TAXATION REVISION KIT (QUESTIONS AND ANSWERS)

QUESTION ONE

  • Cess – a charge on agricultural income especially cashcrops for maintenance and repair of roads which access those agricultural locations.
  • Property rates – rates charged local authority on land and building owned by individuals and body corporates. The local authority charge such rates on property located within its jurisdiction.       Valuation of property is necessary for purpose of imposing property rates.
  • Stamp duty – duty charged by the government in respect of some documents specified under stamp duties act. Such documents must be stamped and duty paid for them to be legal in executing

            transactions. The instruments are written documents for transactions such as:

  • Transfer of property
  • Mortgage of property
  • Hire purchase agreements
  • Lease agreements
  • Insurance policies.
  • Memorandums and articles of association -Marketable securities etc.

QUESTION TWO

  • Forward shifting – shifting the tax imposed on one party to consumers through increase in selling price.
    • Backward shifting–tax is shifted to the suppliers through reduction in buying price.

 

  • Income tax – this cannot be shifted since it is a form of direct tax. The impact and incidence are on the same person.  g. employees cannot shift PAYE to another party.

Custom duties: – if the imparted good is for personal consumption e.g. imparted vehicle for personal use, the duty cannot be shifted. However, if it‟s for resale, the duty is shifted to the buyer since the sell mark-ups the cost inclusive of duty paid.

 

Advantages of progressive taxes

Progressive taxes is where the tax rate rises as taxable income increases (the higher the taxable income, the higher the rate).

 

Advantages

  • Equitable–higher income is subject to more tax.
  • Productive–yields more revenue to the government compared to proportional tax. – Economical–collection cost does not increase with increase in tax rate.
  • Equal sacrifice–the marginal utility of money decreases with every increase in income hence forhigher income individuals to make equal sacrifice, they pay higher taxes.
  • Equalities in wealth distributions–the rich with less disposable income will forgo their luxuriesand the poor will benefit more from the more tax charged on the rich.

 

Goods liable to forfeiture (goods confiscated by the government) – Prohibited goods

  • Uncustomed goods
  • Restricted goods (goods subject to conditions of importation or exportation.
  • Goods imported or exported contained in a package of which the entry, application of shipmentor application to unload does not correspond with the goods.
  • Goods imported or exported concealed in a manner or packaged in a manner appearing to

beintended to deceive an officer.

QUESTION THREE

    • Conditions to be granted IDBM
      • Manufacture goods for exports only (not for local sales)    -Manufacture period not less than 3 years.
      • First qualify for I.D under ordinary manufacture.
      • If manufacture for export only ceases before the lapse of 3 years, the IDBMgranted shall be withdrawn and treated as a taxable income in the year of withdrawal but the investor shall be granted I.B.D and W.T.A as applicable on the withdrawn IDBm.

QUESTION FOUR

  • Importance of tax invoice
    • Indicates the value, quantity and price of supply.
    • Help in determining the tax point.
    • Indicates all vital details of supplier such as VAT number, PIN etc.

Used in claiming input VAT. – Used in claiming bad debt relief.

QUESTION FIVE

 

  • Dividend Income
           –

If from, outside Kenya, it‟s tax exempt.

If received from another company in which the receiving company controls 12.5% or more, it‟s tax exempt.

           –

If controlling is less than 12.5%, 5% W/T is final.

If it‟s investment income of an insurance company from it‟s life insurance fund, it‟s tax exempt.

 

  • Interest
    • From outside Kenya, it‟s tax ex
    • If qualifying interest, gross it up and aggregate with other incomes and tax @ 30%.
    • Enjoy a tax credit of 15% of gross against corporate tax liability.

 

  • Rent:

Determine net rent income, aggregate it with other incomes and tax @ 30% corporate tax rate.

QUESTION ONE

Charitable trusts are exempted from taxation under the following conditions:

  • They are public in character serving a section of the public or the whole public.
  • They are for relief of distress or poverty in Kenya.
  • They are for advancement of religion or education.
  • Their incomes are expended in Kenya for charitable purposes and for benefit of Kenyan citizens.

 

Amateur Sport Associations

The income (apart from their investment income) is exempt from taxation if: -The members are amateurs.

  • The aim of the association is foster and control outdoor sports.
  • It‟s by-laws provide that should a member turn professional, he ceases to be a member of the association.

 

The areas to pay attention in auditing of PAYE are:

  • Has the employer all the cash and non-cash benefits or emoluments into payroll.
  • Was the correct amount of PAYE deducted?
  • Was all the PAYE deducted remitted to the tax authorities.
  • Were the payroll records correctly transferred to tax deduction cards.
  • Have all the tax deductions correctly completed in all respects?

 

Refer to solution of Q5 (c) Dec 2000.

 

Permanent establishment

  • This, in relation to any person (individual or body corporate) means a fixed place of business inwhich a company carries on business.
  • For the purposes of this definition, a building site or a construction site or assembly projectwhich has existed for six months or more shall be deemed to be a fixed place of business.

 

QUESTION TWO

The qualifying expenditures for mining investment deduction (M.I.D) are:

        • Cost of buildings, machineries and other assets that would have little or no value if the mine ceased to operate.
        • Cost of acquisition of rights over the minefield and minerals excluding cost of land. – Cost of prospecting, exploring and searching the mine.     -Any intangible drilling costs.
        • Cost of development, administration and management during prospecting, explorations and during the period prior to the commencement of mining operations.QUESTION THREE
          • Hotel and restaurant services
            • Taxed V.A.T at a lower special rate of 14% -A.T paid by hotel owner.
          • Transportation of raw material -Exempt from V.A.T.
          • Medical services
            • Exempt from VAT
          • Mobile phone airtime
            • Subject to VAT at 16% standard rate. – Paid by service provider. It‟s passed to the consumer through higher charges.

 

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