Kenya declares tax on second hand cars illegal

In a groundbreaking decision, the High Court of Mombasa recently declared the current tax imposed by the Kenya Revenue Authority (KRA) on second-hand cars illegal. The court ruling comes after complaints from industry stakeholders and a case filed by the Kenya Auto Bazaar Association, challenging the high starting quotations used by the KRA in determining import duties and levies on used vehicles imported from overseas. To shed light on this significant development and its potential impact, David Kingoo, Senior Procurement Associate at Cytonn Investments, joined CNBC Africa for an in-depth discussion. The controversy surrounding the taxation of second-hand cars in Kenya stems from the fact that the price quotations used by the KRA for taxation purposes are set by new vehicle dealers in the country. This practice has led to discrepancies where the tax burden on imported used cars does not align with the actual market value. As a result, industry players have raised concerns about the fairness and accuracy of the taxation system. The court ruling mandates that within the next 12 months, stakeholders, including local dealers and importers of second-hand vehicles, must collaborate to establish a pricing methodology that is constitutionally sound and inclusive. While the existing tax rates remain in place for the time being, the decision paves the way for a more transparent and participatory process in determining import duties on used cars moving forward. One of the key questions surrounding this ruling is the potential impact on the economy, particularly in terms of the number of second-hand cars imported and the associated tax revenues. Notably, Kenya is a significant net importer of used vehicles, with imports totaling over 15 billion in the last financial year alone. The high taxation rates imposed under the previous pricing system have contributed to the overall cost of importation, affecting both local dealers and the economy at large. While the court ruling deems the previous pricing methodology illegal due to its lack of stakeholder input, it does not necessarily imply punitive action against the Kenya Revenue Authority. The focus now shifts to establishing a revised pricing framework that aligns with the new constitutional requirements for public participation. This forward-looking approach aims to create a more equitable and sustainable system for taxing imported second-hand cars. Looking ahead, the timeline for implementing a new pricing methodology raises questions about the affordability of importing cars in the near future. Importers and consumers alike are eager to see if the anticipated changes will result in lower prices for second-hand vehicles. However, it is important to note that any potential cost reductions may only materialize after the 12-month period stipulated by the court ruling. In addition to the ongoing legal developments, Kenya is also considering a draft policy proposal to restrict second-hand imports to support the domestic car sector. The proposal, if implemented, could have far-reaching implications for the industry and the economy as a whole. As the country navigates these changes, stakeholders will need to adapt to a shifting landscape in the automotive market. Overall, the recent court ruling on the taxation of second-hand cars in Kenya marks a significant turning point in the industry. With a renewed focus on transparency, collaboration, and compliance with constitutional requirements, the path is set for a more balanced and informed approach to taxing imported used vehicles. As stakeholders work towards establishing a revised pricing methodology, the implications for importers, dealers, and the economy remain at the forefront of discussions in the coming months.