A proposal by Kenya to increase tax on trucks and trailers under the country’s Finance Bill 2023 has rattled transporters within the East African Community, even as partner states prepared to gathered on Friday to discuss the budgets.
The bill proposes to amend the advance tax payable on passenger and commercial vehicles, excluding tractors/ trailers used for agricultural purposes. It proposes to increase the advance tax to Ksh3,000 ($21.91) per tonne of load capacity per year or Ksh5,000 ($36.52) per year for trucks, starting January 2024.
The increase in advance tax for commercial vehicles means a higher cost of doing business.
Kenya’s EAC Cabinet Secretary Rebecca Miano promised a scrutiny of the Bill by Finance ministers from all EAC partner states.
“Let’s hold our horses, as I understand this is going on across the borders; everybody is preparing a budget. EAC Finance ministers meet on Friday. You will have an idea on how these taxes are going to impact on the rest of the region,” said Miano.
High fuel costs
Kenyans and East Africans who travel through Kenya will also have to contend with higher costs of fuel as the draft law proposes a raise of VAT from 8.0 percent to 16 percent.
“We would like to express strong opposition to the increase in advance tax on trucks and trailers,” said Newton Wang’oo, chairman of the Kenya Transport Association.
“As much as advance tax is treated as a tax credit, the proposed increase in advance tax would have a huge adverse impact on the cash flows of transport companies, which are already struggling due to the high cost of fuel and maintenance.”
The transporters – whose trucks ply the Northern Corridor to neighbouring states Uganda, Rwanda, the Democratic Republic of Congo and South Sudan – have proposed the scrapping of the advance tax arguing it won’t deny government revenue.
“Transport companies pay instalment taxes just like other taxpayers in other sectors of the economy,” said Wang’oo.
“With Kenya Revenue Authority embracing technology and advanced systems, we propose that advance tax should actually be abolished as there are many other ways to ensure all transporters are in the tax net and, therefore, the government loses no revenue by removing advance tax,” he added.
For saloons, station wagons, minibuses, buses and coaches, the new advance tax rate is Ksh100 per passenger capacity per month or Ksh5,000 per year, whichever is higher.
But it is the increase in fuel that is going to stretch to the limit to the cost of living in Kenya.
Impact on economy
“Looking at the VAT on fuel going up from eight to 16 percent, that’s the one item that will have the biggest impact on the economy because fuel drives the economy across the EAC region, whether it’s transport or food or inputs. Everything just goes up,” said Ken Gichinga of Mentoria Economics.
“I hoped that that would be the last area that we’ll touch particularly given the situation of the economy but it appears to be the IMF really calling the shots. It doesn’t seem to be in keeping with the “Bottom Up-Hustler” narrative. If anything, I feel those people will be worse off than they are today.”
Kenyans will also be affected by the introduction of a mandatory contribution to the National Housing Development Fund.
The fund proposes introduction of a three percent deduction from employees towards the affordable housing programme. Employers are expected to match employee contributions.
When combined with the proposed changes in NHIF and the recent changes in national pension contributions, the impact on employees will be severe, especially at a time when many are grappling with the high cost of living.
“On this proposal that requires more deductions from the civil servants, I’m afraid they’ll affect the aggregate demand in the economy.
“When the economy is already soft, demand is weak when you take more out of people, it will lead to economic slowdown,” said Gichinga.
The Finance Bill proposes to reduce the threshold for resident persons to qualify for turnover tax to those whose turnover from business is more than Ksh500,000 ($3652.30) but does not exceed or is not expected to exceed Ksh15 million ($109,569).
The Finance Bill proposes to increase the turnover tax (charged on gross sales of a business) from one to three percent, in line with the Kenyan government’s attempt to tax the informal sector. This will capture more micro enterprises under the tax net, which had been excluded by the higher threshold of Ksh1 million ($7,304), but could discourage the informal sector, as the increase may be viewed as punitive.
CS Miano said on Friday that a meeting of EAC’s Tax Policy and Tax Administration Sub-Committee scheduled for June will discuss tax issues.