The The Kenyan Treasury has proposed a significant policy shift by suggesting the implementation of an annual Motor Vehicle Circulation tax – also known as road tax – be paid by all motor vehicle owners at the point of acquiring insurance cover, in the next financial year.

“Government will assess the viability of introducing motor vehicle tax in the medium term as a form of wealth tax. The tax will be paid annually by motor vehicle owners at the point of acquiring insurance,” Treasury said in the draft Medium term revenue strategy.

“There will be a minimum tax amount payable by all car motor vehicles owners in addition to a graduated amount based on the engine capacity of the vehicle,” the strategy paper says.

This move which comes partly as a response to the ongoing electrification of transport and the need to explore alternative revenue sources, is also highlighted in a report from the International Monetary Fund (IMF).

Potential substitute

The proposal, which was initially put forth by Kenya and subsequently included in the IMF’s report following the 5th review concluded in July, this is seen as a potential substitute for the traditional fuel levy.

The rationale behind this proposition is to ensure a sustainable stream of income for the government, even as the global shift towards electric and more fuel-efficient vehicles, threatens the stability of traditional fuel taxes.

The concept of a Motor Vehicle Circulation tax is not entirely novel. Many countries worldwide have adopted similar approaches to maintain revenue flow in the face of the changing automotive landscape.

By linking the tax to the insurance process, Kenya aims to ensure compliance among vehicle owners, in a bid to streamline the collection of funds for road maintenance and infrastructure development.

One of the primary drivers of this proposed shift is the ongoing electrification of transport. As electric vehicles (EVs) and hybrids become more prevalent on Kenyan roads, the revenue generated from the fuel levy, traditionally a significant contributor to government coffers, is expected to decrease.

EVs consume little to no fuel, thereby significantly reducing the tax income from the fuel levy. To counteract this decline and ensure sustainable funding for road maintenance and development, the Motor Vehicle Circulation tax is being explored as a potential alternative.

Furthermore, this proposal emerged as a contingency measure when the 16 per cent VAT on fuel was contested in court. This was when VAT on fuel had faced strong opposition and protests from various quarters, leading to concerns about revenue shortfalls. The Motor Vehicle Circulation tax offers a more politically palatable alternative, as it does not directly impact fuel prices but rather spreads the taxation burden across all vehicle owners.

Low income earners

However, the proposal is not without its challenges and critics. Some argue that this tax may disproportionately affect low-income vehicle owners and may require careful consideration and measures to ensure it does not create an undue burden. Moreover, the implementation of such a tax will necessitate robust administrative systems to track and collect payments effectively.

As the Kenyan government continues to explore ways to adapt its revenue collection strategies to the changing dynamics of the automotive industry, its potential to provide consistent revenue in an era of electrified transportation underscores the need for adaptability in the face of technological advancements and shifting consumer preferences.