ATD NOTES / DCM NOTES – PRINCIPLES OF PUBLIC FINANCE AND TAXATION PDF AND HARD COPY NOTES

 

PRINCIPLES OF PUBLIC FINANCE AND TAXATION

 

 

ATD LEVEL III

DCM LEVEL III

 

 

 

 

STUDY TEXT

 

 

 

CONTENT

1. Introduction to Public Financial Management Legal Framework

•  General overview of Public Financial Management as envisaged by the Constitution ( Chapter 12 of the constitution)
• Financial regulations
• Treasury Circulars
• Process of developing county government finance bills

2. Public budget process for public bodies

• General definition of budgets terms
• Role of budget officers in budget preparation and execution
• Responsibilities of The National and County treasury’s in relation to budget preparation
• Budget process for both national, county and Public entities
• Budgetary and fiscal policy tools

3. Oversight function in public finance management

• The role of National Assembly
• The role of senate
• The role of county assembly
• The role of auditor general
• The role of Internal Audit
• Role of controller of budget in relation to disbursement of public funds as envisaged by the constitution and PFM Act, 2012

4. Introduction to taxation

• History and purposes of taxation
• Principles of an optimal tax system
• Single versus multiple tax systems
• Classification of taxes and tax rates
• Impact incidence and tax shifting, Lax shifting theories
• Taxable capacity
• Budgetary and fiscal policy tools.: General definition of budgets terms ,Budget surplus and deficits
• Role of budget officers in budget preparation and execution
• Responsibilities of the national and county treasury in relation to budget preparation
• Budget process for both national, county and Public entities
• Revenue Authority — History, structure and mandate

5. Taxation of income of persons Taxable and non taxable persons

• Sources of taxable incomes
• Employment income;
• Taxable and non taxable benefits
• Allowable and non allowable deductions
• Tax credits (Withholding tax, personal and insurance relief etc)
• Pension Income
• Business income:
• Sole proprietorship
• Partnerships (excluding conversions)
• incorporated entities (excluding specialised institutions)
• Turnover tax
• Income from use of property- rent and royalties
• Farming income
• Investment income

6. Capital deductions

• Rationale for capital deductions
• Investment deductions: ordinary manufacturers
• Industrial building deductions
• Wear and tear allowances
• Farm works deductions

7. Administration of income tax

• Overview of the income tax act
• Identification of new tax payers
• Assessments and returns
• Operations of PAYE systems: Preparation of PAYE returns, categories of employees
• Notices, objections, appeals and relief of mistake A
• Appellant bodies
• Collection, recovery and refund of taxes
• Offences, fines, penalties and interest
• Application of ICT in taxation: iTax, Simba system

8. Administration of value added tax

• Introduction and development of VAT
• Registration and deregistration of businesses for VAT
• Taxable and non taxable supplies Privileged persons and institutions
• VAT rates
• VAT records
• Value for VAT, tax point
• Accounting for VAT
• VAT returns
• Remission, rebate and refund of VAT
• Rights and obligations of VAT registered person
• Offences fines, penalties and interest
• Enforcement
• Objection and appeals: Requirements and procedure

9. Customs taxes and excise taxes

• Customs procedure
• Import and export duties
• Prohibitions and restriction measures
• Transit goods and bond securities
• Excisable goods and services
• Purposes of customs and excise duties

10. Emerging issues and trends

 

TOPIC                                                                                                          PAGE

 

Topic 1:

Introductions to public financial management Legal Framework………………..5

Topic 2:

Public budget process for public bodies …………………………………………………38

Topic 3:

Oversight function in public finance management………………………….……….71

Topic 4:

Introduction to taxation……………………………………………………….…………….80

Topic 5:

Taxation of income of persons Taxable and non taxable persons……………..116

Topic 6:

Capital deductions……………………………………………………………….…..…………196

Topic 7:

Administration of income tax……………………………………………………………240

Topic 8:

Administration of value added tax ………………………………………………………….258

Topic 9:

Customs taxes and excise taxes………………………………………………………………283

 

KASNEB SAMPLE NOTES

 

Revised on: June 2019

 

TOPIC 1

 

INTRODUCTIONS TO PUBLIC FINANCIAL MANAGEMENT LEGAL FRAMEWORK

 

INTRODUCTION TO PUBLIC FINANCE

 

Meaning of Public Finance

Public finance is related to the financing of the state activities and a narrow definition of the public finance would try to say that public finance is a subject which discusses the financial operation of the fiscal or of the public treasury.

Nature of Public Finance

Public finance has been held as a science which deals with the income and expenditure of the government’s finance. It has been held as a study of principles underlying the spending and raising of funds by the public authorities. The various theories which form the basis of the collection; maintenance and expenditure of the public income constitute the subject and matter of finance.

Scope of Public Finance

The scope of public finance is not just to study the composition of public revenue and public expenditure. It covers a full discussion of the influence of government fiscal operations on the level of overall activity, employment, prices and growth process of the economic system as a whole.

According to Musgrave, the scope of public finance embraces the following three functions of the government’s budgetary policy confined to the fiscal department the:

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TOPIC 2

PUBLIC BUDGET PROCESS FOR PUBLIC BODIES

 

 

General definition of budgets terms

A budget is an estimate of costs, revenues, and resources over a specified period, reflecting a reading of future financial conditions and goals.

One of the most important administrative tools, a budget serves also as a

1. Plan of action for achieving quantified objectives,
2. Standard for measuring performance, and
3. Device for coping with foreseeable adverse situations.

A budget process refers to the process by which governments create and approve a budget

A government budget is a document presenting the government’s proposed revenues, spending and priorities for a financial year. The budget is passed by the legislature, approved by the chief executive and presented by the national or county treasury to the national or county assemblies.

It is also a set of procedures by which the government rations resources and controls spending among the various government agencies. The government budget is used as an instrument for economic policy, management and accountability.

It is an allocation mechanism that aims to maximise the contribution of public expenditure to national welfare.

Budget can be divided in to two parts namely

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TOPIC 3

OVERSIGHT FUNCTION IN PUBLIC FINANCE MANAGEMENT

 

Role of National Assembly

National assembly has established budget committee in public finance matters meant to oversee public finance management.

The committee is established to deal with budgetary matters and has responsibility for the following matters, in addition to the functions set out in the Standing Orders—

1. discuss and review the Budget Policy Statement and budget estimates and make recommendations to the National Assembly;
2. provide general direction on budgetary matters;
3. monitor all budgetary matters falling within the competence of the National Assembly under this Act and report on those matters to the National Assembly;
4. monitor adherence by Parliament, the Judiciary and the national government and its entities to the principles of public finance and others set out in the Constitution, and to the fiscal responsibility principles of this Act;
5. review the Division of Revenue Bill presented to Parliament and ensure that it reflects the principles of the Constitution;
6. examine financial statements and other documents submitted to the National Assembly and make recommendations to the National Assembly for improving the management of Kenya’s public finances;
7. make recommendations to the National Assembly on “money Bills”, after taking into account the views of the Cabinet Secretary; and
8. table in the National Assembly a report containing the views of the Cabinet Secretary
9. Introduce the Appropriations Bill in the National Assembly.

 

Role of Senate

There is established Committee of the Senate set to deal with budgetary and financial matter’s, it has responsibilities for the following matters, in addition to the functions set out in the Standing Orders present to the Senate, subject to the exceptions in the Constitution, the proposal for the basis of allocating revenue among the Counties and consider any bill dealing with county financial matters; review the County Allocation of Revenue Bill and the Division of Revenue

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TOPIC 4

INRODUCTION TO TAXATION

 

HISTORY AND PURPOSE OF TAXATION

Before 1897, Kenya was made up of multifarious tribal-based societies each with its own geographical and sociological background. These societies were communist/socialist in the sense that property was communally owned by all the members of a particular social setup. Upon amassing wealth in form of harvests, part of it was required to be submitted to the community leaders in form of tithe. This “tithe” was to be used in future to assist those who didn’t have enough property to sustain them or even to assist those who were hit by calamities. In a sense, this was a form of taxation because the percentage that was submitted to the community leaders was used to help others in future.

The principles and systems of taxation that existed in most African Kingdoms during this period were therefore informal. It was only upon the influx of foreigners that some form of formal taxation started. The Arabs who entered Kenya in the seventh century for example taxed the coastal region on the basis of Islamic Law. Islamic law upholds the right of leaders to tax their subjects within bearable limits and therefore taxation is not forbidden. Capitation of such tax was done by charging a fixed amount for each and every slave that was to be exported from the Sultanate of Oman. Custom duties were also charged on other exports like ivory, cloves and beads.

The Portuguese arrived at the Kenyan coast and were now taking over from the Arabs. The rst recorded treaty that involved a form of taxation in this period was in 1502. The then Sultan Ibrahim of Malindi was held against his wishes and forced to accept defeat. While being held hostage during negotiations on Vasco da Gamma’s boat, a treaty of surrender was signed with Portugal for an annual tribute of 1,500 meticals of gold.

However, the Portuguese were violent and thus this led to a complete failure to use equity in the creation and levy of taxes there were riots (you thought riots started the other day?) were punctuated with civil disobedience and widespread cases of tax evasion and avoidance.

By the end of the rule of the Arabs and Portuguese along the East coast of Africa the existing balance of taxation that was inherited by the British included a capitation tax payable per head of slave exported and customs revenue shared equally between the Arabs and Portuguese. The tax base was, however, limited to traders only.

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TOPIC 5

TAXATION OF INCOME OF PERSONS

 

INTRODUCTION

Income tax is charged under the income tax Act (Cap 470) which contains rules and regulations relating to the following:

• Ascertainment of income
• Assessment of tax
• Collection of tax
• Entitlement of personal relief

S.3 (1) of the income tax act states that:

“Subject to, and in accordance with this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.”

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TOPIC 6

 

CAPITAL DEDUCTIONS

 

INTRODUCTION

Key terms

Investment deduction: Is a capital deduction given on cost of buildings and machinery which are used for manufacture, on cost of a ship, and on cost of a hotel building.

The investment deduction on buildings and machinery is intended to encourage new investments in the manufacturing sector

The investment deduction is deducted in the income tax computation, or in arriving at the taxable income/loss

Industrial Building allowance: This is a capital deduction or allowance given in respect of capital expenditure on an industrial building

The amount of industrial building allowance is deducted in the income tax computation or in arriving at the taxable income/loss for year or period

Wear and Tear allowance: The wear and tear deduction is a capital deduction on machinery used for business. The deduction is made against income

Farm works deduction: This is a capital deduction granted only in respect of capital expenditure on agricultural land. The farm works deduction is deducted in the income tax computation

The deductions or allowances are at standard rates for all taxpayers depending on the nature of the capital expenditure incurred.

Section 16 of the income tax expressly provides that in calculating the gains or profits of a person no deductions can be made for expenditure of a capital nature. The same principle is applied in disallowing capital losses, exhaustion of capital e.g. depreciation of fixed assets.

• Capital Allowances are allowable deductions granted on the capital expenditure incurred to acquire assets that are utilized in the business to generate taxable income.
•  Capital allowances are granted for the following reasons:
•  To encourage new industrial enterprises;
• To allow such deductions as may just and reasonable as representing the diminution in value of fixed assets during a particular year.
• To encourage exportation

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TOPIC 7

ADMINISTRATION OF INCOME TAX

 

OVERVIEW OF INCOME TAX ACT

Income tax in Kenya is charged under the income tax Cap 470. The Act contains provisions relating to:

• Ascertainment of income.
• Assessment of tax.
• Collection of tax
• Entitlement to personal relief

The income tax Act Cap 470 was enacted on 20 December 1973 to replace the former East Africa income tax management Act. It contains:

• 14 parts
• 133 sections
• 13 schedules
• 8 subsidiary legislation

IDENTIFICATION OF NEW TAX PAYERS

The finance Act 1992 introduced the thirteenth Schedule to the income tax Act which took effect from 1^st January 1993. A personal identification number (PIN) shall be required for tax purposes for any of the following transactions:

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TOPIC 8

ADMINISTRATION OF VALUE ADDED TAX

INTRODUCTION AND DEVELOPMENT OF VAT

VAT is a tax on expenditure that is collected by suppliers of goods and services and passed on to the government.

VAT is charged on the supply of goods and services in Kenya by a taxable person in the cause of or in furtherance of any business carried on by that person and on the importation of goods and services into Kenya.

VAT was introduced in Kenya 1990 to replace sales tax. The decision to replace sales tax with

VAT was as a result of the perceived deficiencies in the sales tax system which includes:

• The sales tax system was a single stage system- sales tax was levied only once at the manufacture level. However, in a country where tax evasion is widespread, a single stage tax system will result in a higher loss of revenue than would normally be the case if the system was multi stage.
• Where the inputs for manufacturing were subject to sales tax, the imposition of sales tax on the finished product will result in the imposition of tax on another tax i.e. cascading effect.
• The sales tax system had a limited scope – sales tax was levied only on certain specific manufactured Goods. Services were not within the scope of tax. Therefore sales tax had a narrow tax base as compared to VAT, with the result that the revenue yield was comparatively low.
• VAT is an indirect tax, It is essentially a tax on the domestic expenditure or consumption. Under VAT, it the end user or consumer that ultimately bears the tax burden.
• VAT is charged on each transaction in the production and distribution chain.

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TOPIC 9

CUSTOMS TAXES AND EXCISE TAXES

 

CUSTOMS PROCEDURE

INTRODUCTION

Customs and Excise duties are charged under the custom and excise Act cap 472. The custom department is charged with the responsibility of controlling imports and exports, enforcing prohibitions and restrictions and collecting revenue on both imports and excisable goods.

• On arrival cargo from an aircraft, vehicle or vessel which unloaded must be declared to customs in a prescribed form within 21 days. The goods should be entered either for home consumption, transit, transshipment, warehousing or to an export processing zone.
• Where there is insufficient information, the declaration maybe made on provisional status subject to approval by the proper officer. Where provisional entry has been allowed, the proper officer will require the owner to deposit an amount estimated as the duty payable.
• Where goods have not been entered for clearance within 21 days, they will be deemed as deposited in a customs warehouse where rent will be charged at the prescribed rates. Where goods are not removed from the customs warehouse within the notice period granted by customs, they may be sold by public auction to recover customs duty and warehouse rent payable on them.

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