Kenyans second-hand car dealers are a happy lot after the High Court declared a formula used by the Kenya Revenue Authority illegal, effectively paving way for used cars in the country to be taxed less and therefore more affordable to Kenyan consumers.
In a case filed by Car Importers Association of Kenya, Justice Eric Ogola has declared that the current retail selling prices (CRSP), used by the taxman is unfair and arbitrary.
“A declaration that for purpose of continuity and in the interest of the public the transactions already effected via the said CRSP … shall continue to apply until such a time as the respondents will establish a new CRSP value in accordance with the law within 12 months from the date of this judgment,” he ruled.
KRA has been using price quotations from dealers of new vehicles such as Toyota Kenya as the basis for calculating import duties and other levies on second-hand cars shipped in from overseas markets.
However, second-hand car dealers argued in court that the starting quotations are intentionally inflated by new vehicles dealers so as to price them out of the market, resulting in unfairly higher taxes running into millions of shillings for those dealing in used imports.
The dealers pointed out that the prices supplied by the new vehicle sellers to KRA are sometimes higher than actual showroom prices.
They further argued that the entire process was unconstitutional since there was no public participation in arriving at the prices since the taxman did not consult them.
Judge Ogola sided with their argument and summarily ordered KRA to consult used car dealers when creating the next price list.
The steep taxes imposed by KRA had forced some dealers to abandon their cars at the port altogether since there was no way they could recoup their profits.
New vehicle dealers on the other hand unsuccessfully argued that the variance in the prices was due to the fact that the CRSP reflects a snapshot of their operations.
They stated that the benchmark prices are static and don’t capture changes in showroom prices over the course of the year as a result of factors like exchange rates and competition, leading to the variance.
How KRA price cars
Used cars generally attract an import duty of 25%, excise duty of 20%, and valued added tax of 16% payable cumulatively and in that order.
The value of a car is calculated based on the CRSP 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.
Imports of used cars are capped at eight years from the date of manufacture.
It is 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.
“Taxes on some models have been unfairly high. We have been telling KRA that their sources of CRSP are interested parties who inflate the prices,” said Charles Munyori, the secretary-general of Kenya Auto Bazaar Association.