TAXATION REVISION (QUESTIONS AND ANSWERS)

QUESTION ONE

Comment on any information not used above.             (2 marks)   

• Company dividend payment – withholding tax is final tax.
• Medical cover – not taxable because it is not discriminatory
• School fees – not taxable on Prof. Omar.
• Gain from plot – not taxable, capital gains tax suspended.

QUESTION TWO:

1. Write brief notes on:
2. specified sources of To what extent do the rules on specified sources income. to insurance companies? apply (5 marks)

• Employment and professional income
• Business income
• Farming income
• Gains or rights arising from use or occupation of property
• Investment income
• Unspecific sources Pension and provident funds

Exceptions from unspecified sources computation

• • Banks
  • Insurance companies
  • Financial institutions other than banks
  • Housing financial institutions
  • Companies quoted in the NSE
  • Oil companies
  • Large multi-national companies (manufacturing)
• QUESTION THREE:   Correct valuation of imports such that there is no undervaluation.

  Suggested three possible ways in which the government may prevent loss of tax revenue from imports. (6 marks)

  •      – Impose stiff penalties on customs duty defaultersAdequate documentation using import declaration forms, importers code number, PIN, clean report of findings etc.

    –   Destruction of counterfeit goods which could be of low value compared to the original goods.

    –   Tightening controls at the point of entry and eradicate corruption among customs officers.

  •   -Suppliers of accountancy services such as auditing, book keeping etc
    • You have recently received a request from the management of a newly registered business for your help with matters concerning VAT. The following is the extract of the letter:     
    • Manufacturers whose annual turnover exceeds Sh.3 million.
    • Hotel and restaurant owners
    • Saw millers
    • Motor vehicle dealers who sells four or more vehicles in any one year.
    • Suppliers of designated goods such as jewellery, timber, motor vehicle spare parts, domestic electronic and electrical appliances etc.
  • 1. We understand that some business must register for VAT while others need not register.           Could you please advise us on the position regarding VAT registration?
    2. How should VAT on our income and expenditure be reflected in our operating budgets and monthly management accounts?   – The VAT paid on expenditure should be accounted for as input tax while VAT charged on supply of goods and services should be accounted for as output tax. 
    3. iii) When and how is the amount of VAT to be accounted for to the Commissioner of VAT?   
       • The amount of VAT payable to the commissioner of VAT is equal to output tax minus input tax.

        

       20^th day falls on a weekend or public holiday, Vat is payable on the last working or

       
       business days of the week before 20^th         

       • Appeals to Income Tax Tribunal (5 marks)
         • tribunal is an appeal body consisting of chairman and four other members, appointed by Minister of Finance for a two year period. The tribunal hears appeals in respect of:

          

         Shortfall distribution of dividends (Section 23 of Cap.470) e.g a firm must pay at least 40% of profits as dividends otherwise there will be shortfall distribution.

          

         Transactions designed to avoid tax liability e.g inter-group transactions not made at arm‟s length and intended to understate taxable income and tax liability.

       • Regressive taxes. (5 marks) 
         • This is the opposite of progressive tax. The tax burden falls more heavily on the poor than on the rich especially when tax is imposed on basic commodities commonly consumed by the poor. -It thus means that as income increases, the tax rate decreases and vice versa.

          

         • This is a very unjust tax and no civilized government could impose such taxes.
       • Government Budget Deficit. (5 marks)    
       • a budget is a statement showing revenue and expenditure of the Government for one particular A budget deficit arises when the Government expenditure exceeds the revenue. When revenue exceeds expenditure, we would have budget surplus.

       (Total: 20 marks)

        

       This VAT is payable on or by 20^th day of the month after the month of transaction. If the