Rotich raids landlords and motorists to finance budget

Landlords and motorists were hit hardest as Treasury secretary Henry Rotich briefed Parliament on how he plans to finance his record setting Sh2.1 trillion budget for the year beginning July 1.

Mr Rotich announced a range of new tax measures, including one targeting property owners who will now pay 12 per cent of gross rental income compared to 30 per cent of profits they have been remitting.

Motorists got a double whammy after Mr Rotich announced a Sh3 per litre of petrol roads maintenance levy fund (RMLF) increment and a yet to be specified excise tax on imported used vehicles.

A uniform 12 per cent tax on gross rental income should make it easier for the taxman to enforce compliance in the real estate market that has yielded little revenue despite growing by the widest margins in the past decade.

Taxing gross rental income is particularly a bitter pill for landlords because they will not be able to deduct costs incurred on wages, repairs, utilities and land rates from their tax bill.

It means the Kenya Revenue Authority (KRA) will not distinguish between profitable and loss-making property holdings in charging the tax.

The KRA has been collecting less than Sh5 billion annually from landlords, a performance that has been blamed on lack of reliable property market data.

The shift to gross rental income as the basis of taxation means all the KRA has to do to determine a landlord’s tax liability is to find the rent paid by each tenant and calculate its 12 per cent share.

For motorists, the tax changes should make it more expensive to buy and run a car than is presently the case. The KRA currently uses the value of an imported car as the basis of taxation, with older cars attracting the lowest levies due to higher depreciation levels.

Market price

The value of a car is calculated based on the current market price for a specific model, adjusted for depreciation at a rate of 10 per cent per year. Insurance and freight charges are added to the adjusted market price to arrive at the customs value.

Imports of used cars are capped at eight years from the date of manufacture and most importers have preferred to ship in seven-year-old models that attract the lowest taxes.

Taxing older cars at a higher rate is set to reverse this taxation regime, which Mr Rotich says should help conserve the environment by reducing emissions associated with aged and inefficient vehicles.

Specifics of how the new age-based taxation will be computed are expected to emerge from new regulations expected to be published in the coming weeks.

The prices of most second-hand cars are consequently expected to rise above the Sh1 million mark, making it harder for the lower middle class to acquire them.

All motorists will pay more to fuel their cars with the introduction of the extra Sh3 per litre on roads levy, which will now rise to a high of Sh12 per litre up from the current Sh9.

Additional revenue

The additional revenue should partly finance the planned tarmacking of 10,000 kilometres of roads in five years and to maintain the existing ones.

The higher fuel levy will further raise fuel prices that started climbing last month after a dramatic fall last year in the wake of the global oil price crash.

Increased fuel levy revenues should help raise the Sh260 billion that the government needs to fund the roads annuity program.

The Kenya Roads Board (KRB) collects and manages the roads maintenance levy fund that has been charged at Sh9 per litre since June 2006.

In the current fiscal year, the KRB is projected to collect Sh25.3 billion, an increase from 2013/14 when it collected Sh22.8 billion.

Kenyans consumed 2.8 billion litres of diesel and petrol in the calendar year ended December. This means that the country stands to raise over Sh8.4 billion in the coming years from the increment alone.

The Sh3-per-litre rise on fuel levy, however, falls short of KRB’s earlier proposal to the Treasury that sought to double the levy to Sh18 citing increased cost of maintaining roads.

More expensive fuel will also lead to higher overall transport costs for logistics firms and public service transport operators, with the costs potentially being passed on to consumers.

Other losers in the budget are sugar importers who will be charged duty at the rate of $460 per tonne, up from the current $200 in a measure to protect local millers.

Importers of a wide variety of other goods, including milk cans and plastic tubes, will also be slapped with an import duty of 25 per cent from the current 10 per cent, with Mr Rotich betting on the increase to protect local manufacturers.

Mr Rotich said he expects to raise an additional Sh25 billion from the new tax measures to finance his budget.