PUBLIC FINANCE AND TAXATION

 

  

PART I

 

CPA Section 2

CCP Section 2

CIFA Section 2

CS Section 2

 

STUDY TEXT

 

 

CONTENT

1.  Introductions to public financial management Legal Framework

• General overview of public financial management as envisaged by the constitution
• Overview of the public financial management Act
• Financial regulations
• Treasury circulars; meaning and application
• Process of developing county government finance bills

2.    The operations of the national and county governments on management and control of public finance

• Establishment of National County Treasury
• Responsibility of National and County Treasuries with respect to public funds
• Establishment, purpose and composition of intergovernmental budget and economic council
• The process of sharing revenue
• The role of the Commission on Revenue on Allocation (COR)
• The role of the council of governors in county financial management

3.    Establishment of public funds in the public sector

• Provision of establishing public funds
• Rationale of creation of public funds
• The consolidated fund
• The establishment and administration of contingency funds
• The establishment and administration of equalization funds

4.    Supply chain management in public entities

• Definition and terminologies
• General overview of Public Procurement and Disposal (PPD) Act
• Procurement guidelines as envisaged by PPD Act
• Committees responsible for procurement
• Procurement process by National, County and other Public entities
• Tendering process and selection of suppliers in public sector
• Concept of E-procurement

 

5.    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

 

6.    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

 

7.    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
• Capital gains tax

 

8.    Capital deductions

• Rationale for capital deductions
• Investment deductions: ordinary manufacturers
• Industrial building deductions
• Wear and tear allowances
• Farm works deductions
• Mining allowance
• Shipping investment deduction
• Other deductions

 

9.     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

 

10.      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
• Challenges in administration of VAT

 

11.    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
• Goods subject to customs control
• Import declaration form, pre-shipment inspection, clean report of findings
• Other revenue sources

6.12      Emerging issues and trends

 

THIS IS A SAMPLE

 

Topic 1: Introductions to public financial management Legal Framework….. 6

Topic 2: The operations of the national and county governments on management and control of public finance…..37

Topic 3: Establishment of public funds in the public sector…. 64

Topic 4:Supply chain management in public entities….. 74

Topic 5: Oversight function in public finance management….94

Topic 6:Introduction to taxation….104

Topic 7: Taxation of income of persons…..138

Topic 8: Capital deductions…… 217

Topic 9: Administration of income tax…. 261

Topic 10: Administration of value added tax….. 278

Topic 11: Customs taxes and excise taxes…. 303

 

THIS IS A SAMPLE

Revised on: July 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

 

TOPIC 2

THE OPERATIONS OF THE NATIONAL AND COUNTY GOVERNMENTS ON MANAGEMENT AND CONTROL OF PUBLIC FINANCE

 

Establishment of the National Treasury

There is established, pursuant to Article 225 of the Constitution, an entity of the national government to be known as the National Treasury.

The National Treasury shall comprise of—

1. the Cabinet Secretary;
2. the Principal Secretary; and
3. The department or departments, office or offices of the National Treasury responsible for economic and financial

The Cabinet Secretary shall be the head of the National Treasury.

General responsibilities of the National Treasury

1. formulate, implement and monitor macro-economic policies involving expenditure and revenue;
2. manage the level and composition of national public debt, national guarantees and other financial obligations of national government within the framework of this Act and develop a framework for sustainable debt control;

 

TOPIC 3

 

ESTABLISHMENT OF PUBLIC FUNDS IN THE PUBLIC SECTOR

 

ESTABLISHMENT OF A COUNTY REVENUE FUND FOR EACH COUNTY GOVERNMENT

 There is established, for each county a County Revenue Fund in accordance with the Constitution.

The County Treasury for each county government shall ensure that all money raised or received by or on behalf of the county government is paid into the County Revenue Fund, except money that—

1. is excluded from payment into that Fund because of a provision of this Act or another Act of Parliament, and is payable into another county public fund established for a specific purpose;
2. may, in accordance with other legislation, this Act or County legislation, be retained by the county government entity which received it for the purposes of defraying its expenses; or
3. is reasonably excluded by an Act of Parliament as provided in Article 207 of the Constitution.

 

TOPIC 4

 

SUPPLY CHAIN MANAGEMENT IN PUBLIC ENTITIES

 

Procurement of public goods and services

 When a State organ or any other public entity contracts for goods or services, it shall do so in accordance with a system that is fair, equitable, transparent, competitive and cost-effective.

The public procurement and disposal act prescribe a framework within which policies relating to procurement and asset disposal are to be implemented and provides the following—

1. Categories of preference in the allocation of contracts;
2. The protection or advancement of persons, categories of persons or groups previously disadvantaged by unfair competition or discrimination;
3. Sanctions against contractors that have not performed according to professionally regulated procedures, contractual agreements or legislation; and

Sanctions against persons who have defaulted on their tax obligations, or have been guilty of corrupt practices or serious violations of fair employment laws and practices

TOPIC 5

 

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;

TOPIC 6

INTRODUCTION 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.

TOPIC 7

 

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.”

TOPIC 8

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

TOPIC 9

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
• Assessment of
• 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

TOPIC 10

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
• 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
• 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.

TOPIC 11

 

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
• 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
• 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