• Distinguish between farm works deductions and capital deductions. (  5 marks)                                                                     
  • Strictly speaking, it is not possible to distinguish between farm works deductions and capital deduction. Farm works deductions are, to all intents and purposes, capital deductions. Capital deductions are unique as they relate to farm works. Other capital deductions mainly relate to manufacture.


    • State the benefits of value added tax (VAT) in the context of the principles of a good tax system.

    (10 marks)

    • Benefits of VAT in the context of a good tax system


    • VAT is usually collected by the government through VAT registered traders. The government does not pay the traders to collect VAT on its behalf. Given the wide scope of



    VAT, each and every person in the economy is affected. The government is able to reach every person who suffers VAT though a relatively small proportion of the entire population that comprises VAT traders.


    • VAT is equitable the overall liability is determined by a person‟s expenditure/consumption.

    Those with a higher expenditure (and therefore more able to pay tax) end up contributing similarly high proportion of VAT collected.


    • VAT is also equitable where it does not apply, (either through zero rating or exemption) to basic necessities such as foods, medicine, healthcare, agricultural inputs, education, etc.

    Lower income groups spend a high proportion of their incomes on such goods. Consequently, only a small proportion of their expenditure is affected by VAT.


    • VAT is based on consumption in the domestic economy. Its wide scope where accompanied by little leakage results in high revenue yields.


    • VAT is an indirect tax. It is based on a person‟s expenditure and not income. This minimizes the disincentives associated with direct taxation. Its indirect nature means most people who suffer VAT may not know about it or may not be able to quantify how much is paid. For this reason there is less likelihood of resentment. Resentment of taxation usually leads to high tax evasion.


    The wide scope of VAT accompanied with minimal expenditure does not distort the working of the market mechanism. In other words, VAT ensures neutrality as consumers in the economy cannot switch their preferences/consumption to avoid taxation.

    QUESTION FIVE:                                                                                                                                                                                                     

  •  Explain the meaning of the following terms as appearing in the respective tax legislation:


    Excise duty;  – The Customs and Excise Act does not expressly define excise duty. However, it refers to duty levied on the local manufacture or importation of excisable goods which are usually luxurious items such as cigarettes, wines, electronic sets, etc

  •   Local committee –Is an appeal body charged with hearing and deciding on disputes between taxpayers and the commissioners of income tax.
  •   Designated primary society;                                                                                                                                                                           

    Means a co-operative society registered under the Co-operative societies Act, Section 19 A (7).

  •  Bonded warehouse; Is a warehouse licensed by the commissioner of customs and excise for storage of goods prior to entry for home use or re-exportation or awaiting payment of duty.
  •  Taxable person;Section 2 of VAT Act – Any person liable to apply for registration under the sixteenth schedule but does not include an export processing zone enterprise.
  • Zero-rated; Section 8 of Vat Act gives zero-rated supplies as those business transactions on which VAT is charged at zero rate.
  •  Non-resident; Is a person/company that does not fit into the definition of a resident as specified in Section 2(1) of the Income Tax Act.              
  •  Exempt income; Is income not subject to tax such as interest earned on tax reserve certificates.
  •  Registered home ownership savings plan Is a savings plan established by an approved institution and registered with the commissioner in a prescribed manner – Section 2 (1).
  • Commercial vehicle                                                                                                                                                                                          Is a road vehicle which the commissioner is satisfied that it is manufactured for carriage of goods and so used in connection with business; or a motor or minibus as per Traffic Act, or used for carriage of members of public for hire or reward
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