QUESTION ONE
- Briefly explain the rationale behind the “benefit theory” of taxation. ( 4 marks) Maintains that justice in taxation is secured by taking each citizen in proportion to the benefits he derives from the activity of the state.
- What problems are experienced in attempting to achieve justice in taxation? Support your answer with the four main theories which explain why it is difficult to exercise justice in taxation.
(12 marks)
Recommendations:
- Distribution of taxation can be considered and treated as payment for public services and a payment equal to the cost of the services rendered.
- People can pay tax in proportion to benefits derived from the state activity.
- Sacrifice by the tax-payer should be taken into account.
Problems experienced:
- Cost theory:- method of specific payment for public services does not result in justice in the distribution of the burdens of taxation.
Citizen normally not at liberty to reuse the services of the state and by refusing is not able to escape the necessity of paying taxes.
- Benefit theory:- weak and the poorer people receive great benefits from the government in the form of free education, but they are least able to bear the burden of taxation.
Impossible to determine the proportion of the general benefits of government expenditure that accrue to particular individuals.
- Equal sacrifice theory:- not feasible to levy heavy taxes on the rich and to leave the general public free as such tax would discourage savings and investment.
- Ability theory:- difficult to measure ability to pay. Property may not be a good indicator of ability to pay.
Expenditure incurred may not necessarily be an indication of ability to pay because amount of expenditure could be due to number of dependants.
- Giving appropriate examples, differentiate between customs duty and excise duty. ( 4 marks)
(Total: 20 marks)
Customs duty is the tax paid on goods imported through the ports of Kenya. The goods subjected to customs duty are specified in the first schedule of the Customs and Excise Act (Cap.472)
Examples of such goods include:
- Machinery
- Motor vehicles
- Electronics
- Textiles
- Food commodities, etc.
Excise duty is the tax imposed on goods manufactured locally and are specified in the fifth schedule of the Customs and Excise Act (cap.472). Examples of such goods include:
Beer
Cigarettes
Shoes
Textiles
Sodas, etc
QUESTION THREE
- Explain the basic principles followed in the taxation of the income of cooperative societies.
( 4 marks)
- Taxed on incomes from independent activities e.g. rent
- The basic notion underlying the new code of taxation is that a co-operative society is a body
- Corporate having its own existence, separate from that of its members. A co-operative society is, therefore, deemed to have its own income, regardless of the consideration that some of that income
may be derived from transactions with its own members. The current law sanctions the deduction
from the income of the co-operative society appropriations to profit made by it from its members.
- Corporate rate = 30%
- Tax on gross investment income
- A different basis of taxation has been laid down for credit and savings societies. These societies will be liable to tax generally on only their gross investment income, that is on interest and dividends
derived from normal investment of surpluses. Expenses not from incomes deducted.
- Interest income deducted from members loans not taxable
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- This is applicable where a registered person has supplied goods or services and has accounted for and paid tax on that supply but has not received any payment from the person liable to pay the tax.
- With reference to the provisions of the VAT Act, write brief notes on the following: Bad debt relief.
