In a case filed by Car Importers Association of Kenya, the judge ruled in favour of the petitioners and found KRA’s taxation of used cars to be 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.
“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.
Al-Husnain Motors, for instance, imported a Toyota Land Cruiser V8 running on a 4.6-litre petrol engine. The used car dealer paid taxes of Sh4.1 million derived on the retail price of Sh14.4 million for a similar model in Kenya.
KRA, however, demanded more taxes from the dealer, arguing that the car should be taxed based on the higher selling price of Sh17.9 million for a Toyota Land Cruiser VX.
“This court is satisfied that the respondents have no legal mandate to extract more taxes from Al-Husnain Motors on the basis of Facebook website data, or data offered in unclear circumstances by Toyota Kenya who are the petitioner’s competitors.
“Clearly, the basis of such taxation is guesswork whose result is ambiguity which has led to some importers being left off the hook while others being forced to pay.”
The judge added that the current motor vehicle tax process, if allowed to continue, will promote bias, unfairness and discrimination in assessment of tax due.
Used car dealers have long accused their formal counterparts of supplying the taxman with exorbitant prices of the models they sell, with KRA using this information as a base for calculating import duties.
The second-hand dealers estimate the losses brought by this price divergence at hundreds of thousands to millions of shillings for each imported car.
The dealers see this as a bid by their formal counterparts to drive up prices of used models and render them uncompetitive in the eyes of their price-sensitive customers.
New vehicle dealers on the other hand have argued that the variance in the prices is due to the fact that the CRSP reflects a snapshot of their operations.
They say 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.
Used cars generally attract an import duty of 25 percent, excise duty of 20 percent and valued added tax of 16 percent, 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.
A higher reference price, therefore, has the effect of inflating taxes and the ultimate yard prices of second-hand cars. Formal dealers, however, lay the blame on the taxman, saying the current method of arriving at the benchmark prices is also hurting them.
“I’m not surprised that the CRSP may be different from showroom prices,” Dennis Awori, Toyota Kenya’s chairman, told the Business Daily in a past interview.
“KRA asks for pricing information at a certain time and does not update it for months. In the interim period, prices change due to factors such as foreign exchange rates,” he said.
Mr Awori added that the CRSP for some models are lower by up to a third compared to auction prices in source markets like Japan, adding that this has given an undue advantage to used car dealers.