Court halts KRA’s higher tax rates for used cars

The Mombasa High Court has stopped the Kenya Revenue Authority (KRA) from raising taxes on used motor vehicle imports through adjusting the base on which various levies are computed by up to 40 percent.

The taxman on July 7 published new Current Retail Selling Price (CRSP) –a database of prices of new vehicles in the country that forms the basis of taxing second-hand units after taking into account depreciation.

Car Importers Association of Kenya, representing 80 dealers of used cars, went to court to stop the implementation of the new catalogue.

The dealers argue that the new CRSP is inflated and has therefore increased the final prices of some car models such as Subaru Forester SJD by hundreds of thousands of shillings.

The dealers also complain of not having been consulted during the preparation of the CRSP as required by the Constitution.

“Pending the hearing and determination of the petition herein, a conservatory order is hereby issued restraining the respondents (KRA) from implementing the new CRSP values from July 7, 2020,” Justice Mugure Thande said in a ruling delivered on August 6.

The judge ordered the petitioner to file its submissions by August 18 and the KRA to submit its submissions by September 1. The case will be mentioned on September 22 to highlight the submissions and/or fix the date for judgment.

The suspension of the new CRSP will save importers from higher taxes as the case continues but those who shipped in vehicles and paid levies during the brief period when the catalogue was in place will not be refunded the excess cash paid.

The prices of used vehicles are dependent on many factors, including dealer margins, the age of the car and a series of cumulative taxes.

Imports of the second-hand vehicles are capped at eight years from the date of manufacture.

The value of a model is calculated based on the CRSP — which should match showroom prices — for that specific model, adjusted for depreciation at a rate of 10 percent per year. Insurance and freight charges are added to the adjusted CRSP to arrive at the customs value.

The vehicle then attracts an import duty of 25 percent, excise duty (ranging from 25 percent to 35 percent) and value added tax of 16 percent, payable cumulatively and in that order.

A higher CRSP quote has the effect of inflating taxes and the ultimate yard prices of second-hand cars. The association obtained showroom prices independently and compared it with the KRA’s list to build its case, the court was told.

“The petitioner further accused the respondent (KRA) of increasing the current CRSP values by 10 percent to 40 percent which is contrary to the inflation rate of seven percent recorded between 2018 and 2019,” says the association in court papers.

“Some of the CRSP values given are higher than the value of purchasing a new motor vehicle from the franchised (local motor vehicle dealers) For example the undiscounted value of a brand new Subaru Forester OXC (SJD) is Sh4.38 million yet the CRSP value given by the respondents for the same vehicle is Sh6.39 million.”

The association says other price guides are also unreasonable and do not make any commercial sense. They cite the CRSP value of a Honda Fit (a small hatchback) of Sh3.7 million being higher than that of Mercedes Benz B Class (a luxury minivan) at Sh3.1 million.

In its defence, the KRA said it conducted sufficient public participation before publishing the catalogue.

The taxman told the court that it uploaded the draft price guide on its website on April 20 and did a broadcast on Simba (its tax platform) on April 21, seeking stakeholder comments and received an objection from the petitioner.

“Thereafter, the respondents did, by an advert in the local dailies and in their website extend the period by 14 days from May 12, 2020 to May 26, 2020.”

This was the first time the taxman published the CRSP after being ordered by a court case last year to conduct public participation before updating the catalogue.

The case highlighted the arbitrary nature of the previous regime which saw some importers abandon their vehicles at the Port of Mombasa after being hit with higher levies than they expected.

The association says the KRA did not invite all stakeholders in the industry to weigh in on the new CRSP.

Used vehicle dealers have accused the taxman of relying on inflated showroom prices from new vehicle dealers as the basis for calculating taxes on second-hand cars shipped in from overseas markets.

It was expected that by forcing public participation in the setting of the CRSP, the process will become more transparent and lead to lower taxes on models that have been unfairly overcharged in recent times.

Players in the industry have pointed a trend where the KRA raises the CRSP of popular car models to raise more taxes, resulting in bizarre cases where the value exceeds showroom prices.