Motor vehicle tax: Revenue raising or environmental protection plan?

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The Finance Bill, 2024 is finally out. In contrast to previous years, where the emphasis was on raising additional revenue from the existing tax base, this year's Bill has adopted a noteworthy strategy aimed at broadening the tax base to include previously untouched sectors.

One proposal under consideration is the introduction of a motor vehicle circulation tax of 2.5 percent of the vehicle value at the time of insurance coverage acquisition. This tax is to be capped at a minimum of Sh5,000 and a maximum of Sh100,000.

The responsibility will fall on the insurer to collect and remit the tax within five days of issuing the insurance policy. Failure to comply would lead to a penalty of 50 percent of the outstanding tax, in addition to paying the principal amount.

This proposal is consistent with Kenya's commitments outlined in its nationally determined contributions (NDCs) under the Paris Agreement and its National Climate Change Action Plan (NCCAP), which highlight the danger from increasing emissions from transportation,

Unless significant interventions are implemented, emissions from transported are projected to reach 17 percent of Kenya's total emissions by 2030. Additionally, the Medium-Term Revenue Strategy 2024/25 – 2026/27 proposed carbon taxes based on fossil fuel usage.

Internationally, motor vehicle taxes are common. In Germany, vehicle tax is based on CO2 emissions, engine size, and fuel type to promote fuel efficiency. England's vehicle excise duty (VED) is payable on a yearly basis and is determined by CO2 emissions and fuel type, with lower emissions resulting in lower taxes.

In France, the bonus-malus system taxes high-emission vehicles and rewards low-emission ones based on CO2 emissions, aiming to encourage environmentally friendly vehicle choices.

Unlike the other countries that have implemented motor vehicle taxes, the proposed tax is based on the motor vehicle value without considering the emissions from the vehicle. The Finance Bill has other provisions, which contradict the country’s stated ambition to lead the climate agenda in the region.

The Bill, for instance, proposes imposing excise duty on electric motorcycles, at the higher of 10 percent of the unit's value or Sh12,952.83. In a contradictory proposal, the Bill seeks to abolish excise duty on other types of motorcycles. These proposed adjustments will negatively impact eMobility adoption and call into question the government’s commitment to environmental protection.

Lastly, electric vehicles are not exempt from the motor vehicle taxes which indicates that the proposed tax is more about revenue generation and not environmental protection.

While subsidies and incentives can be used to mitigate negative externalities, their implementation comes with a cost to the government. As per the Treasury's 2023 Tax Expenditure Report, the government forwent KES 393.6 billion in 2022 through different tax reliefs, incentives, and subsidies. This substantial sum is noteworthy, considering the government's historical challenges in meeting budget targets.

It therefore calls for careful evaluation of the proposed tax measures to ensure that foregone taxes are exchanged for meaningful and effective outcomes. This prompts the question; have the tax measures aimed at incentivizing eMobility genuinely expedited its adoption?

If so, it would be illogical to stray from this approach of eliminating the incentives. However, if there has been minimal or no effect, then the logical step would be to eliminate such non-performing incentives. Unfortunately, the speed of change in tax policies is such that the public has limited time to react before the government changes course and introduces new, often contradictory taxes.

Kennedy Mugambi is a Tax Advisor with KPMG Advisory Services Limited ([email protected] ). The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG.

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