Insurance firms in Kenya are bracing for a potentially seismic shift in the landscape of vehicular taxation, as the Treasury has unveiled a plan to levy an annual tax on motor vehicles via the Finance Bill 2024. The proposition—an arduous 2.5 percent tax on the declared value of motor vehicles—is leaving insurers in a state of high alert. The implementation of this policy means that insurance companies will not only collect premiums but also act as tax agents, thereby incurring additional operational duties and costs.
The Tax Proposition Under Finance Bill 2024
Under the Treasury’s proposal, the tax floor is set at Ksh 5,000 with a ceiling at Ksh 100,000, respecting both the affordability for the populace and the respective value of the vehicles in question. With the introduction of this vehicle tax, insurance companies are expected to bear the onus of collecting the tax at the time of policy issuance and then promptly remitting it to the Kenya Revenue Authority (KRA) within an extremely tight window of five days. This new role as KRA’s de facto intermediary undoubtedly introduces a layer of complexity to insurers’ routine procedures.The timing is particularly challenging as insurance policy renewal dates vary widely among vehicle owners. This results in what would essentially become a continuous tax collection process for insurers. The Association of Ken Insurers (AKI) is already sounding the alarm on the implications of the bill, highlighting the intense pressure that will rest on insurance firms to not only collect but also remit taxes virtually on a daily basis.
Insurance Industry’s Operational Hurdles
The insurers’ predicament deepens as they contemplate the herculean task of revamping their operating systems to accommodate the collection and remittance of this new tax. Adapting to these procedural changes is not trivial—it requires substantial modifications to financial systems across the board, redistribution of manpower, and extensive training of personnel. This comes hard on the heels of the significant investment that insurance companies already channeled into complying with the recently adopted International Financial Reporting Standards (IFRS) 17.The AKI’s concerns also extend to the added expenditure that would stem from the likely increase in the workforce needed to manage the tax collection and reporting responsibilities. The cumulative effect of these concerns has left insurers apprehensive about the true cost of compliance, emphasizing the dichotomy between the government’s intent to boost revenue and the potential financial strain on the insurance industry.
Anticipated Market Behavior Changes
Kenya’s insurance sector is on high alert as the Treasury’s proposed vehicle tax, announced in the Finance Bill 2024, looms on the horizon. This new legislation mandates a yearly 2.5 percent tax on a vehicle’s declared value, triggering significant changes for insurers. Not only will they continue collecting insurance premiums, but the bill also designates them as tax agents, adding a layer of responsibility that comes with its own set of operational challenges and expenses. With this change, insurance companies are assessing the potential impact on their business models, as these additional duties could introduce complexity to their current processes, resulting in higher operational costs which could affect their service delivery and pricing. As the industry prepares to navigate this change, the ramifications of such a tax could bring about profound changes in the Kenyan vehicular insurance landscape.