The approval of a 35 percent import duty on motor vehicles by the East African Community (EAC) has dealt a heavy blow to Kenyan car buyers.
In response to Kenya's application to raise the duty under the common external tariff, the EAC Council of Ministers has given the green light, exacerbating the challenges faced by the automotive sector due to a depreciating currency.
This move, which marks an increase from the current 25 percent duty, will lead to double-digit price hikes for various imported vehicles, including those used for transportation, racing cars, station wagons, and vehicles designed for ten or more passengers.
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Consequently, cars imported into Kenya will now come with a higher price tag compared to regional counterparts such as Uganda and Rwanda.
The raised customs duty, once implemented, is expected to translate into approximately a 14 percent overall increase in the cost of importing vehicles.
Robert Waruiru, the managing partner of Ichiban Tax and Business Advisory and chairperson of the Institute of Certified Public Accountants of Kenya Public Finance Committee, suggests that this duty hike, combined with recent fuel price increases, may push consumers towards embracing greener mobility options.
While local vehicle assemblers may benefit from the policy change in the short term, second-hand importers are likely to feel the squeeze, particularly due to the unpredictable exchange rate.
Kenya's import duty shift
In addition to the import duty adjustment, Kenya's request to maintain higher taxes on household gadgets like mobile phones and television sets for another year has also been approved by the EAC.
The objective is to support the revenue-raising measures proposed by the William Ruto administration, with a target of an additional Sh211 billion this financial year.
Dealers anticipate that the new 35 percent import duty on both new and used vehicles will further escalate car prices by hundreds of shillings.
This will compound the existing challenges caused by a weakening shilling and rising credit costs.
Furthermore, vehicles are subject to excise duty ranging from 25 to 35 percent based on engine size, in addition to a 16 percent value-added tax (VAT).
Import duty changes will consequently impact excise and VAT charges, as the value is compounded for taxation purposes.
These developments have led to total taxes on a car valued at Sh998,621 to increase by Sh129,821, as estimated by one dealer.
This figure includes import declaration fees and the railway development levy, charged at rates of 2.5 percent and 1.5 percent of the customs value, respectively.
With an average of 81,791 fully built vehicles imported each year and a local vehicle assembly capacity of 34K units, Kenya's automotive industry already faced numerous hurdles.
The depreciation of the local currency and a shortage of U.S. dollars for timely international supplier payments have prompted dealers and assemblers to raise prices in order to cover expenses and protect their margins.