The government has set a condition for assemblers to source parts in the local market worth at least 30 percent of the value of passenger cars before they can be exempted from VAT which is charged at a rate of 16 percent.
The VAT exemption is new and specific for assemblers of passenger cars and adds to the waiver of import duty (25 percent) and excise tax (20 percent) enjoyed by assemblers of all types of vehicles.
The condition put on the VAT waiver is aimed to push the firms including Simba Corp (which assembles Proton cars) and DT Dobie (Volkswagen cars) to expand the list of components made locally to widen the value chain.
“The condition is that you have got to have local components worth at least 30 percent of the value of the car for you to be exempted from VAT,” said Dinesh Kotecha, the chief executive of Simba Corp which assembles Malaysian car brand Proton at its plant in Mombasa.
He added that it will take a few years before local assemblers hit that threshold that will allow them to benefit from the VAT exemption.
The main car components sourced locally include batteries, tyres, seat covers, and windows but they are not of high value. The most expensive car parts such as engines and transmission are imported from overseas markets such as Japan, Malaysia, and China.
Companies that will be able to comply will benefit from a waiver of the majority of taxes, cutting the cost of their cars by hundreds of thousands of shillings and making them more competitive in the market.
Cars shipped in fully built from overseas markets like Japan, the UK, and South Africa are charged an import duty of 25 percent, excise duty of 20 percent, and VAT of 16 percent, payable cumulatively and in that order.
Commercial vehicles account for most of the units assembled in the country, with the government keen on growing the local passenger car segment as well.
The tax waivers are expected to nudge more middle-class shoppers to showrooms at a time when used car prices have been rising on the back of increased taxation and higher quotations from overseas suppliers. The formal dealers, however, face the challenge of a limited variety of brands and classes of cars (saloons, station wagons, and SUVs).
