Kenya Finance Bill of 2024: The Unintended Consequences of the Motor Vehicle Tax on Consumer Behavior and the Insurance Market
From 1st July 2024, the Bill proposes to introduce a new Motor Vehicle Tax ("MVT”) at the rate of 2.5% of the value of the motor vehicle subject to a minimum of KES 5,000 and a maximum of KES 100,000
Written by Nuru Shaba
The introduction of the Motor Vehicle Tax, as outlined in the Finance Bill of 2024, could significantly impact consumer behavior and the insurance market. Paying the motor vehicle tax when obtaining insurance will likely lead to more people evading legitimate insurance purchases, which, in turn, could result in a surge of fake insurance stickers as individuals attempt to circumvent the tax. Such a scenario poses substantial risks to road safety and financial security, particularly in the event of accidents.
Given that insurers will collect the tax, associating this additional cost with obtaining insurance might push more consumers to opt for third-party insurance, which is generally cheaper than comprehensive insurance. This shift would reduce overall asset protection, as third-party insurance covers damages to others but not the insured's vehicle. The switch to third-party insurance by many motorists could drastically reduce revenue for insurers, potentially leading to job losses and even the shutdown of insurance companies. Additionally, related industries such as garages and assessors would inevitably suffer from reduced business.
The requirement for insurers to remit the tax within five days of policy issuance could also financially strain both insurers and insured parties. Especially for those purchasing comprehensive insurance through payment plans, this rapid remittance requirement might necessitate upfront payments that many consumers cannot afford, causing a significant disruption in cash flow for both parties. Furthermore, the added administrative burden of collecting and remitting the tax will strain insurance companies, particularly as they lose revenue due to the shift from comprehensive to third-party insurance. This additional cost will likely be passed on to customers, making mandatory third-party insurance more expensive and adding to consumers' financial burden.
Depending on the desired policy objective, several suggestions could mitigate the negative impacts of the Motor Vehicle Tax. If raising revenue is the goal, taxing the insurance sector premiums as a whole could spread the effect across many different products, reducing the outsized impact on a single insurance class. Alternatively, the government could tax driving licenses, depending on the classes of vehicles a driver is licensed to drive.
If the policy aims to reduce the number of vehicles on the road, removing the cap on the tax and exempting public service vehicles could provide commuters with a viable alternative. To improve road safety, imposing a more significant portion of the tax on much older or unroadworthy vehicles while exempting zero-mileage vehicles would be more effective.
Regardless of the policy objective, this tax will increase the total cost of vehicle ownership. Car owners already face heavy taxation at the point of import or purchase, with upwards of 40% of the price of new vehicles on Kenyan roads going to levies and taxes. Additionally, approximately 40% of fuel costs are taxes, while high maintenance costs are needed to keep vehicles roadworthy. Notably, these are often the first budget items drivers ignore during financial constraints, leading to more unroadworthy vehicles on the roads.
Ultimately, this tax will push vehicle ownership out of the reach of 'hustlers' and make it a preserve of the rich, reminiscent of the pre-early 90s period. This policy could have far-reaching consequences, potentially exacerbating socioeconomic inequalities and reducing mobility for lower-income individuals.
Dean N Onyambu is the Founder and Chief Editor of Canary Compass, a co-author of Unlocking African Prosperity, and the Executive Head of Trading at Opportunik Global Fund (OGF), a CIMA-licensed fund for Africans and diasporans (Opportunik). Passion and mentorship have fueled his 15-year journey in financial markets. He is a proud former VP of ACI Zambia FMA (@ACIZambiaFMA) and founder of mentorship programs that have shaped and continue to shape 63 financial pros and counting! When he is not knee-deep in charts, he is all about rugby. His motto is exceeding limits, abounding in opportunities, and achieving greatness. #ExceedAboundAchieve
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