TAXATION REVISION KIT (QUESTION AND ANSWER)

(a)       State and briefly explain four factors which influence the taxable capacity in a country.  (  6 marks) 

Number of inhabitants:

The larger the number the greater is the taxable capacity of the community to contribute towards the expenses of the Government.

Distribution of wealth:

Where wealth is more equally distributed, the taxable capacity will be correspondingly reduced. If accumulations of wealth in a few hands then the Government has to tax the rich highly to help the poor.

^{Method of taxation:}A tax system composed of various types; direct and indirect will ensure a larger yield.

 

Purpose of taxation:

If the purpose of taxation is to promote welfare of the people, they will be more willing to pay tax for popular causes. If tax revenue is used to finance war, maintenance of armed forces, a costly civic service them taxable capacity will reduce.

Others: Psychology of taxpayers, stability of incomes, rate of inflation etc.                                                                                                                      

(b)    “Governments in developing countries tend to overtax individuals in formal employment”.

 (I) Using suitable explain why Governments find it convenient to continually raise higher taxes on earnings from formal employment. (  6 marks)

• Income in formal employment is certain since those in employment are expected to be in work over a long period of time before retirement.
• Collection of such tax is less costly since employers are agents to the Government who charge, collect and remit tax to the state without payment.
• Elasticity of demand for income in formal employment is inelastic in face of rise in tax since incomes informal employment tends to be higher than would be the case in informal sector.
• It is not easy to evade taxes on formal employment.
• The tax authority does not have sufficient capacity to enforce/collect tax from informal sectors.

 

 (ii) Suggest and explain one proposal on how the Government can be able to generate tax revenue from the informal sector.            (  2 marks)

One-way the Government can be able to generate tax revenue from informal sector is designating areas of informal sector operations so as to make easy registrations and collection of tax/charges from such operators.

 

^Others:

• Introducing indirect tax on items used by informal sector operations.
• Introduce direct tax on informal operations.

(c)         Normally in Kenya a trader is required to pay for a variety of licences in order to conduct trade.

 

• Do you consider a licence to be a tax?    ( 1 mark)  
• (i)         A licence is not strictly a tax but authorization for one to conduct a particular business or a line of business.(ii)        For such licences include: 

  Trade licence – for authority to conduct business

• Specify four of such licences. ( 4 marks)

Driving licence – authorizes one to drive an automobile

Import/export licences – authorizes one to import or exportPractice licence – authorizes one to practice in a particular profession as a professional.

 

Others:

 

–           Transport licensing board permit –   Liquor licences, etc.

• In Kenya there is a proposal for the Government to issue a single licence to a trader in preference to   the practice of issuing a variety of licences. Would you support this proposal?  Why        (  1 mark)

(iii)       Issuing a single licence to a trader rather than a variety of licences would reduce costs involved in acquiring a number of licences from different points hence convenient to trader. However this would not check abuses by traders wishing to carry out trade in various trade activities requiring proof of eligibility. It would also reduce revenue collection by the government.

(Total: 20 marks)                                                                                                                                                                                                                   

QUESTION FIVE

 

• What are the partners responsibility with respect to the following VAT matters?
• i) Exempt supplies in relation to their business. (2 marks)                                                                                                                    Partners need not register for VAT and consequently cannot claim input tax suffered on purchases

       ii) Zero rated supplies in relation to their business.    ( 2 marks)

Partners need to register for VAT, to charge VAT but at zero rate can claim input tax suffered on purchases.

 QUESTION ONE

• What does the term employer include for PAYE purposes? (  4 marks)

Employer for PAYE purposes includes:

 

• Any person having contract of payment of remuneration.
• Any agent or manager or other representative in Kenya of any employer who is outside Kenya.
• Any paying officer of the government or public authority
• Any institution or insurance company or other body of pension paying pensions. A manager of a branch or firm as well as the main employer.

 

 

1. 1. What is instalment tax and when is it payable? (6 marks)Payment of Income tax due for the year within the accounting period in full or instalments. Four equal instalments are made during the year of income based on 110% of last years tax  liability. Instalment tax is not payable where:
      • emoluments have been subjected to PAYE deductions
      • tax due for any corporate taxpayer is not more than Sh.40,000 p.a.

       

      Instalment tax is payable on the following dates:

       

      20^th of the 4^th month

      20^th day of the 6^th month

      20 ^th day of the 9^th month 20^th day of the 12^th month

       

      Agricultural income:

       

      20 ^th day of the 9^th month 20^th day of the 12^th month..

       

      Balance of tax due is payable at end of the 4^th month of the year following the accounting date of the year of income

   2. Who is a „whole time service director‟ as defined by Income Tax Act (cap 470)?(2 marks)             

      • WTSD – a director of a company who is required to devote substantially the whole of his time to the service of that company in a managed or technical capacity and does not control directly or indirectly more than 5% of the company’s share capital.
        

         QUESTION THREE

        1. Trading receipts   – Trading receipt in confirming business where the disposal value trading receipt class of WTA more than/exceeds the written down value in that class. The excess of the disposal value over WDV is taxable.
        2. Balancing charge – 
        3. Balancing Charge – arises where in closing down business the disposal value of a class is more than/the WDV in that class, it is chargeable to tax as taxable income.
        4. Trading loss –   This arises in a confirming business where the disposal in a particular class of WTA is less than the WDV. Trading loss is deductible.
        5. Balancing deduction –  balancing Deduction: In a class of down business where the disposal value of a particular class less than the WDV of that class for taxing deduction is deductible
2. • 1. QUESTION FOUR
     2. (a)        Write short notes on VAT tribunal.  ( 5 marks)Appointed by the Minister of Finance to arbitrate disputes between commissioner of VAT and      registered pensions for VAT

         Composed of a chairman and two other members from the general public

        The Minister prescribes the manner in which an appeal may be made

        The tribunal may confirm, reduce, increase or nullify the tax assessed as it thinks fit.

        Any person aggrieved by the decision made by the VAT tribunal may make an appeal to the

        high court.

         

        Requirements for Appeal

         

        • Submit all outstanding returns
        • Pay all tax not in dispute
        • Deposit 50% of tax in dispute if dispute in assessment relates to:

         

        Within 30 days

        • failure to
        • failure to submit returns
        • non-registration
        • late registration
3. 1. What are your recommendations to the management on VAT compliance? (  2 marks)                                         
4. 1. Use of the right VAT rate
   2. Incorrect claim of input tax should be discouraged.
   3. Maintain accurate VAT records.