TAXATION REVISION KIT (QUESTIONS AND ANSWERS)

 

Write short notes on the following:

 Taxable turnover in relation to VAT;  

If a business is making taxable supplies, the value of these supplies is called taxable turnover. All goods are taxable except those listed in the second schedule of VAT Act as exempt.

Taxable services are listed in the third schedule of VAT Act. All other services are exempt. If a business supplies taxable goods or services and the turnover is above Sh.3 million p.a. then the person is taxable and should register for VAT. The above limits are not applicable if:

 

One is a supplier of designated jewellery

•         One is a supplier of pre-recorded cassettes

•         One is a saw miller

•         One sells 4 or more motor vehicles in a year.

•         One is a supplier of accountancy services

•         One is an auctioneer

 

•         One is a lawyer

•         One is a supplier of motor vehicle spare parts accessories and electrical appliances.

  Deregistration for VAT; 

A registered person can apply for deregistration for VAT if:

He/she ceases to make taxable supplies.

The value of taxable supplies in any 12 months does not exceed Sh.2.0 million.

•         The business is liquidated.

•         The business is sold as a going concern.

 Assessment for VAT; 

The commissioner of VAT may issue an assessment if:

 

•         The taxpayer fails to keep proper books of accounts, records or documents.

•         Fails to make a return

•         Fails to apply for registration

 Appeals under VAT Act; 

An appeal is made to the tribunal under the following conditions:

– If a taxpayer is aggrieved by the commissioner‟s decision.

The appeal should be made within 30 days from the date of the assessment provided the taxpayer has fulfilled the following conditions:

 

•         Made all VAT returns

•         Paid all the tax shown on the returns not in dispute

 

•         Pay 50% of tax in dispute

•         Tribunals decision is final and conclusive.

 Tax invoice; 

Whenever a taxpayer supplies goods or services, the registered person must furnish the purchaser with a Tax Invoice on his sales, in order that they (the customers) may claim relief on the tax they pay.

It should show – Pin No., VAT registration number, value of taxable supplies, amount of VAT etc. It should be issued within 14 days of making taxable supply.

 

 Rules regarding payment of VAT

Rules:

 

Payable on or before 20th of following  month Submitted with a return

Penalty 2% of VAT payable + Ksh.10,000

QUESTION THREE

  • Indicate the date when the tax, if any, is payable to the Income Tax Department. (2 marks) Tax should be paid through self-assessment by 30th April 2006. The return should be filed by 30th June 2006.
  • What is the tax position on a wife‟s income? (5 marks)
    •  Wife‟s income is deemed to be the income of the h

     

    However, employment income, professional and self employment are assessed separated on the wife unless:

     

    • Husband or wife or both own more than 12½% of the voting power of the company
    • Wife is an employee of a settlement/trust created by the husband  Wife is employed by a firm where the husband is a partner.

 

QUESTION FIVE

  • 15% of total income from all sources or
  • fair market rental value or
  • actual rent paid by employer.(Total: 20 marks)TAXATION I DECEMBER 2009 Name and briefly explain four major principles of a good tax system.         (16 marks) 
  •  Economical: Low cost of collection to the tax body

    Low compliance costs by the taxpayer.

     

    • Equity

     

    Horizontal equity: People with the same economic position should pay equal amount of tax.

    Vertical equity: Consideration is taken as to whether tax payable should be proportional to income i.e progressive or regressive.

     

    • Certainty

     

    Clear to taxpayer what his liability actually is and how it arises To the tax body it is guaranteed of the amount of revenue its going to collect

    • Convenience

     

    Taxpayer should pay when he has the ability to pay There is no administrative difficulties when collecting tax

    Write brief notes on housing benefit.  (4 marks)   

    • It is a taxable benefit on the employee where the employer provides accommodation
    • For agricultural employees, HB is equal to 10% of pensionable pay
    • For directors other than whole time service directors HB is the higher of:

     

      • For employees provided with accommodation and meals, HB is equal to 10% of
    •                      pensionable pay.
      • For ordinary employees and whole time service directors, HB is the higher of:

       

      • 15% of pensionable pay or
      • fair market rental value or
      • actual rent paid

       

      –           In all the above cases, HB is reduced by amount of rent contributed by the employee.

    • Explain the meaning of the following terms as used in respective tax legislation:
      • Medical bills:Bond security(2 marks)
        • This is where a personal taxpayer delivers a document as prove of legal ownership of an asset and enters into a binding agreement to fulfill his obligations with regard to compliance and payment of tax.

         

        • If the person fails to fulfill the conditions he loses the asset.

        Single business permit

        (2 marks)   

        • This is a license granted by local authorities to businesses operating within their jurisdiction.

         

        • It replaces the local authority service charge and other licenses that were issued by

        different Government departments

        Customs bonded warehouse

        (2 marks)   

        This is a place/store licensed by the commissioner for customs and excise for deposit of dutiable goods for which duty has not yet been paid. It helps in reducing clogging of goods at the port and also facilitates smooth handling of transit goods.

        Stamp duty

        (2 marks) 

        • This is chargeable in respect of certain legal documents such as partnership deeds, hire purchase agreements, lease agreements, mortgages, etc. as specified in the Stamp Duties Act (Cap.480). Any legal instruments which have not been duly stamped are inadmissible as evidence in any civil proceedings and may not be registered or legally enforced as evidence of ownership.

         

        -Duty is payable within 30 days of the execution of the instrument.

        Tax free remuneration

        (2 marks)

        QUESTION THREE:

        Mr. Lewis Duncan is a director of Lewin Ltd., a manufacturing company in which he owns 20% of the issued and fully paid up capital. He earns a fixed salary of Sh.1,500,000 per month. For the year commencing 1 January 2006, the board of directors evaluated him and considered various additional means of remunerating him given his excellent performance. The chairman of the board has written to you seek your opinion on the proposals before any of them can be adopted.

         

        • Giving him a housing loan of Sh.1,000,000 at an interest rate of 5% per annum repayable over a ten year period. Interest for the year will be computed on the loan balance due on 31 December each year. Mr. Duncan would be required to occupy his own house from the date of receiving the loan from the company. He is currently housed by the company.

         

        • Issuing him 1,000 redeemable preference shares of sh.10 par value for free in recognition of his dedicated and loyal service to the company. The market price of these shares is currently estimated at sh.50 each.

         

        • Providing him with a fully maintained company car of 2000 cc which was bought in the year 2000 for Sh.600,000 instead of the current mileage allowance of Sh.6,000 per month.

         

        • Increasing the company‟s contribution to the unregistered Executive Provident Fund from 5% to10% of his basic salary per annum.

         

        • Paying his medical bills and those of his family directly to the doctor instead of the current system where he has to pay the doctor and then claim a reimbursement from the company. He is also entitled to claim a maximum of Sh.30,000 per annum. His normal medical bills are approximately Sh.40,000 per annum. The company has a medical scheme for directors and executive staff.

         

        Required:

         

          Discuss the above proposals with regard to their income tax implications.    (18 marks) 

        House loan:

         

        • The loan would be subject to fringe benefit tax which is payable by the employer at the corporate rate of tax. 1,000,000 x (15%, – 5%) x 30% = 30,000
        • It is computed on the difference between the interest rate charged and the market interest
        • For Duncan the loan is not taxable on him.
        • Duncan will also benefit by the savings he will make on the housing benefit which he is currently paying tax on. The benefit is material because it is based on his global income.

         

        • Share issue:

         

        • There will be no tax benefit for Mr. Duncan since he will be taxed on the value of shares when ownership passes. Benefit 1000 x 50 = 50,000
        • In the long run he will be entitled to dividends for which WHT will be deducted @ 5% and        is final tax.
        • On the employer there are no tax implications.

         

        • Company car:

         

         

        • There will be no advantage for Duncan since his tax liability will increase if he is given a company car. Currently he is being taxed on the Sh.6,000 mileage allowance. However, if given the car this taxable benefit will double to Sh.12,000 per month.

         

        • On the company there are no major tax implications. However, the company can claim wear and tear allowance on the vehicle and repair and maintenance of the car.

         

        • Increase pension contributions:

         

        • Since the provident fund is not registered there will be no immediate benefit for Mr. Duncan. However, in the long term his savings into the pension scheme will double and increase his tax liability.

         

        • On the company the amount will not be allowable for tax purposes.

         

      • Whichever way this does not change Mr. Duncan‟s taxable income, unless the company intends to pay the full bill for Duncan which means he benefits by a furthur Sh.10,000 tax free.
      • On the company given that the scheme is for senior employees only the amounts paid are not allowable for tax purposes.

                       Advise the board on the best alternative to ensure Mr. Lewis Duncan stays motivated to work.

      (  2 marks)       

      • From the above it appears that giving Mr. Duncan a loan of Sh.1,000,000 to purchase a house is the most beneficial taxwise. This is because he will not only get an additional tax-free benefit but also reduce his taxes as a result of discontinuing the house benefit.

       

      However on the part of the company providing a house loan will result into higher taxes as a result of the fringe benefits tax.

      QUESTION FIVE:                                                                                                                                                                                             

      1. Recently, traders opposed a move by Kenya Revenue Authority requiring them to keep stock records on a daily basis arguing that it would result in increased cost of compliance. However, upon review of the VAT Act, one realizes that record keeping in general has all along been part of the VAT regulations.

       

                             List down ten examples of records that must be kept for purposes of accounting for VAT.

      (10 marks)    

      1. Recently, traders opposed a move by Kenya Revenue Authority requiring them to keep stock records on a daily basis arguing that it would result in increased cost of compliance. However, upon review of the VAT Act, one realizes that record keeping in general has all along been part of the VAT regulations.

       

                             List down ten examples of records that must be kept for purposes of accounting for VAT.

      (10 marks)                                                                                                                                                                                                              

      Copies of all VAT invoices issued in serial number order

    • Copies of all debit and credit notes issued in chronological order.
    • All purchase invoices, copies of customs entries, receipts for payment of duty or tax.        Details of goods manufactured and delivered from the factory
    • Orders and delivery notes
    • Copies of customer entries.
    • Annual accounts e.g. P & L a/c
    • Purchase and sales books
    • Bank statements and pay-in-slips
    • Import and export documents
    • Cash books, petty cash vouchers and other books of accounts
    • Relevant business correspondence
    • Records in the computers
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