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Cost of luxury cars up as KRA raises tax rate

Car Bazaar
Car Bazaar at Jamhuri grounds in Nairobi on February 10, 2019. FILE PHOTO | NMG 

The prices of used luxury cars are set to rise significantly after the Kenya Revenue Authority (KRA) proposed new base rates for charging duties on motor vehicle imports. This also means the tax charged on such vehicles will also go up considerably.

The prices of some high-end models - such as Toyota Land Cruiser VX and Land Rover Discovery - have increased by more than Sh600,000 in the draft Current Retail Selling Price (CRSP) April 2020 compared to the existing catalogue that has been in use since March last year. This means the final prices of such models will rise by more than Sh80,000 if KRA’s proposals are upheld.

This is the first time the taxman is conducting public participation on the setting of CRSP following a court order last year. Used car importers had taken the case to court, arguing that KRA was relying on inflated showroom prices from new vehicle dealers as the basis for calculating import duties and other levies on second-hand cars shipped in from overseas markets.

It was the expectations of the court and used car dealers that KRA would review the tax computation formula downwards in what would ultimately lower the prices used to sell vehicles.

However, KRA has increased the base price for top-end vehicles and kept it unchanged for the other categories.

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The proposed CRSP shows that the price guide for cheaper models - including Toyota Vitz, Toyota Allion, Mercedes E200 and Honda Fit will remain unchanged.

Prices of top-of-the-range models, however, have gone up substantially. A Toyota Land Cruiser VX with a 4,500cc engine and running on diesel is listed at Sh20.8 million in the proposed CRSP, up from Sh20.1 million. This represents an increase of Sh640,000.

A Land Rover Discovery with a 3,000cc engine running on diesel is listed at Sh15.8 million, a jump from Sh15.1 million. This amounts to a hike of Sh615,000. The final prices of used models of both cars will rise by more than Sh80,000, everything held constant.

The prices of used vehicles are dependent on many factors, including dealer margins, the age of the car and a series of cumulative taxes.

Imports of the second-hand vehicles are capped at eight years from the date of manufacture.

The value of a model is calculated based on the CRSP for that specific model, adjusted for depreciation at a rate of 10 percent per year. Insurance and freight charges are added to the adjusted CRSP to arrive at the customs value.

The vehicle then attracts an import duty of 25 percent, excise duty (ranging from 25 percent to 35 percent) and value added tax of 16 percent, payable cumulatively and in that order.

A higher CRSP quote, therefore, has the effect of inflating taxes and the ultimate yard prices of second-hand cars.

“Kenya Revenue Authority informs the public that in accordance with the court ruling on petition 190 of 2018 and Article 47 of the Constitution, the Commissioner is required to conduct public participation on the current draft Retail-Selling Price (CRSP) April 2020 before implementation of a new CRSP database,” the taxman said in a notice.

KRA added that the public should review and send their submissions and feedback on the proposed CRSP by May 26, bringing to an end the previous opaque process of setting the catalogue.

Dealers in second-hand vehicles have argued that the prices supplied by the new vehicle sellers to KRA were sometimes higher than actual showroom prices.

It was expected that by forcing public participation in the setting of the CRSP, the process will become more transparent and lead to lower taxes on models that have been unfairly overcharged in recent times.

Used car dealers have already raised issues with some of the price guides in the proposed CRSP. Several models of Honda Fit, a small hatchback, are listed at prices ranging from Sh3.2 million to Sh3.5 million.

This is more expensive than Mercedes B-Class, a luxury minivan whose price is set at Sh3.1 million.

“These are the inconsistencies we are talking about. It is ridiculous for a Fit to cost more than a Mercedes B-Class,” said Charles Munyori, the secretary-general of Kenya Auto Bazaar Association.

He added that KRA has been raising the CRSP of popular car models to raise more taxes, noting that Honda Fit has become a favourite of drivers working for digital taxi-hailing platforms.

The court case filed by the second-hand car dealers highlighted the arbitrary nature of the current tax system, which has seen some importers abandon their vehicles at the Port of Mombasa after being hit with higher levies than they expected.

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