How Much Taxes Do Car Owners Pay in Kenya

The Finance Bill of 2024 proposes significant changes to Kenya's tax framework. One proposal that has sparked much debate is the introduction of a motor vehicle tax set at 2.5% of the vehicle's value. 

According to the proposal, motor vehicle tax would need to be paid to KRA when each vehicle obtains insurance coverage. The tax would be calculated based on the vehicle’s value, determined by its make, model, engine capacity, and year of manufacture. The insurer would do the valuation.  

For instance, if your car is valued at Ksh1 million, you will have to pay Ksh25,000 a year. These contributions are capped at Ksh5,000 on the minimum and Ksh100,000 on the maximum. 

This new tax adds to the myriad of direct and indirect taxes car owners already pay, and many feel it could significantly increase the cost of vehicle ownership. This article will dissect all the taxes car owners pay and discuss how much the new taxes could affect them if the Bill is signed into law.

Read Also: Summary of Finance Bill 2024 and Its Impact on Your Pocket

The Taxes You Pay When Buying a Vehicle 

When purchasing a vehicle in Kenya, whether from a dealership, showroom, or another person, several taxes are typically included in the buying price. These are the one-time direct taxes levied on a vehicle. However, if you import the car directly, you will be responsible for paying these taxes. 

Here are the key taxes charged on all imported vehicles in Kenya. The figures are based on the latest motor vehicle valuation template provided by KRA.

• Import Duty: Import Duty is a tax levied on the value of the imported car. It is calculated as 35% of the car's customs value, which includes the cost, insurance, and freight (CIF) value. 

• Excise Duty: Excise Duty is an additional tax on imported vehicles, calculated as a percentage of the Excise Value, which is typically the sum of CIF value and Import Duty. It ranges from 20% to 35%, depending on the car's engine capacity. 

It is calculated at 20% for vehicles below 1,500cc, 25% for vehicles exceeding 1,500cc, and 35% for vehicles with engines exceeding 3,000cc for petrol and 2,500cc for diesel. The excise duty for 100% electronic-powered vehicles is 25%. 

• Value Added Tax: VAT is charged at 16% on the VAT Value, which is the sum of the CIF value, Import Duty, and Excise Duty. 

• Railway Development Levy (RDL): The Railway Development Levy is 1.5% of the vehicle's CIF value.

• Import Declaration Fee: The Import Declaration Fee is 2.5% of the CIF value. This fee covers the cost of processing import declarations.

If you import a 1600cc car into Kenya with a customs value of Ksh460,000, here are the taxes you would pay. 

1. Import Duty (35%) - Ksh161,000

2. Excise Duty (25%) - Ksh155,250

3. VAT (16%) - Ksh124,200

4. Railway Development Levy - Ksh6,900

5. Import Declaration Fee - Ksh11,500

Grand Total - Ksh458,500

This will bring the total cost of the car to Ksh918,500. 

Read Also: The 7 Hidden Costs of Car Ownership

The Indirect Taxes You Pay Everyday 

Indirect taxes are integrated into the costs of essential items and services that car owners regularly purchase and use. They significantly contribute to the overall cost of owning and maintaining a vehicle in Kenya. 

One of the most significant indirect taxes car owners face is the tax on fuel. For the period from 15th May 2024 to 14th June 2024, the total taxes on petrol and diesel were Ksh76.73 and Ksh64.02 per litre, respectively. 

During this period, petrol in Nairobi retailed at Ksh192.84 per litre and diesel at Ksh179.18 per litre. This means that taxes accounted for about 40% of every litre bought by petrol users, and for diesel users, it was 36%.

If you use an average of 3 litres of petrol daily, you will pay approximately Ksh230 in taxes daily. 

Here is the breakdown all taxes and levies levied on petrol and diesel:

1. Excise Duty
2. Road Maintenance Levy
3. Petroleum Development Levy
4. Petroleum Regulatory Levy
5. Railway Development Levy
6. Anti-adulteration Levy
7. Shipping Levy
8. Import Declaration Fee
9. Value Added Tax (VAT)

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Car owners also pay a Value Added Tax (VAT) on vehicle maintenance and services. This includes a 16% VAT on services at garages/service centers. Every spare part you buy also attracts a 16% VAT. 

Additionally, car owners pay an Insurance Premium Levy, a 0.25% levy on insurance premiums. This is typically included in your premiums. 

Furthermore, in the event of an insurance claim, car owners will also pay VAT on insurance payouts at 16%. This means that car owners pay more for their insurance policies due to the VAT and incur additional costs when they receive payouts for claims.

How Prospective Car Owners Can Reduce Tax Burden 

Despite the increasing costs associated with car ownership and taxes, there are several strategies prospective car owners can employ to lower expenses. Here are some ways to lower the cost of vehicle taxes: 

1. Choose a Fuel-Efficient Vehicle: Opting for a fuel-efficient vehicle can significantly reduce fuel expenses over time, mitigating the impact of fuel taxes. Consider hybrid for even greater savings.

2. Regular Maintenance and Care: Proactively maintaining your vehicle can prevent costly repairs in the long run. Regular servicing, timely oil changes, and proper tire maintenance can improve fuel efficiency and extend the lifespan of your car.

3. Shop Around for Insurance: Compare insurance quotes from different providers to find the most competitive rates. Look for insurers offering discounts for safe driving records, bundled policies, or loyalty programs.

4. Utilize Tax Deductions for Business Use: If you use your vehicle for business purposes, you may be eligible for tax deductions on certain expenses such as fuel, maintenance, and insurance. Consult with a tax advisor to explore potential deductions. 

5. Consider locally assembled cars: Locally assembled cars often attract lower excise duty rates and are exempt from some taxes levied on imported taxes. This can lower the overall tax burden on these vehicles than fully imported cars. 

Read Also: How to Pay Less Taxes Legally in Kenya 

Wrapping Up

The proposed Motor Vehicle Tax in the Finance Bill 2024 represents a significant change to Kenya's tax framework for car owners. If passed into law, it will add a substantial annual cost, impacting current and prospective vehicle owners.

As a car owner, getting your finances in order is crucial. This preparation includes budgeting for the additional annual tax and planning ahead. This can help you avoid financial strain and ensure you can comfortably afford your vehicle. 

If you are a prospective car owner, it's essential to understand all the costs involved in car ownership. This includes the purchase price and taxes, insurance, maintenance, and fuel costs. Being informed about these expenses will help you make better financial decisions and avoid unforeseen financial burdens.