Importers of used cars are set for a fairer and lower tax burden at the Port of Mombasa as the Kenya Revenue Authority (KRA) moves to adopt a new taxation system that relies on the value of the units at the point of shipment.
This will mark a departure from the existing system where the taxman takes the current retail selling price (CRSP) from formal dealers such as CFAO Mobility Kenya and Inchcape Kenya and depreciates it to arrive at the value of an imported car.
CRSP has been discredited for inflating the value of used motor vehicles and the taxes levied through a mix of KRA’s arbitrary actions and inaccurate information supplied by the new vehicle dealers, with Mombasa’s High Court suspending its review in October 2019 until KRA conducts public participation to guide a new price list.
The court, for instance, was told at the time that KRA listed the price of a new Subaru Forester at Sh6.39 million while the same vehicle had a showroom sticker price of Sh4.38 million.
This deviation resulted in importers incurring an excess tax burden of more than Sh1 million on the model.
Used vehicles imported from overseas markets like Japan, the UK, and South Africa are charged an import duty at the rate of 35 percent, excise duty ranging from 25 percent to 35 percent depending on the size of the engine and value-added tax of 16 percent. The taxes are paid cumulatively and in that order starting with the CRSP that provides for a maximum depreciation rate of 65 percent based on the eight-year import limit.
This means that a higher base price results in a larger tax burden. In the petition that was filed by the Car Importers Association, KRA was found to have arbitrarily used higher price lists that left some importers with unexpected additional tax burden running into millions of shillings.
The KRA now says it intends to ditch the CRSP and replace it with a taxation system based on the value of the vehicle imports at the point of shipment, shifting to actual prices paid by importers as the starting point for computing taxes.
The move comes after the taxman relied on the old CRSP for years, stopping it from further jacking up taxes on what would have been an annual frequency.
“KRA wishes to notify the public that it proposes to move away from use of the CRSP in valuation of used motor vehicles to use of transaction value,” the taxman said in a notice, explaining that the move is in compliance with the court’s ruling.
“This is also to align KRA to the decision of the East Africa Community (EAC) Sectoral Council on Trade, Industry, Finance and Investment whereby partner states were directed to use Free on Board values for used motor vehicles.”
Free on Board (FOB) value means the actual price paid or payable to the exporter when the car is loaded into the carrier at the port of export.
It will also include commissions, cost of containers and packing provided that these are incurred by the buyer, according to EAC regulations.
The new proposed system will see importers furnish the taxman with the details of the invoices and payments made to their suppliers, marking the base on which the taxes will be computed.
The taxman says it will conduct public participation on the proposed change, noting that this will include physical engagements with associations of used vehicle dealers in Mombasa and Nairobi in September and October.
Besides lowering the tax burden and entrenching fairness, the proposed system is expected to inject dynamism in the used vehicle market since importers will incur different tax bills depending on the prices they negotiate with their overseas suppliers.
Major used car dealers are likely to benefit the most, negotiating better prices for many units in a move that could give them a price advantage in a market that targets the middle class and small businesses.
Some players in the industry have warned that the proposed transaction-based system can be abused to benefit unscrupulous importers.
Mr Charles Munyori, the Secretary-General of Kenya Auto Bazaar Association said that a similar model that was in use before the introduction of the CRSP had loopholes that were abused by unscrupulous businesspersons and rogue KRA officials to lower taxes payable.
The problems with the CRSP system was exposed in the court case in which the judge termed it as guesswork.
Al-Husnain Motors, for instance, imported a Toyota Land Cruiser ZX running on a 4.6-litre petrol engine. The used car dealer paid taxes of Sh4.1 million derived on the retail price of Sh14.4 million for a similar model in Kenya.
KRA, however, demanded more taxes from the dealer, arguing that the car should be taxed based on the higher selling price of Sh17.9 million for a Toyota Land Cruiser VX. The judge found that the taxman was unfairly shifting goalposts to collect higher taxes.
