TAXATION REVISION KIT (QUESTIONS AND ANSWERS)

 

Answer ALL questions. Marks allocated to each questions are shown at the end of the question. Show ALL your workings. Any assumptions made must be stated.

 QUESTION ONE

• Explain the concept of elasticity with respect to:

Direct Tax         ( 2 marks)

• Impact and incidence is on the same person e.g. PAYE, imports or exports, corporate    tax etc.
• Tend to be elastic

  Indirect Tax.      ( 3 marks)   

• Impact and incidence falls on different persons.

Tend to be inelastic since these taxes are imposed mainly on the necessities examples are VAT, custom duty etc

 

• Name five objectives of raising taxes and explain how they are achieved by the government.

                                                                                                                            (15 marks) 

• Pension of social and merit goods and services by the government such as roads, health, education etc.

 

• Efficient allocation of resources e.g. tax the rich more and use taxes to alleviate poverty among

low income groups.

• To achieve monetary policies e.g. control rate of inflation by increasing taxes, and thus reducing disposable income available on individuals.

 

• Protect local industries e.g. raise the customs duty on imports to discourage consumption of import and encourage consumption of local goods and production.
• Creation of employment e.g. government could impose more taxes to reduce investment in private sector (“crowding out” effects) and invest more in public sector to create employment opportunities.

 

(Total: 20 marks) 

QUESTION TWO

• Explain the reasons why, for a particular year of income, the total income received is usually different from total taxable income. (  4 marks)   
  • Why accounting income is different from taxable income.

   

  • Some income of capital nature e.g. capital gain is not taxable but it is part of accounting profits.

   

  • Accounting profits are determined after deducting depreciation but from taxable income, we  deduct capital allowances.
  • Some accounting expenses are not allowable for tax purposes e.g. general provision for bad  debts, capital loss, some legal fees etc.
  • Released and unrealized profits – for tax purposes, we recognize realized foreign exchange gains/losses but accounting profits recognize both realized and unrealized gains (losses).

QUESTION THREE

 

• State and explain the VAT position on:

 

• • • Security on property for unpaid tax. (4 marks) 
    •  – Commissioner may by notice in writing to inform that person of his intention to  apply to the Registrar of Lands or buildings to be the subject of security for tax ofan amount specified in the notice. 
      • If a person fails to pay the whole of the amount specified in the notice within 30 days from the date of service of the notice, the commissioner may by notice in writing direct the Registrar of Lands that the land and buildings, to the extent of the interest there in must be the subject of security, for the tax of specified amount and the Registrar shall, without fee, register the direction as if it were an instrument of mortgage over, or charge on, as the case may be.

       

      • Commissioner will write to the Registrar of lands to cancel the directive upon

      payment of the whole of the amount of tax secured.

       

      Commissioner has right to sell property if VAT is not paid.

    • Relief because of doubt or difficulty in recovery of VAT. (2 marks)                                                                                      
    • Uncertainty as to any question of law or fact.
    •   Bankruptcy or insanity of the debtors.
    • Impossibility due to undue difficulty or expense in recovery of tax.

QUESTON FOUR

Write brief notes on the following:

                      Taxation of companies operating in export processing zones.(3 marks)

• 100% investment deduction on plant and machinery
• Exempted from Corporation tax for the first ten years
• Pay tax at a lower rate of 25% for the next 10 years
• Zero-rated for purposes of the VAT Act.
• Refund of import duty on imported raw materials to manufacture exports.

                  Taxation of members‟ clubs.(3 marks)

• Provided ¾ or more of club income (i.e. entrance fees and subscriptions) comes from members,

the club income will not be taxable.

• This excludes investment income such as dividends, interest and rent.

They pay tax at corporate tax rate

 

 

QUESTION ONE

 

• Differentiate between the low interest benefit tax and the fringe benefits tax. (  4 marks)                         
•  Low interest benefit results from the charging of a low rate of interest on an employment benefit as compared to the commissioner‟s prescribed marked rate of interest. The employment benefit applicable is normally staff loan(s) advanced to staff at a concessionary rate(s) of interest. 

  The difference between the commissioner‟s prescribed market rate (currently 15%) and theconcessionary rate of interest charged to staff by the employer constitutes a taxable benefit for all loans given before 12 June 1998. The benefit is taxable on the employee based on the ruling PAYE rates.

   

  Fringe benefits tax (FBT)

   

  Fringe benefits tax is applicable to all employment benefits (loans) given to employees or their relatives on or after 12 June 1998 at concessionary rates of interest. It is based on the 91 days average treasury bill rates. The average rate is computed and issued by the Kenya Revenue Authority through the press.

   

  The tax is payable by the employer at the average treasury bill rate less the interest rate charged to the employees. The tax is based on the ruling corporate tax rate which is currently 30%.

   

  FBT is submitted together with PAYE before 10^th of the following month together with PAYE.

 

• with reference to the provisions of the Income Tax Act, identify four methods which the Commissioner of Income Tax is empowered to use in order to collect overdue tax from a taxpayer. (  4 marks)

• Commissioner of Income Tax can use for the recovery of the tax through a court of law.
• Commissioner of Income Tax can collect the tax through authorized agents under Section 96
• Can collect under Section 102 by distress i.e. can seize property
• Commissioner of Income Tax under Section 103 can attach property of a tax payer as security for unpaid tax.

• With the introduction of the self-assessment system in 1992, the Commissioner of Income Tax does not raise assessments or send notices to taxpayers except in two circumstances.

 

                     Explain these two circumstances.                                                   (4 marks)   

• • A person has not submitted a return of income and the CIT considers that the person has income chargeable to tax for that years

   

  • CIT considers that a person has been assessed or has assessed himself at a less amount in relation to income or tax payable.
  • Where CIT issues an agreed amended assessment but later discovers unassessed income.

• List six matters that are contained in a notice of assessment. (6 marks)    
• Notice to the taxpayer that he has been assessed under the Income Tax Act (ITA)
• Information to the taxpayer that he has a right to object to the notice of assessment
• Amount of tax assessed or loss to be carried forward
• Amount of relief available (in case of individual)
• Any amount of tax paid at source
• Personal identification number (PIN)
• Interest and penalties where applicable
• Amount of tax payable, due date, or where tax is overpaid amount of refund -Name/and address of taxpayer
• What is “stamp duty”? (2 marks) Stamp duty is charged on a large number of legal documents and agreements e.g cheques,  bonds, marketable securities etc. Payable within 30 days after transaction.

   

(Total: 20 marks)                                                                             

QUESTION THREE:

• • • (b) (i) Recently Kusoma Institute underwent a PAYE audit by the Kenya Revenue Authority  (KRA) auditors after which penalties amounting to sh.1,000,000 were levied.            Explain the circumstances that might have triggered the PAYE audit at Kusoma Institute.

      (  5 marks)

      • PAYE not paid on time
      • Salaries and wages figure as per annual accounts is high compared to that reflected in PAYE returns.   Major month to month variances on PAYE payments
      • Third party information/complaints
      • Newspaper/Media report
      • Non-compliance detected during a normal tax audit
      • Failure to submit PAYE Returns Failure to keep proper records.
        • The income of educational institutions is exempt from tax. What would be the tax implications of a  proposal to pay school fees for the children of junior staff who qualify for university admission?
      • (  2 marks)

        Since Kusoma Institute is tax exempt,, school fees will be taxed on the employees concerned as a benefit.

         

        • List three “unique” disallowable expenses against partnership income. (  3 marks)                               
        • Remuneration/salary paid to partners
          • Interest on capital paid to partners
          • Commission paid to partners
            

             QUESTION FIVE:

            Determine the amount of VAT payable.     (  3 marks) 

          • With reference to the tax legislation in your country, write brief notes on the following: 
            • Import declaration form. ( 3 marks)   
              • Import declaration form is a form supplied by the customs department for the importer to fill in order to ensure that:

               

              • He declares/shows the goods he is importing, and that
              • He indicates the correct value of the goods he is importing
              • Show country of origin and destination

              Name/address of importer and exporter

            • Reverse charge.( 3 marks)   This refers to VAT charged on imported services. The VAT in this cse is paid by the person importing the service since the provider of the service is outside the scope of VAT. The importer of the service also claims the tax paid as input tax.
            • Refund of duty paid on imported goods. ( 3 marks) The commissioner of customs and excise may refund duty paid on imported goods under the following circumstances: 

              Where goods are returned to seller

              Re-assessment leads to lower duty

              Where goods are lost or destroyed in an accident while under customs controlWhere goods are used in production of exports or specified duty exempt goods.