they achieve a local content of 50 percent of the ex-factory price value.
This means they will have to expand the number of parts they source from local suppliers to hit the set threshold, a move that will require going beyond common items like tyres, coil springs and batteries.
The parts are to be designed and manufactured in Kenya by an original equipment manufacturer operating in the country.
“This is meant to provide clarity on the companies that qualify for a further extension of the reduced corporation tax rate of 15 percent,” audit, tax and advisory firm KPMG said in an analysis of the Bill.
“This may incentivize the motor vehicle assemblers to utilize the local content and benefit from the preferential corporate tax rate.”
The government has been rolling out various incentives to support the local assembly industry which has grown to become the dominant supplier of new vehicles.
Data from the Kenya Motor Vehicle Industry Association (KMIA) shows that a record 77.8 percent of the 13,352 new vehicles sold last year were assembled locally.
Currently, assemblers of passengers can be exempt from value-added tax –charged at a rate of 16 percent— if they can achieve a local content of 30 percent.
Assemblers of all types of vehicles also enjoy a waiver of import duty (25 percent) and excise tax (20 percent).
Vehicles imported fully built from overseas markets attract import duty of 25 percent, excise duty starting from 20 percent and VAT of 16 percent, payable cumulatively and in that order.
Besides the tax benefits, the government also supports the sector by prioritizing the purchase and leasing of locally assembled vehicles.
The National Police Service (NPS) and Kenya Defence Forces (KDF) are among the major buyers of new vehicles including pick-ups and trucks assembled in the country.
A gradual ban on imports of used vehicles, especially those used for commercial purposes like buses and trucks, is expected to further lift demand for local firms.
