Give brief definition of value added tax (VAT).(2 marks) VAT is a multi-stage indirect tax imposed at every point of sale on value added to goods and services. The tax paid on expenditure is called the input tax and tax charged on income is called output tax.
Explain in numbered paragraph the case for and against VAT in your country. (8 marks)
- The case for VAT in Kenya is:
- Easy to administer since the seller of good or service becomes the collection agent.
- It allows for the canon of productivity since more goods and services can be subject to VAT to increase revenue to the government.
- It is difficult to evade since it is charged on selling price.
- It does not have a cascading effect i.e no tax is charged on tax.
The case against VAT
- It is complicated for most traders and requires many records to be maintained.
- If charged on basic commodities, hence it falls heavily on the poor and may not be equitable.
- Not convenient for most taxpayers e.g it has to be paid by 20th day of the following month even where the trader made a credit sale and has not received cash. It could have inflationary effects since it will lead to increase in commodity prices.
What is meant by the term qualifying expenditure? ( 2 marks)
- Qualifying expenditure – the cost of the asset (used for generating taxable income) which should qualify for a capital allowance/deduction
- Name and briefly explain items which may be included in the qualifying expenditure for the purposes of investment deductions. ( 8 marks)
- The items to be included as qualifying expenditure include:
- Buying price of the asset
- Any customs duty and Vat paid on the asset
- Installation costs
- Insurance on transit and transport costs before the asset is brought into use
- Cost of demolition of a building to accommodate the asset
- Any repair cost incurred before the asset is brought into use
- As a rule, any incidental cost incurred before the asset is brought into use is a qualifying expenditure.
- Write explanatory notes on the taxes listed below and in each case indicate whether the tax complies with the main principles of a good tax system.
- Presumptive tax on agricultural produce.(5 marks)
Presumptive Tax on Agricultural Produce This tax was levied on the value of gross sales of specified agricultural produce. Introduced in
1989 was charged at rate of 5% and collected by the authorized agents specified in the 19th sechdule of the Act. These agents are required to remit this tax to the commissioner in 30 days
of making such deductions. This tax is charged under the provisions of Section 17 (a) of the Income tax Act and based on the presumption that farmers who grow certain crops or produce derive gains and profits
chargeable to tax under Section 3 (2) (a). The rate was later reduced to 2% which was final tax in the case of individual farmers only.
Presumptive tax which was suspended from 1st January, 1999 was reintroduced with effect
from 1st January 2000 and lasted till June 2000 when it was again suspended. The tax complies with principles of a good tax in that gains to farmers are also brought
to taxation in line with canon of equality/equity or fairness. It is convenient and economical since it is collected by authorized agents appointed by
Government and that it is based on gross sales made. It is certain since it is collectable at points of sales of agricultural produce affected.
- Cess on agricultural produce. (5 marks)
(b) Cess on Agricultural Produce Is a levy imposed by Rural local authorities on traders of the main commodities found in such local authority such as Agricultural produce, building materials, e.g. Sand, Stones, Quarry chips. The purpose of the levy is to maintain roads and essential facilities provided by such local authority.
- Trade licence chargeable to professionals. (5 marks)
(c) Trade Licence Chargeable to Professionals Trade licences fees are charged in accordance with provisions of Trading Licenses Act (Cap 497).
These are licenses on annual basis to grant the permission to conduct professional work for a gain. This charge ensures that the right persons get the authorization to conduct professional work and protects such professionals from non-qualified persons who may wish to join the trade. It is convenient and economical since the licenses will normally be issued by the local authority concerned as a Government body. It may not be productive given few number of professionals require such permit per year but satisfies principle of equity or fairness as professionals desiring to practice are also brought into the tax net.
- Stamp duties on transfer of properties. (5 marks)
(d) Stamp Duties on Transfer of Premises Stamp duties are charges by Government in respect of some documents which are specified in the
Stamp Duties Act. Stamp duties are charged in Kenya in accordance with the provision of Stamp
Duties Act Cap 480. instrument must be stamped where property transfers are effected. Conveyance or transfer duty is charged on every instrument or court order in respect of the transfer of any property as a result of sale. Stamp duty on transfers of premises is equitable/fair since the property owners contribute tax, it is convenient since it is only applicable upon such transfer.
(Total: 20 marks)
DECEMBER 2004
Distinguish between tax evasion and tax avoidance. ( 5 marks)
- Tax evasion is an illegal means employed by a taxpayer in order to reduce his tax liability. This may be carried out by fraudulent or false tax, smuggling, hiding or non-declaration of incomes, claiming expenses or relief one is not entitled to, etc. The Tax Act usually states the penalties to be applied in case of evasion of tax.
Tax avoidance on the other hand is where a taxpayer uses methods to reduce tax liability but within the law. This could be done by studying the Tax Act and detecting loopholes in it to be exploited to the full advantage of the taxpayer. For example a taxpayer could operate business as a company or sole proprietorship or partnership whichever gives the best advantage. Pressure groups could be formed to influence legislation in taxpayers favour. Note that tax avoidance (tax planning) may or may not lead to loss of revenue to the government and is not punishable.
( b) The recent debate relating to importation of goods through the port of Mombasa has had one of its issues the amount of tax assessed. Specify and explain clearly at least three ways in which the Government may lose tax revenue on imports. ( 6 marks)
- Three ways in which the government may lose tax revenue on imports are:-
- Collusion
- Use of wrong rates or valuations for goods 3. Conversion of goods on transit for local use.
(c) Collusion may take place between customs officials and taxpayers in order to escape or pay less tax. Wrong rate or valuations may result due to improper import declaration procedures, poor inspection procedures. Goods destined for other countries which are on transit to such countries may be converted and sold in the country so that no duty is paid on them.
- Suggest three possible ways in which the Government may prevent loss of tax revenue from imports.
( 6 marks)
- To prevent or curb loss of revenue on imports, Mombasa port should seal loopholes by:-
- Ensuring that import declaration procedures as well as pre-shipment inspections be improved and tightened. Offshore inspections and proper classifications of goods imported be done.
- Goods in transit must reach countries of destination and not converted into use in the country by ensuring that bond charges are imported to be refunded on proving that such goods have reached destination. This could also call for liaison with the authorities of the country of destination of the goods in question.
Collusion between customs officers and taxpayers should be strictly policed and that heavy penalty be imposed on offenders
- Should citizens feel obliged to pay tax? ( 3 marks)
- It is the obligation of persons liable to tax to pay tax. In the case of the citizens it is hoped that being patriotic and knowing the need for the Government to raise finances to carry out functions for the common good of all and that Government is by the people, of the people and for the people, they should feel obligated to pay taxes. However, the obligation to pay taxes can be strengthened only where citizens clearly reap expected benefits.
(Total: 20 marks)
QUESTION FIVE
- Write brief notes on the following:
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- An E.P.Z is an area within a country which is free of duty or government red tape. An EPZ enterprise will be exempted from paying any corporation tax for a period of 10 years commencing with the year in which production, sales or receipts from its activities commence.After the first 10 years an E.P.Z enterprise will be subject to corporate tax at the rate of 25%Exports are zero rated for VAT purposes.Stamp duty; ( 6 marks)
- (i)Stamp Duty
Stamp duty is a charge by the Government in respect of some documents specified in the Stamp Duties Act. The stamp duties law is enforced to raise revenue by requiring certain documents to be stamped. The instruments include those for securing the payment of money, the performance of some obligation, transfer of property, mortgage of property, etc. The instruments requiring stamping includes agreements such as Hire Purchase agreement, partnership deeds, bills of exchange, memorandum of associations, articles of association and capital of companies, conveyances on sales or title deeds, lease agreement, marketable deed, affidavit or statutory declaration, awards, bill of lading, delivery order, instrument of divorce, letter of allotment of shares, etc.
- An E.P.Z is an area within a country which is free of duty or government red tape. An EPZ enterprise will be exempted from paying any corporation tax for a period of 10 years commencing with the year in which production, sales or receipts from its activities commence.After the first 10 years an E.P.Z enterprise will be subject to corporate tax at the rate of 25%Exports are zero rated for VAT purposes.Stamp duty; ( 6 marks)
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- Tax matters relating to Export Processing Zones.( 6 marks)
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- After the first 10 years an E.P.Z enterprise will be subject to corporate tax at the rate of 25%
- (ii) Matters Relating to Export Processing Zones
- An E.P.Z is an area within a country which is free of duty or government red tape. An EPZ enterprise will be exempted from paying any corporation tax for a period of 10 years commencing with the year in which production, sales or receipts from its activities commence.
for a period of 10 years commencing immediately thereafter.
- Exports are zero rated for VAT purposes.
100% I.D on building and machinery used to manufacture exports
- Presumptive tax on agricultural produce.(5 marks)
