Proposed Motor Vehicle Tax Threatens Fare Hikes and Job Cuts in Matatu Sector

Public service vehicles in Nairobi.
Public service vehicles in Nairobi.

The matatu sector is bracing for a challenging future as it warns of imminent fare hikes and job cuts if the proposed Motor Vehicle Tax is enacted.

This tax, outlined in Finance Bill 2024, could have a profound impact on an industry that directly employs around 70,000 people and indirectly supports an additional 80,000 workers.

In Nairobi, where approximately 58.7 per cent of residents rely on Public Service Vehicles (PSVs) for their daily commute, the repercussions could be severe.

Operators are sounding the alarm that commuters might face significantly higher fares if the proposed amendment to the Income Tax Act, introducing the Motor Vehicle Tax, is passed.

Many commuters are already grappling with high fares due to fluctuating fuel prices. For instance, on the 125/126 route, which covers Nairobi to Kiserian through Rongai, passengers are currently paying up to Ksh150, or Ksh200 for those travelling to Kiserian, following fare hikes that commenced in early January.

The government aims to raise Ksh58 billion in the 2024/25 financial year through this tax, set at 2.5 percent of a vehicle's value, with a minimum of Ksh5,000 and a maximum of Ksh100,000.

A file image of matatus parked along Accra road in Nairobi County.
A file image of matatus parked along Accra road in Nairobi County.

PSV operators, however, are cautioning that this tax could lead to exorbitant expenses. The Federation of Public Transport Sector has told the Departmental Committee on Finance and National Planning that their tax and levy costs in the first year of acquiring a new vehicle could soar to 74 per cent of the purchase price if the tax is implemented as currently proposed.

In a submission to the National Assembly's Finance and Planning Committee, the Federation of Public Transport Sector detailed the potential financial burden. For example, a 33-seater mini-bus, typically costing around Ksh6.6 million, would face first-year taxes and levies, including the Motor Vehicle Tax, amounting to an estimated Ksh4.9 million. Similarly, a 51-seater bus, with an average purchase price of Ksh8.5 million, would incur approximately Ksh6.3 million in year-one taxes and levies.

For the smaller 14-seater vehicles, fetching an average of Ksh5.3 million, the tax burden could be around 69 percent of the unit cost, or roughly Ksh3.7 million.

"The Federation of Public Transport Sector urges all Kenyans, and especially the National Assembly, to reject the proposed Motor Vehicle Tax. This tax will drastically increase the cost of acquiring PSVs and operating businesses, which will inevitably be passed on to passengers," the federation asserted to the Finance and Planning Committee.

The federation also raised concerns about the proposed use of insurance companies as tax collection agents. They argue that the poor health and reliability of insurance companies, which already struggle to pay claims, make them unsuitable for this role. "Entrusting insurance companies to collect the Motor Vehicle Tax will lead to corruption and inefficiencies," the federation stated.

In Nairobi, the Matatu Owners Association estimates that around 10,000 matatus operate on various routes, including those to nearby counties. These vehicles generate significant revenue for both central and local governments, insurance firms, spare parts dealers, mechanics, and other related businesses.

Mungai Kihanya, a columnist for the Nation newspaper, proposed an alternative method for tax collection.

"Could the tax be collected every time a vehicle is transferred to a new owner, and the rate then be increased from 2.5 percent to 4 percent of the last insured value?" he suggested, indicating a potential compromise that could alleviate the burden on operators while still achieving the government's revenue targets.

File images of matatus at a bus terminus in Nairobi
File images of matatus at a bus terminus in Nairobi
Citizen Digital
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