QUESTION ONE
- A person who is registered for VAT must maintain certain records to satisfy the VAT regulations.
Give ten examples of such records that must be kept. (10 marks)
- Ten of the records a person registered for VAT must maintain are:
- Tax invoices on sales and purchases
- A record of all the taxable goods and services received or supplied by the firm including zero rated supplies.
- Separate record of any exempt supplies made.
- Summary of total input and output tax for each calendar month i.e VAT account
- Copies of all invoices issued, in serial number order
- Copies of all credit and debit notes issued in chronological
- All purchase invoices, customs entries, receipts for payment of customs duty or tax and credit and debit notes received.
- Details of goods manufactured and delivered from the factory of the taxable person
- Other business records namely – orders and delivery books, relevant business correspondence, appointment and job books, purchase and sale books, cash books, petty cash
vouchers, annual accounts, import and export documents, pay in slips, record of daily takings. -Details of cash or other discounts, whether supply is for cash or credit, etc.
- Discuss three practical problems experienced by a Kenyan in complying with the VAT Act. Suggest
ways in which these problems can be overcome. (6 marks)
- Practical problems experienced under VAT include:
- Complexity of interpretation of the VAT Act and regulations stemming from it. This can be overcome through regular training seminars conducted by the VAT department for the benefit of tax payers, easy to read and understand literature through the
Department‟s taxpayers
education programme as well as continuous press bulletins.
- Cash flow problem could arise especially because the taxpayer is required to account for excess VAT charged on earnings basis even where the customer has not yet paid him (credit sales). This could be overcome if the taxpayer could be allowed to account for VAT when the
credit period allowed to the customers is over.
- Compliance problems of elaborate and costly accounts to be maintained, filling of returns on a monthly basis. This could be overcome by simplifying as to reduce record keeping and extending time for payment rather than on monthly basis.
QUESTION TWO
- State and explain from tax perspective whether each of the following items are capital or revenue.
- Legal and professional fees on computerization.
- Structural alterations to premises to maintain existing rent.
- Legal costs and stamp duty for acquisition of lease of business premises
- Expenditure on advertising to promote sale of goods or services provided by a business income tax
- Reserves and provisions. (3 marks)
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- Give five examples of non-taxable income. (5 marks)
- Casino and betting winnings.
- Donation
- Gifts
QUESTION THREE :
- With reference to wear and tear allowances, what is meant by the “pooling method”? ( 2 marks)
- The pooling method refers to the classification of plant and machinery in four respective classes each reflecting a rate of wear and tear for assets in that class for the purpose of determining or calculating wear and tear allowance on a reducing method basis.
QUESTION FIVE:
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With reference to Income Tax, write short notes on the following:
Self assessment;
Self-Assessment
For accounting year-ended 31.12.1992 and after, a taxpayer will determine the tax liability on the basis of the final return and such bill is referred to as self-assessment and the final return itself referred to as self-assessment return. Self-assessment return may be submitted along with payment of self-assessment tax but submission of return may be delayed up to end of sixth month after year-end.
Notice of Objection;
| (b)
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Notice of Objection
A taxpayer who disputes or who does not agree with an assessment for any year of income has a |
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right to lodge an objection against such an assessment by the C.I.T. Such objection is referred to as “notice of objection”. For such objection to be valid it must: |
NSSF;
| ( c)
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N.S.S.F
Is National Social Security Fund which was established by the Nation Social Security Fund Act of 1965 for the benefit of workers. It is a compulsory savings scheme into which the employer pays a statutory contribution for every employee who is a member of this fund. The scheme is applicable to those employers having five or more employees. The average rate of contribution is 10% of the workers wage, half of which is paid by the employer and half by the worker concerned. The following benefits are provided under the scheme:- |
| (i)
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Age Benefits:
Paid to a member of age sixty or when he retires from paid employment whichever is later. |
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(ii) Withdrawal Benefit
Paid to a member who is at least fifty-five years of age and has not engaged in paid employment during the previous three months. |
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(iii) Invalidity Benefit
Paid to a member who is permanently incapable of work because of physical or mental disability. (iv) Survivors Benefit Paid to the dependants of deceased member. |
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(v) Emigration Grants
Paid to a member who is permanently emigrating from Kenya. |
PIN advantages;
| (d)
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PIN Advantages
PIN is personal identification number for taxpayer. PIN has the following advantages: |
| 1. Identifies eligible taxpayers 2. Assists the Government in identifying known taxpayers who were suppressing their |
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income to evade tax.
3. It is a deterrent to tax evaders 4. Assists in ensuring the national tax burden is distributed as fairly as possible. |
Valuation of housing for employees
| (e)
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Valuation of Housing for Employees
A housing benefit arises where an employee is housed by the employer. The employer may own the house or lease it from third parties. To determine the amount of housing benefit, the employees may be classified into five groups. |
Write short notes on the following
Industrial Building – “Hotel”
This is a hotel building or part of a hotel building which the Commissioner of Income Tax has certified to be an industrial building, including any building directly related to the operations of the hotel such as kitchens, staff quarters and entertainment and sporting facilities.
Exempt Dividend Income.
Dividends received by an exempt person, e.g registered pension and provident funds.
Dividends received by a company which owns 12½% or more of the voting power of the paying company.
Non-Resident Individual
| (c)
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Non-Resident Individual
Is an individual person who has a permanent home in Kenya and was not present in Kenya for any period during the year of income under consideration; or he has no permanent home in Kenya and was not present in Kenya for a period or periods amounting in aggregate to 183 days or more during the year of income under consideration; or he has no permanent home in Kenya and was present in Kenya for any period during the year under consideration and in each of the two preceding years for periods not averaging more than 122 days for the three years. |
Memorandum of Appeal & Statement of Facts
These are the most important documents (Memorandum of appeal and statements of facts) which must be submitted to the clerk of the Local Committee. Memorandum of appeal is a document stating the grounds/reasons for the appeal. The original and 9 other copies for the members of the Local Committee. A statement of facts, on the other hand, is a document which gives a sequence of events on the assessment before appeal to the local committee, i.e. dates assessment was issued and objected to, confirmed, etc
QUESTION TWO:
Write brief notes on the tax aspects of the following:
Royalties
Royalties are gains or profits from a right granted to another person for use of one‟s property. Royalties could be paid on copyrights, patents, trademarks, etc. In the case of resident individual person royalty income is added to the persons other income for taxation at the individual scale rates. Royalties payable to non-residents will be subject to withholding tax at the rate of 20%. Specific rates are available for countries with which Kenya has double tax treaties.
Import Declaration Form
An import declaration form is a form filled by persons intending to import goods into the country wherein the nature, quantities of the goods imported and country of origin of goods. This facilitates inspection and authorization of such importation. The importer forwards the completed import declaration form with copies or supplier‟s invoices to the respective inspection company.
Valuation Roll of Local Authorities
Valuation Role of local authorities is categorization of properties (land and buildings) within the local authority for the purpose of charging appropriate rates of tax/charges.
QUESTION THREE:
- Distinguish between sole proprietorship and limited liability forms of business in relation to:
Income Tax
PAYE for the owners of business Service charge for the owners and the business. ( 8 marks)
Distinction
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REFERENCE
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SOLE PROPRIETORSHIP
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LIMITED LIABILITY
COMPANY |
| 1. | Income Tax | Income tax is computed on all | Profits of the company shall |
| profits and other incomes using | be subjected to corporation | ||
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the graduated scale rates
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taxation at corporation tax rate of 30%
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| 2. | PAYE on owners of | Applicable to income from | Directors/shareholders in |
| business | employment and is a set-off tax | receipt of employment income | |
| against gross tax liability to arrive | will pay PAYE tax as | ||
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at net tax liability
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individuals and not the company. Salaries or fees to directors are allowable to the company against its profits.
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| 3. | Service Charge for the | Service charge was payable by | Service charge was payable by |
| owners and the | the self-employed persons and | legal persons as well. This has | |
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business
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those employed. This has been scrapped.
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been scrapped.
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QUESTION FOUR
- Now that there is self assessment under the Income Tax Act, does the Commissioner of Income Tax have to issue any assessment? ( 3 marks)
- Section 52(b) of the Income Tax Act requires that every individual chargeable to tax with effect from the year of income 1992 shall furnish to the Commissioner a return of income including a self assessment of his tax from all sources not later than the last day of the sixth month after year end. However, the commissioner may, where he considers appropriate send to any person to whom Section 52(b) applies in respect of any year of income, a form or forms to enable that person to furnish the required return. The C.I.T may raise an assessment where taxpayers fails to do so or when the commissioner considers that assessment raised by the taxpayer is not correct. Estimates, additional assessments may be raised by the commissioner including reverse charges (back duty) wherever applicable.
- Does an individual person have to raise an objection for tax assessed under the Income Tax Act now that there is self assessment? ( 3 marks)
- An individual person assess his own income in self-assessment thus he can only raise an objection for tax assessed where the C.I.T intervenes in the following instances:
Estimates assessment raised by the C.I.T where the C.I.T does not agree with assessment by the taxpayer or no accounts were submitted along with self-assessment forms.
Additional assessment has been raised by the C.I.T where the taxpayer had under assessed.
