Cost of proposed tax increment on used cars

The Committee on Finance in Parliament last week voted to increase the taxes charged on imported used vehicles. In the National Budget Framework Paper for Financial Year 2015/16 – Financial Year 2019/20, the government is proposing that 86 per cent of the proposed budget for 2015/16 should be sourced locally. This is intended by government to reduce dependency on foreign aid.
And this, therefore, is believed to be part of the reason for the increased levy because government intends to collect more than Shs7b from these taxes in a year. However, the increased taxes are also expected to reduce the number of used cars which make up the largest vehicle population in the country.

Cars to be affected

The proposed new taxes, contained in the Finance (Amendments) Bill 2015, indicates that cars older than five years, from the date of manufacture, will be targeted.
“These amendments will come into effect once the Budget for 2015/16 has been approved,” says Fred Mwesigye (Nyabushozi MP), chairperson of the Presidential Committee and a member of the Budget Committee, adding that, “the levy on vehicles between five to 10 years will be increased to 35 per cent of the cost, insurance, and freight.”
Currently, the levy on used cars stands at 20 per cent, although the government had initially proposed an increase to 25 per cent. On cars 10 years and older, the proposed tax is 50 per cent.

reasons for the increment

The reason for the increment is that the environment needs to be protected from vehicles that release carbon emissions into the atmosphere.
“The constitution mandates us to use all means to protect the environment,” says Fred Mwesigye, the chairperson of the Presidential Committee and a member of the Budget committee.
“There are many cars on our roads, but it is better for us to have fewer cars which are in good working condition, rather than having junk,” he explained.
The move to eliminate old cars from the roads is not only unique to Uganda.
In Kenya, the Energy Regulatory Commission (ERC) commissioned a study by the United Nations Environment Programme (UNEP) and the University of Nairobi to look into the prospects of promoting cleaner and more fuel-efficient vehicles in order to reduce localised air pollution, greenhouse gas emissions and national fuel bills.
As part of the recommendations of the study, Kenya is considering restricting the importation of vehicles older than five years. Already, all road vehicles which are more than eight years old, from the year of manufacture, cannot be imported.

Clashes

According to MP Geoffrey Ekanya (Tororo County), who in a minority report proposed an outright ban on used vehicles, no study has been commissioned by the government to justify the claim that emissions from used cars are detrimental to the environment.
“The issue of carbon emissions is bigger than used cars. We have poor disposal systems of industrial waste and a large percentage of Ugandans are still using charcoal for cooking. Government is silent on these issues.”
Ekanya insists that the new taxes are a ploy to increase taxes. “There is no will power to protect the environment. Government is just using it (the environment) as a cover-up to raise taxes.”

Effects of the increment

Under the Pre-Export Verification of Conformity Programme (PVoC) car dealers are paying for pre-inspection services in the country of origin.
“For cars originating from Japan, the dealer will pay a pre-export road worthiness inspection fee, per vehicle, of USD 140 (about Shs419,000),” says Linda Kobere, PVoC Desk Officer, Uganda National Bureau of Standards. “For cars coming from the UK and Dubai, the importer will pay USD 200 (about Shs599,000) and USD 125 (about Shs374,000) per car, respectively.”
“The competition among car importers is already stiff, and now with higher taxes we have to raise the price of cars,” says Peter Kiwanuka an importer of used cars at COIN, adding,
“our customers are used to specific price ranges for different cars so it will be hard for them to adjust to the new prices.”
MP Ekanya concurs, saying that, “taxes make it hard for people to buy cars. It is not the prices of the cars that are high; it is the make which makes it almost impossible to buy a car.” Already, in car depots such as COIN, used cars which are in genuine good condition are expensive. Kiwanuka argues that eventually, dealers will import few cars and sell them at very high prices.
Michael Soita, a sales executive at COIN advises that, “instead of levying taxes according to the year of manufacture, government should come up with one specific tax to cover all imported used cars. Instead of Parliament coming up with new taxes, they should first consult with the importers to know their stand.”
MP Mwesigye admits that the importers were never consulted. But says, “I do not believe an increase in tax will affect these people”
Medi, a dealer in old and used cars at PINE, disagrees with MP Mwesigye, saying it is futile to engage the government.
“If they can approve a tax without coming out of Parliament to talk to us, then what is the use of opposing the tax? It is as good as passed.”
“If the intention of the government is to protect the environment, how many people have the capacity to buy a new car?” asks Soita, adding that the cheapest new cars cost between Shs80m and Shs100m.

Those who want a total ban

“Old cars are being driven to (Democratic Republic of) Congo, South Sudan, and Burundi from Mombasa via Uganda,” Ekanya says. “We need a policy at the regional level for a complete ban on used cars.”
Mwesigye takes the view that out rightly banning old cars will backfire.
“This process should be gently introduced to the public. Of course, the new taxes will act as a deterrent to those importing used cars and eventually their number will reduce.”
Banning used cars will affect those who buy cars for purely sentimental reasons. For instance, if you would like to import a used Benz 1990 model, the process may be rigorous.

When the ne levies start

Customers intending to buy used cars will have to dig deeper into their pockets once the new taxes begin because at the end of the day, it is the consumer who will have to bear the burden of the new taxes.
Currently, a Vitz 1998 model goes for Shs12m in a car bond. With the increased taxes, the price may go up to Shs15m.
“If the tax is to encourage people to buy new cars, then the taxes on such cars should also be reduced,” says Michael Soita, a sales executive at COIN. “In (Democratic Republic of) Congo, a brand new car, with zero millage, is not taxed. A colleague once imported a BMW 2010 Model and had to pay Shs90m in taxes. To recover his money, he had to drive the car to Congo and sell it there.”
“The only way to encourage people to buy new cars is to reduce the taxes levied on them,” says Ekanya. “Government needs to reduce the tax to 20 per cent on every new vehicle.”
Mwesigye says the committee will engage government to start the process of reducing the taxes on new cars. “Our goal is to encourage investors to set up car assembling factories in Uganda so that the cost of importing new cars will eventually be minimised.”

The numbers

20 per cent
Current percentage charged on used cars imported in the country

35 per cent
Proposed new tax on used vehicles whose year of manufacture is more than five years

50 per cent
Proposed new tax on used vehicles whose date of manufacture is more than 10 years.