KRA will allow used car importers to defer taxes

Imported second-hand cars at the port of Mombasa on April 8, 2022. PHOTO | WACHIRA MWANGI | NMG

Second-hand car dealers and individuals will soon be able to ship in vehicles and defer paying taxes for up to one year, boosting their cash flow positions in reforms that are expected to lower automobile prices.

The William Ruto administration has directed the Kenya Revenue Authority (KRA) to allow the use of bonded warehouses for imported used vehicles, putting them on the same pedestal as new vehicle imports.

This allows importers to store units in KRA Customs-controlled premises for up to six months without payment of taxes as they look for buyers, and they may seek for an additional six months extension.

At present, used car importers are required to pay all taxes estimated at nearly 55 percent of the import cost and remove their units from container freight stations (CFS) within 30 days.

Failure to evacuate prompts the KRA to give them a month’s notice to clear the cars or risk the vehicles being auctioned.

Vehicles shipped in from overseas markets like Japan, the UK, and South Africa are charged an import duty of 25 percent, excise duty of between 20 percent and 35 percent depending on engine type and VAT of 16 percent, payable cumulatively and in that order.

The policy shift is part of a resolution of a multi-agency meeting on ease of doing business in Mombasa co-chaired by Trade Cabinet Secretary Trade Moses Kuria and his Transport counterpart, Kipchumba Murkomen, on April 14 in Mombasa.

The meeting, attended by heads of key State agencies such as the KRA and the Kenya Ports Authority, “agreed to streamline and introduce bonded warehouses for imported used vehicle inspection”.

Dealers reckon that the elimination of upfront payment of taxes will boost their cash flow, and ultimately ease pressure on used car prices.

Bonded warehouses are premises operated by private companies licensed annually by the KRA, where goods whose taxes have been deferred are kept.

The same benefits will also be available to individuals bringing in vehicles for their own use or for resale for profit.

“It means importers can leave the vehicles in the bonded warehouses and not pay taxes until they get buyers. This will boost cash flows for importers,” Charles Munyori, secretary general of the Kenya Auto Bazaar Association, told the Business Daily.

“It also has the potential to lower prices of vehicles by encouraging large volumes of imports by big players, which will reduce the need for everyone to buy from abroad and incur foreign exchange charges.”

Prices of used vehicles such as Subaru Impreza, Toyota Vitz and Volkswagen Golf have increased by hundreds of thousands of shillings on scarcity and weakening of the local currency.

Car dealers say the prices of cars assembled in 2016 –which is what they are largely importing now based on the eight-year age limit— have gone up by up to Sh400,000 for certain models compared to last year.

A used Subaru Impreza is now retailing at Sh1.7 million, rising from Sh1.35 million last year.

Over the same period, the price of a Toyota Vitz has increased to Sh1.3 million from Sh1.1 million.

A Volkswagen Golf has seen its price jump to Sh1.8 million from Sh1.4 million. There are now few eight-year-old cars going for less than Sh1 million, entrenching car ownership as one of the markers of the middle class.

The rally has cut sales for roadside car dealers and priced out a large section of professionals and small business owners who are major customers of second-hand cars.

Although second-hand vehicles are listed amongst dutiable goods to be kept in bonded warehouses, dealers have claimed that the KRA has put restrictions on them and only allows importers of new cars to enjoy the deferred tax benefits.

The KRA in April 2021 reversed its October 2020 move under the East African Community Customs Management Act Regulations that had excluded second-hand vehicles, amongst other goods, from being deposited in Customs-controlled premises.

The law allows bonded warehouses, whose licences are renewed annually, to extend the duration the goods are deposited in the premises for a further six months or such other period subject to discretion by KRA’s Commissioner for Customs.

This means an importer can defer payment of taxes for up to one year.

“This ends discrimination in the market since new vehicle dealers have been enjoying the privilege of using bonded warehouses,” Mr Munyori said.

“The use of bonded warehouses for imports of used vehicles was there before, but was stopped in 1992.”

Besides tax benefits, warehousing also allows businesses to manage their stock by replenishing them in time and avoiding delays which are prone to freight being shipped into the country via sea.

“We also expect that with customs having lifted restrictions on warehousing of second-hand cars there will be improved cash flow and stock for importers in the market,” Car Imports Association of Kenya chairman Peter Otieno said on the phone.

The move is part of the Ruto administration’s plan to ease the cost of doing business in the country, with the Port of Mombasa being a key node in trade for the seven-nation East African Community bloc.

Bonded warehousing is implemented globally as a means of facilitating international trade.

In Kenya, it allows businesses, including those involved in cross-border trade, to deposit their cargo on the premises as they look for customers without paying taxes.

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