Rotich’s taxes on locally made cars put 10,000 jobs at risk

 

General Motors employees work on the body of a truck being assembled at the plant in Industrial Area in Nairobi. PHOTO | FREDRICK ONYANGO 

By VICTOR JUMA, vjuma@ke.nationmedia.com

In Summary

• The firms import completely knocked down (CKD) vehicles which are assembled in their plants, customising them to fit local fuel and driving conditions.
• “Production will fall and availability of some vehicles will be threatened,” said Rita Kavashe, the chief executive of GMEA, adding that the increase in prices of locally assembled vehicles will enhance the appeal of second-hand imports from markets like Japan.
• The decision by Kenya to raise taxes on the assemblers is in stark contrast to South Africa which has expanded its incentives to manufacturers and assemblers, a move that has seen it emerge as one of the largest consumer and exporter of motor vehicles on the continent.

Nearly 10,000 vehicle and motorcycle assembly jobs are at risk of disappearing in the wake of the recently introduced excise taxes on locally assembled vehicles, industry officials said.

The assemblers said they had already retrenched 415 workers in the first five months of the year in response to a slowdown in business associated with the levies.

The Kenya Association of Manufacturers (KAM) said last year’s introduction of a flat excise tax of Sh150,000 and its recent enhancement to 20 per cent of a vehicle’s value have effectively wiped out the tariff and tax incentives that led to the establishment of assembly plants in the 1970s.

The series of excise tax measures followed the imposition of a value added tax (VAT) on the industry in 2013, which KAM says marked the first of the disincentives that have since deepened in severity.

A flat rate of excise duty of Sh10,000 per unit has also been imposed on motorcycles, pushing up retail prices by wide margins.

KAM warns in a memorandum to the government on behalf of Kenya Vehicle Assemblers (KVM), General Motors East Africa (GMEA) and Associated vehicle Assemblers (AVA) that the plants will shut down if the taxes are not terminated.

“Imposition of this duty on locally assembled vehicles will disincentivise the motor vehicle industry, leading to the ultimate collapse of the industry with significant ripple effects on the forward and backward linkages, whereby the local content suppliers and dealers may have to close shop,” KAM wrote in the memo seen by the Business Daily.

The manufacturers want Treasury secretary Henry Rotich to stop the application of the 20 per cent excise tax immediately, adding that the tax laws should be amended to explicitly exempt vehicle parts headed to assembly plants from taxation. The lobby says the proposed measure is necessitated by the fact that 10,000 jobs across assembly plants, dealerships and local content suppliers are at stake.

READ: Kenya auto assemblers feel the heat as Addis engages top gear

READ: Kenya assembled vehicles hit 10,000 units on tax incentive

Also read: Leyland to put Sh500m trucks and buses assembly plant in Kenya

KAM says the effect of the taxes is already being felt in the industry, including a 26 per cent drop in motor vehicle unit sales to 5,938 in the first five months of the year. A similar margin of drop in sales value amounting to Sh2.5 billion has also been recorded in the period.

Motor vehicle assemblers have also reported an average production decline of 30 per cent in the review period, leading to redundancies of 115 employees and capacity utilisation of just 20 per cent.

Motorcycle assemblers on the other hand have cut 300 jobs, reducing their staff count to 900 after production fell 47 per cent to 32,000 units.
This saw their capacity utilisation drop to 55 per cent from the previous year’s 80 per cent amid a 46 per cent decline in motorcycle sales to 30,634 units.

Besides the job losses and reduced earnings for assemblers and dealers, KAM says an industry shutdown will deny Kenya technology transfer, slow down the march toward industrialisation and reduce revenues to government via PAYE and corporate taxes.

The firms import completely knocked down (CKD) vehicles which are assembled in their plants, customising them to fit local fuel and driving conditions.

The industry also benefits auxiliary firms, including body fabricators and manufacturers of upholstery, paint and steel.
The automakers mostly assemble commercial vehicles –the fastest-selling in the new vehicles market.

Various brands of pick-ups, trucks, buses and utility vehicles are assembled locally, including Toyota, Hino, Isuzu, Mitsubishi, Nissan and Eicher.
While the exemption from the 25 per cent import duty remains, local assemblers expect a decline in their industry at best if the VAT and excise taxes are not terminated.

Production will fall

“Production will fall and availability of some vehicles will be threatened,” said Rita Kavashe, the chief executive of GMEA, adding that the increase in prices of locally assembled vehicles will enhance the appeal of second-hand imports from markets like Japan.

Used vehicles can be up to 50 per cent cheaper compared to new ones, making them popular among price-sensitive individuals and small businesses.
Last month’s increase in the excise tax to 20 per cent of a vehicle’s value will raise the burden of that particular levy from the previous flat rate of Sh150,000 to between Sh231,000 and Sh1.2 million depending on the vehicle’s value.

Heavy-duty trucks, which command the highest prices, will see the biggest price inflation in effective excise tax increments that KAM says ranges between 54 per cent and 750 per cent.

KAM says the new tax rate will halve dealers’ margins to seven per cent on average, meaning that actual profitability per vehicle will ultimately depend on how well a company manages its other operating expenses.

The decision by Kenya to raise taxes on the assemblers is in stark contrast to South Africa which has expanded its incentives to manufacturers and assemblers, a move that has seen it emerge as one of the largest consumer and exporter of motor vehicles on the continent.

The incentives in South Africa include a non-taxable cash grant of 20 per cent for assemblers/manufacturers and 25 per cent for component producer and tooling companies on the value of qualifying investment. An additional non-taxable cash grant of five per cent is given to firms maintaining their base year employment figure. South Africa requires companies to achieve a minimum annual output of 50,000 units or a turnover of R10 million (Sh66.5 million) to qualify for the incentives.

More vehicle manufacturers have moved to boost their production to take advantage of the incentives, reducing their assembly in markets like Kenya and shifting them to South Africa.

General Motors in 2013 stopped the assembly of Isuzu pick-ups in Kenya and transferred it to South Africa, which now exports the fully-built vehicles to Kenya.

The incentives have seen South Africa produce more than 600,000 vehicles annually – 60 times Kenya’s output — and sell to the domestic market and tens of other African countries. Ethiopia has also announced a raft of incentives, including tax breaks, in an ambitious plan to build its vehicle assembly industry for internal sales and exports.