TUESDAY: 22 August 2023. Afternoon Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. Any assumptions made must be clearly and concisely stated. Do NOT write anything on this paper.
RATES OF TAX (Including wife’s employment, self-employment and professional income rates of tax).
Year of income 2022.
QUESTION ONE
1. Explain the following terms as used in taxation:
Forward shifting. (2 marks)
Backward shifting. (2 marks)
2. Outline FOUR obligations of value added tax (VAT) registered person as provided under the Value Added Tax Act 2013. (4 marks)
3. Neno Safi Ltd. is registered for value added tax (VAT) purposes. During the month of April 2023, the company made the following transactions:
April 1: Sold goods on credit to Ufanisi Traders for Sh.500,000.
April 2: Purchased goods on credit from Salama Enterprises for Sh.250,000.
April 3: Paid for catering expenses Sh.85,000 by cash.
April 3: Ufanisi Traders returned goods valued at Sh.75,000.
April 4: Exported goods to Mwanza Ltd. a company based in Tanzania for Sh.375,000.
April 5: Purchased stationery for Sh.105,000 from Elimu Bookshop on credit.
April 6: Purchased goods for Sh.1,000,000 from Upendo Ltd. on credit.
April 9: Imported goods for Sh.1,125,000 from China exclusive of import duty at the rate of 25% and value added tax at the rate of 16%.
April 12: Received a debit note of Sh.60,000 from Upendo Ltd.
April 17: Paid electricity bills amounting to Sh.30,000 by cash.
April 19: Paid audit fee Sh.75,000 by cheque.
April 21: Sold goods worth Sh.1,750,000 to the Ministry of Education.
April 23: Bought spare parts for repair of delivery van for Sh.150,000.
April 26: Sold goods on credit to Ulinzi Traders for Sh.1,000,000 a business not registered for VAT purpose.
April 28: Made cash sales of Sh.250,000.
April 30: Purchased shares worth Sh.920,000 from Kenlight Ltd.
April 30: Closing stock were valued at Sh.600,000.
The above transactions are stated inclusive of VAT at the rate of 16% where applicable unless otherwise stated.
Required:
Prepare a value added tax (VAT) account for the month of April 2023. (12 marks)
(Total: 20 marks)
QUESTION TWO
1. In a tax forum one of the facilitators noted that, “the recent Finance Bill elicited divergence views across the country, where main concern was whether the Finance Bill meets the equity, productivity, diversity and simplicity principles of taxation”.
With reference to the above statement, explain the FOUR principles of taxation mentioned above. (8 marks)
2. Eliud Meta is employed as a senior officer of Bumala Ltd. He has presented the following information relating to his employment income for the year ended 31 December 2022:
1. Basic salary Sh.102,500 per month (PAYE Sh.23,000 per month).
2. He received gifts worth Sh.60,000 from the company during the year.
3. He was provided with a company car of 2000cc whose cost was Sh.1,875,000. The car was leased by the company at a monthly rental of Sh.30,000. He also received a monthly fuel allowance of Sh.12,500 for the car.
4. He was provided with a fully furnished house by the employer. The house was rented at Sh.50,000 per
month. The cost of the furniture to the company was Sh.240,000.
5. The company paid his life insurance policy whose annual premium amount to Sh.72,000 per annum.
6. He was out of work station on official duty for 5 days for which he was paid per diem of Sh.5,750 per day.
7. During the year the company settled his medical bills amounting to Sh.675,000. The company medical
scheme is only available to senior officers only.
8. He is a member of a registered pension scheme where he contributes Sh.22,500 per month with the
employer contributing an equal amount for him.
9. The employer provided him with a cook and a security guard. The employer paid monthly salaries of
Sh.9,000 and Sh.12,000 respectively to the two servants.
10. School fees amounting to Sh.240,000 was paid for his daughter’s education. The amount was not debited in company’s books of account.
Required:
Compute taxable income for Eliud Meta for the year ended 31 December 2022. (10 marks)
Determine tax payable on the income computed in (b) (i) above. (2 marks)
(Total: 20 marks)
QUESTION THREE
1. Propose FOUR measures that could be used by the customs and excise duty departments of your country to prevent dumping. (4 marks)
2. State FOUR meaning of “tax decision” as provided under the Tax Procedures Act, 2015. (4 marks)
3. Bora and Malezi are in partnership trading as Boma Traders and sharing profits or losses in the ratio of 2:3 respectively. Their statement of profit or loss for the year ended 31 December 2022 reflected the following:
Required:
Prepare adjusted taxable profit or loss of the partnership for the year ended 31 December 2022. (10 marks)
The allocation of the taxable profit or loss in (c) (i) above to the partners. (2 marks)
(Total: 20 marks)
QUESTION FOUR
1. Identify FOUR benefits of applying information communication technology (ICT) in taxation. (4 marks)
2. Summarise FOUR advantages of progressive taxes. (4 marks)
3. The following information was obtained from the books of Greenlight Ltd. for the year ended 31 December 2022:
Additional information:
1. Opening inventory were valued at Sh.7,094,400 and closing inventory valued at Sh.6,008,000.
2. Included in the sales figure was a sale of Sh.1,113,600 that was inclusive of value added tax (VAT) at the rate of 16% while the rest of the sales were recorded net of VAT.
3. Included in the advertising was an amount of Sh.234,000 spent on erection of a bill board.
4. Audit fees includes an amount of Sh.50,400 paid to the audit firm for tax consultation.
5. Two thirds of the bad debts recovered related to bad debts which were previously written off from the
company’s books.
6. Legal fees relate to the following:
Required:
Adjusted taxable profit or loss for Greenlight Ltd. for the year ended 31 December 2022. (12 marks)
(Total: 20 marks)
QUESTION FIVE
1. Explain the following types of tax assessments:
Advance assessment. (2 marks)
Default assessment. (2 marks)
2. Highlight FOUR circumstances under which duty paid on goods may be refunded. (4 marks)
3. Betah Ltd. was registered in the year 2021 as a manufacturer of leather products. The company started operations on 1 January 2022. Prior to commencement of operations, the company incurred the following expenditure on purchases and construction of fixed assets:
Further analysis of the above capital expenditure showed that:
• A staff canteen constructed at a cost of Sh.1,550,000 formed part of the office administration.
• Processing machinery comprised of locally purchased new machinery (cost Sh.11,400,000) while the
balance relates to imported second hand machinery.
• The factory building included a warehouse constructed at a cost of Sh.9,600,000.
Additional information:
1. On 1 June 2022, the company commissioned a computerisation project which had not been completed by the year end. A total of Sh.300,000 had been spent on the project as at 31 December 2022.
2. The following building extensions were undertaken during the year 2022:
3. One of the delivery lorries with an original cost of Sh.4,500,000 was traded in for a new and bigger lorry of 4 Tonnes costing Sh.6,600,000 on 1 September 2022. The market value of the old lorry on the date of transaction was Sh.3,900,000. The balance due for the new lorry was paid in cash.
4. The company sunk a borehole at a cost of Sh.1,300,000 which was utilised from 1 October 2022. A water pump costing Sh.450,000 was purchased and utilised from the same date.
5. On November 2022, the company purchased a fleet of ten Tuktuks at a cost of Sh.180,000 each.
6. On November 2022, the company purchased the following assets:
Required:
Determine the investment allowance due to Betah Ltd. for the year ended 31 December 2022. (12 marks)
(Total: 20 marks)
