The Kenyan government has withdrawn the proposed 2.5% levy on motor vehicles in the Finance Bill 2024 in the face of the tax's likely unfavourable impact on the insurance industry.
Finance and Planning Committee chairperson Mr Kimani Kuria told the local media that the proposal would have made the insurance industry unsustainable, reported the radio station CapitalFM.
"We have agreed that the motor vehicle tax cannot be amended through an Income Tax Act and pegging it on insurance would cripple the insurance business and make it difficult for Kenyans taking third-party insurance," said Mr Kuria.
Earlier, Treasury Cabinet Secretary Njuguna Ndung'u said that to expand the tax base and make Kenya self-reliant, he proposed to introduce an annual motor vehicle tax of 2.5% of the value of the vehicle subject to a minimum amount of KES5,000 ($38.65) per annum.
If the proposal had passed, motor insurers would be penalised if they were to fail to collect the tax and remit it to the Kenya Revenue Authority (KRA).
In a statement in May 2024, the Association of Kenya Insurers (AKI) urged the National Assembly to discard the proposed motor circulation tax in the Finance Bill, 2024.
AKI said, “With motor vehicle insurance being compulsory in Kenya, we anticipate a major shift towards third-party motor insurance if this tax is implemented. Consequently, motorists will face higher risks, as they will essentially only be covered for third-party liabilities, leaving their vehicles unprotected in the event of accidents. This could burden motorists with significant out-of-pocket expenses for repairs or replacements.
“Moreover, a shift towards third-party coverage will lower insurers' income which will translate to lower corporate tax contributions. Additionally, a reduction in insurers’ income will prompt downsizing the workforce subsequently reducing employee tax revenues to the government.”