Tax proposals will claw back gains in climate change fight

President William Ruto alights from an electric car at the KICC during the Youth Africa Climate Change Summit. [PCS, Standard] In contrast to previous years where the emphasis was on raising additional revenue from the existing tax base, this year's Finance Bill has included previously untouched sectors. One proposal under consideration is the introduction of a motor vehicle tax of 2.5 percent of the vehicle value at the time of insurance coverage acquisition. This tax is to be capped at a minimum of Sh5,000 and a maximum of Sh100,000. The responsibility will fall on the insurer to collect and remit the tax within five days of issuing the insurance policy. Failure to comply would lead to a penalty of 50 percent of the outstanding tax, in addition to paying the principal amount. The government has long considered imposing taxes on motor vehicle usage to address environmental concerns. For instance, in the 2022 Draft National Green Fiscal Incentives Policy Framework, the Treasury proposed carbon and congestion taxes on vehicles to combat their environmental impact. Internationally, motor vehicle taxes are common. In Germany, vehicle tax is based on carbon dioxide emissions, engine size, and fuel type to promote fuel efficiency. England's vehicle excise duty is payable on a yearly basis and is determined by carbon dioxide emissions and fuel type, with lower emissions resulting in lower taxes. In France, the bonus-malus system taxes high-emission vehicles and rewards low-emission ones based on carbon dioxide emissions, to encourage environmentally friendly vehicle choices. Unlike the other countries that have implemented motor vehicle taxes, the proposed tax is based on the motor vehicle value without considering the emissions from the vehicle. The Finance Bill has other provisions, which contradict the country's stated ambition to lead the climate agenda in the region. Fiscal measures such as the imposition of taxes, subsidies, and incentives have been effective in shaping consumer behaviours. For instance, excise taxes on alcohol, cigarettes, and bottled water have long been employed to regulate the externalities linked to their consumption. In recent years, the government has been taking a similar approach to influence climate action. In the 2023 Finance Act, amendments were made to the Value Added Tax (VAT) Act to zero rate the supply of electric motorcycles, electric bicycles, solar and lithium-ion batteries, and electric buses with a capacity of ten or more passengers. Additionally, in 2022, 100 percent electric-powered motor vehicles became excisable at a subsidised rate of 10 percent compared to combustion engines which are excisable at between 20 percent and 35 percent depending on their engine capacity. The incentives were designed to promote eMobility adoption by recognising these items as crucial to reducing reliance on fossil fuels in transportation and transitioning to alternative energy sources, especially eMobility. These endeavours are also evident in the draft eMobility policy published by the Ministry of Transport in March 2024, which seeks to enhance both fiscal and non-fiscal measures to expedite the adoption of EVs. This year's tax proposals reveal several contradictions in the Government's approach to environment conservation with some measures seeming to claw back gains that the country has made in recent years. Examples include proposals to eliminate the zero rate on the supply for electric bicycles, solar and lithium-ion batteries, and electric buses carrying ten or more passengers. It also proposes exempting from VAT electric motorcycles, previously zero-rated. Consequently, electric bicycles, batteries, and buses would be subject to 16 percent VAT, while suppliers of electric motorcycles will not be allowed to reclaim VAT inputs on their production purchases. The bill also proposes imposing excise duty on electric motorcycles, at the higher of 10 percent of the unit's value or Sh12,952.83. In a contradictory proposal, the bill seeks to abolish excise duty on other types of motorcycles. These proposed adjustments will negatively impact eMobility adoption and call into question the government's commitment to environmental protection. Lastly, electric vehicles are not exempt from the motor vehicle taxes which indicates that the proposed tax is more about revenue generation and not environmental protection. While subsidies and incentives can be used to mitigate negative externalities, their implementation comes with a cost to the government. As per the Treasury's 2023 Tax Expenditure Report, the government forwent Sh393.6 billion in 2022 through different tax reliefs, incentives, and subsidies. This substantial sum is noteworthy, considering the government's historical challenges in meeting budget targets. It therefore calls for careful evaluation of the proposed tax measures to ensure that foregone taxes are exchanged for meaningful and effective outcomes. This prompts the question; have the tax measures aimed at incentivizing eMobility genuinely expedited its adoption? If so, it would be illogical to stray from this approach of eliminating the incentives. [Kennedy Mugambi is a tax advisor with KPMG Advisory Services (kmugambi@kpmg.co.ke). The views and opinions are those of the author]

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