Car assemblers fault new tax regime

When Treasury Cabinet Secretary Henry Rotich reversed the excise tax duty regime on imported motor vehicles in the 2016/2017 budget, he had hoped to create a level playing field for the low income earners and the importers of new vehicles.

The move included in the budget proposals dubbed ‘Pro-production’ may however hurt the very sector it sought to protect.

Locally assembled vehicles which were enjoying a lower excise duty of Sh150,000 will now retail at a higher price, becoming less competitive. This will end up hurting the sector which was starting to accelerate.

Industry players say the move came as a surprise to them after a year of promising progress and market confidence.

Kenya Vehicle Manufacturers Managing Director David Percival said the move will be counterproductive in the long run when sales drop and corporate taxes dwindle.

“Locally assembled vehicles will be 20 per cent more expensive while those assembling the vehicles which are imported into the country have the advantage of mass production compared to our narrowed capacity locally. That will put us at a real disadvantage in an industry which has been struggling to rise up in the last ten years,” Mr Percival told Smart Company.

“The move is just reversing the little gains we had made and the ripple effects stretch to the jobs we create as well.”
The Thika-based assembly plant is behind the Mobius, Kenyan vehicle brand that hit showrooms in May 2014.

Mr Percival said the stakeholders were not fully involved in reaching the decision that could well work in reverse of its intended result.

The assembly plant, which started production in August 1976, has cumulatively produced approximately 60,000 cars. The plant was originally designed to produce light and heavy commercial cars including Land Rovers, Range Rovers, Volkswagen Microbuses, Leyland trucks and buses.

Mr Rotich in announcing the tax move said he had factored in complaints that the fixed Sh150,000 for vehicles less than three years old and Sh200,000 for those older than three years was skewed in favour of the former.

Push for amendments

“Last year I introduced excise duty on motor vehicles based on the age of the vehicles at a specific rate. This has been perceived to be unfair, inequitable and punitive to importers of vehicles commonly imported by low income earners but beneficial to importers of luxurious vehicles,” the CS said.

“In order to address the situation, I propose to amend the Excise Duty Act, 2015 to remove specific rate of duty and introduce advalorem rate of 20 per cent based on the value of the vehicle.”

General Motors East Africa Managing Director Rita Kavashe said the industry players will still push for amendments that will see the budget’s goal to support local production maintained.

She said even the Sh150,000 excise duty had the considerable impact in the market of pushing up prices, adding that the proposed 20 per cent will have worse effects.

“We cannot make Kenya a regional assembly point with this kind of move,” she said adding that the commercial vehicle segment, which forms close to 90 per cent of her firm’s products, will be hit hard.

“The government will lose as well since these vehicles are very vital in promoting economic growth as they are used for commercial transport,” Ms Kaveshe said.

Kenya has three major vehicle manufacturing plants producing about 32,000 vehicles per year, putting them at a disadvantage against their foreign counterparts which enjoy the economies of scale.

The number of locally assembled vehicles surpassed the 10,000 mark last year as dealers increased their output in a bid to lower their tax bills.
Data from the Economic Survey 2016 report showed that production of cars, trailers and semi-trailers went up by 6.8 per cent in 2015.

“The number of assembled motor vehicles increased by seven per cent from 9,514 vehicles in 2014 to 10,181 vehicles in 2015. Similarly, production of trailers and semi-trailers increased by 13.2 per cent while that of motor vehicle bodies went up by 1.3 per cent,” says the survey.

The local motor vehicle assembly firms were last year guaranteed at least 40 per cent of the government’s annual car lease contracts increasing optimism over good prospects.

The Kenya Vehicle Manufacturer (KVM) — assemblers of CMC and DT Dobie’s trucks and heavy commercial vehicles such as the Nissan double-cab pick-ups, Land Rover, Mazda, Iveco, and Mercedes Benz, Toyota Kenya, Associated Vehicle Assemblers (AVA) and General Motors East Africa (GMEA) are among local assemblers who have been battling it out for the 40 per cent reserve.