Professional Documents
Culture Documents
Taxation Nites
Taxation Nites
Course Objectives
1. To enable the learner describe taxation principles and concepts
2. To equip the learner of with skills on computation of tax liability for individuals, corporations,
and VAT
3. To enable learners understand the computation of capita allowances
Course content
1. Introduction
Definition of taxation
Brief history of taxation, purpose of taxation, and principles of taxation
Types of taxes, incidence of taxation and effects of taxation
Administration of taxes in Kenya
2. Definition of concepts and terms used in taxation
Year of income, Persons, and Residence
Rates of taxes, Withholding tax, Installment tax, and Personal relief
Tax evasion and tax avoidance
Taxable and non-taxable incomes or exempted incomes
3. Taxation of incomes from dividends, interest, and rent
4. Determination of taxable employment income and tax computation
5. Determination of taxable income from gains or profits from business and computation of
taxes
6. Taxation of partnerships
7. Capital deductions
Investment deduction
Wear and tear deduction
8. Value Added Tax (VAT) computations:
Taxable and non-taxable supplies
Registration and deregistration
Accounting for VAT
9. Returns, Notices, Assessment, and payment of taxes
10. Objections, Appeals, Offences, and Penalties
References
Saleemi, N. A. (2009). Taxation I Simplified. Saleemi Publications Ltd., Nairobi.
Saleemi, N. A. (2009). Taxation II Simplified. Saleemi Publications Ltd., Nairobi
Simiyu, T. T. N. (2008). Taxation in Kenya: Principles & Practice. Nairobi.
Income Tax Act Cap. 470.
The Value Added Tax Act Cap. 476.
Grading System
Continuous assessment Tests 30%
University Examination 70 %
Total 100 %
BBM 303: Taxation 1
Mr. Tuwey, Department of Accounting and Finance, Moi University
Introduction
The Government is charged with the responsibility of providing essential services to its citizens such as:
Protective functions: To maintain peace and security in the country and to defend the country from external
aggression.
Administrative functions: To provide administrative functions of the country such as providing documents
of title, issuance of identity cards, passports, etc.
Social functions: To provide social services such as education, health, housing, etc. which are essential for
the welfare of the society.
Development functions: The Government is expected to execute development functions such as developing
irrigation systems, transport and communication infrastructure, industrial and agricultural systems, among
others.
To be able to provide these functions, the Government requires funds in the form of public revenue. Public revenue
means those amounts which are received by Government from different sources. In other words, the income of the
Government is known as public revenue.
4. Fines
Fines are charged on individuals who do not obey the laws of the country.
5. State Property
The forests, mines, and National parks are considered Government property. The income from such sources is also part
of Government revenue.
What is Tax?
The word tax comes from the Latin “taxo” meaning ("I estimate"). Tax is a financial charge or other levy upon a taxpayer
by a state such that failure to pay is punishable by law. Tax may either be direct tax or indirect tax, and is paid in monetary
terms.
A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the government. A tax
"is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is
"any contribution imposed by government whether under the name of toll, duty, custom, excise, or other name. A tax is
a compulsory payment levied by the government on individuals or companies to meet the expenditure which is required
for public welfare.
According to Hugh Dalton, "a tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount of service
rendered to the taxpayer in return, and not imposed as penalty for any legal offence."
Seligman defines tax as a “compulsory contribution from a person to a government to defray expenses incurred in the common interest of all,
without reference to special benefits conferred”. It is in effect a contribution designed to reduce private expenditure in favor of
public expenditure to enable the government to obtain funds in order to provide social and merit goods and services,
redistribute income, clear market imperfections and stabilize the economy.
Characteristics of Tax
From the foregoing definitions, three characteristics are identified as follows:
i. Tax is a compulsory contribution imposed by the government of the people residing in the country. Since it is a
compulsory contribution, a person who refuses to pay a tax is liable to punishment.
ii. Tax is a payment made by the tax payers which is used by the government for the benefit of all its citizens. The
state uses the revenue collected from taxes for providing hospitals, schools, public utility services, etc. which
benefit all people.
iii. Tax is not levied in return for any specific service rendered by the government to the taxpayer. An individual
cannot ask for any special benefit from the state in return for the tax paid by him.
Scholars have argued that “the essence of tax is the absence of a direct quid pro quo between the taxpayer and the
government. This means the public cannot claim something equivalent to the tax paid from government. Taxes are meant
to cover the general expenses of the state and are not levied for any particular purpose. The government therefore cannot
guarantee or promise to perform a particular service in return for the payment of the tax.
If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or
service, then it is called an indirect tax. The purpose of taxation is to finance government expenditure. One of the most
important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Since public
goods and services do not allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot be a market
in the good or service, and so they need to be provided by the government or a quasi-government agency, which tend to
finance themselves largely through taxes.
History of Taxation
The first known system of taxation was in Ancient Egypt around 3000 BC - 2800 BC in the first dynasty of the Old
Kingdom. The earliest and most widespread form of taxation was the corvée and tithe. The corvée was forced labor
provided to the state by peasants too poor to pay other forms of taxation. Records from the time document that the
pharaoh would conduct a biennial tour of the kingdom, collecting tithes from the people. Other records are granary
receipts on limestone flakes and papyrus.
Early taxation is also described in the Bible. In Genesis (chapter 47, verse 24 - the New International Version), states "But
when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your
households and your children". Joseph was telling the people of Egypt how to divide their crop, providing a portion to the
Pharaoh. A share (20%) of the crop was the tax.
Later, in the Persian Empire, a regulated and sustainable tax system was introduced by Darius I the Great in 500 BC; the
Persian system of taxation was tailored to each Satrapy (the area ruled by a Satrap or provincial governor). At differing
times, there were between 20 and 30 Satrapies in the Empire and each was assessed according to its supposed productivity.
It was the responsibility of the Satrap to collect the due amount and to send it to the emperor, after deducting his expenses
(the expenses and the power of deciding precisely how and from whom to raise the money in the province, offer maximum
opportunity for rich pickings). The quantities demanded from the various provinces gave a vivid picture of their economic
potential. For instance, Babylon was assessed for the highest amount and for a startling mixture of commodities; 1,000
silver talents and four months’ supply of food for the army. India, a province fabled for its gold, was to supply gold dust
equal in value to the very large amount of 4,680 silver talents. Egypt was known for the wealth of its crops; it was to be
the granary of the Persian Empire (and, later, of the Roman Empire) and was required to provide 120,000 measures of
grain in addition to 700 talents of silver. This was exclusively a tax levied on subject peoples. Persians and Medes paid no
tax, but, they were liable at any time to serve in the army.
Opposition to taxation
Because payment of tax is compulsory and enforced by the legal system, some political philosophies view taxation as theft
(or as slavery, or as a violation of property rights), or tyranny, accusing the government of levying taxes via force and
coercive means. The view that democracy legitimizes taxation is rejected by those who argue that all forms of government,
including laws chosen by democratic means, are fundamentally oppressive. Libertarian opponents of taxation claim that
governmental protection, such as police and defense forces might be replaced by market alternatives such as private
defense agencies, arbitration agencies or voluntary contributions. Walter E. Williams, professor of economics at George
Mason University, stated “Government income redistribution programs produce the same result as theft. In fact, that's what a thief does; he
redistributes income. The difference between government and thievery is mostly a matter of legality”.
Taxation has also been opposed by communists and socialists. Karl Marx assumed that taxation would be unnecessary
after the advent of communism and looked forward to the "withering away of the state". In socialist economies such as
that of China, taxation played a minor role, since most government income was derived from the ownership of enterprises,
and it was argued by some that taxation was not necessary. While the morality of taxation is sometimes questioned, most
arguments about taxation revolve around the degree and method of taxation and associated government spending, not
taxation itself.
Canons of Taxation
Given its central role, taxation has been applied to meet two objectives. First, taxation is used to raise sufficient revenue
to fund public spending without recourse to excessive public sector borrowing. Second, it is used to mobilize revenue in
ways that are equitable and that minimize its disincentive effects on economic activities. The imposition of taxes is a double
edged sword in which it creates a burden on individual taxpayers and at the same time the amount collected by the
government are spent in productive activities. This calls for an optimum tax system which takes care of the taxpayers as
well as being able to raise sufficient revenue for the state.
Canons of Taxation are the main basic principles (i.e. rules) set to build a 'Good Tax System'. Canons of Taxation were
first originally laid down by economist Adam Smith in his famous book "The Wealth of Nations". In this book, Adam smith
only gave four canons of taxation. These original four canons are now known as the "Original or Main Canons of Taxation".
As the time changed, governance expanded and became much more complex than what it was at the Adam Smith's time.
Soon a need was felt by modern economists to expand Smith's principles of taxation and as a response they put forward
some additional modern canons of taxation.
1. Canon of Equity
According to this principle, every person should pay to the government depending upon his ability to pay. The rich class
people should pay higher taxes to the government, because without the protection of the government authorities (Police,
Defense, etc.) they could not have earned and enjoyed their income. Adam Smith argued that the taxes should be
proportional to income, i.e., citizens should pay the taxes in proportion to the revenue which they respectively enjoy under
the protection of the state. Smith explained it thus “the subjects of every state ought to contribute towards the support of government, as
nearly as possible, in proportion to the revenue which they respectively enjoy under the protection of the state”. It means that every person
should pay the tax according to his/her ability and not the same amount. Every taxpayer should thus pay tax in proportion
to his income. The rich should pay more and at a higher rate than the other person whose income is less.
2. Canon of Certainty
According to Adam Smith, the tax which an individual has to pay should be certain, not arbitrary, because uncertainty
breeds corruption. The tax payer should know in advance how much tax he has to pay, at what time he has to pay the tax,
and in what form the tax is to be paid to the government. In other words, every tax should satisfy the canon of certainty.
At the same time a good tax system also ensures that the government is also certain about the amount that will be collected
by way of tax. This canon requires that there should be no element of arbitrariness in a tax. It should be clear to every tax
payer as to what, when, and where the tax is to be paid. Nothing should be left to the discretion of the income tax
department.
3. Canon of Convenience
The mode and timing of tax payment should be as far as possible, convenient to the tax payers. Adam Smith argues that
“Every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay”. For example,
value added tax is collected together with the sales and remitted to the government because they are included in the prices
of commodities, similarly, tax on employment income is withheld at source by the employer in the form of PAYE and
remitted to the government instead of waiting until end of the year. Convenient tax system will encourage people to pay
tax and will increase tax revenue.
4. Canon of Economy
This principle states that there should be economy in tax administration. The tax should satisfy the canon of economy in
two ways. First, the cost of tax collection should be lower than the amount of tax collected. Meaning that if the cost of
collecting a certain tax is more than what the tax brings in, then there is no need to levy the tax. It may not serve any
purpose, if the taxes imposed are widespread but are difficult to administer. Second, it should be economical to the
taxpayer. It means that the taxpayer should be left with sufficient money after paying the tax. A heavy tax on incomes will
discourage savings and investments, and thus adversely affect the productive capacity of its citizens. In the words of Adam
Smith, “Every tax ought to be contrived as both to take out and keep out of the pockets of the people as little as possible, over and above what
it brings in to the public treasury of the state”.
6. Canon of Elasticity
According to this canon, every tax imposed by the government should be elastic in nature. In other words, the income
from tax should be capable of increasing or decreasing according to the requirement of the country. For example, if the
government needs more income at time of crisis, the tax should be capable of yielding more income through increase in
its rate.
7. Canon of Flexibility
It should be easily possible for the authorities to revise the tax structure both with respect to its coverage and rates, to suit
the changing requirements of the economy. With changing time and conditions the tax system needs to be changed without
much difficulty. The tax system must be flexible and not rigid.
8. Canon of Simplicity
The tax system should not be complicated. It should be simple to understand as to how it is computed and how it is paid.
The forms to be filled up for calculation and payment of tax should be simple and intelligible for the taxpayer. This cannon
is essential as it minimizes corruption and bribery on the part of tax department.
9. Canon of Diversity
This principle states that the government should collect taxes from different sources rather than concentrating on a single
source of tax. It is not advisable for the government to depend upon a single or a few sources of tax; it may result in
inequity to the certain section of the society and uncertainty for the government to raise funds. If the tax revenue comes
from diversified source, then any reduction in tax revenue on account of any one cause is bound to be small. A point to
note is that a large multiplicity of taxes will be difficult to administer and hence uneconomical.
Classification of Taxes
Tax may be classified on the basis of the following:
(i) Impact tax
(ii) Base of tax
(iii) Rates of tax
Impact of Tax
Under this category, tax may be classified as either:
(a) Direct tax
(b) Indirect tax
Definition of Direct Tax and Indirect Tax
Direct tax is a form of tax under which the impact and incidence of the tax is on the same person. According to Dalton,
“a direct tax is paid by the person on whom it is legally imposed; while indirect tax is imposed on one person, but paid
partly or wholly by another”. John Stuart Mill defined a direct tax as one which is “demanded from the very person who it is
intended or desired to pay it” on the other hand, an indirect tax is one which is “demanded from one person in the expectation and
intention that he shall indemnify himself at the expense of another”. Examples of direct taxes include income tax corporation tax,
etc. while indirect tax include excise duty, value added tax, import and export duty etc.
Merits
1. It is administratively simple because there are no complicated rate schedules and a degree of progression in each
tax is not involved.
2. It is neutral because it does not change the relative position of tax-payers. Put differently, proportional tax does
not affect the relative demand/supply positions and therefore the developmental course of the economy.
Progressive Tax
In the case of progressive tax, the rate of the tax rises as the taxable income increases. The higher the income, the higher
the rate and so rich tax payers pay more.
Digressive Tax
A tax is considered digressive when the higher incomes do not make a due contribution. In other words, the tax is mildly
progressive such that the rate is not sufficiently steep. Similarly a tax is digressive if incremental rate is applied on increasing
incomes up to a certain level when the rate applied is proportional even as income increases.
Effects of Taxation
Taxation yields both positive and negative effects, it is a bag with mixed blessings and so when designing a tax system
effort should be made to embrace the good effects and minimize the bad effects. In the words of Dalton, a good tax
system is one “which has the best or the least bad, economic effect”.
Types of Taxes
Income Tax
Income taxes were in existence even before independence but were not structured as they are at present. Companies and
individuals were meant to file returns and pay income taxes at the end of the year. The income tax is classified into
individual, corporate, withholding and other income taxes.
Income from employment is subject to Pay As You Earn (PAYE). Personal income tax and PAYE are charged
at the same graduated scale.
Corporate Income Tax (CIT), on the other hand, is charged on profits of limited liability companies at a flat rate.
This is currently at 30%.
Withholding Tax (WHT) is another type of income tax that is charged on interest, dividends, royalties,
commission and pension. The person paying out these amounts is required to withhold a certain percentage, as
prescribed in the Act, and remit the same to the Commissioner of income Tax by the 20th day of the following
month. A withholding tax certificate is issued for the amount withheld.
Excise Duty
An excise tax is a levy applied selectively on particular goods and services. Kenya’s excisable commodities at the moment
are alcoholic beverages, tobacco, fuel and motor vehicles. Other than motor vehicles, excise taxes on beer, cigarettes and
petroleum are currently charged on a specific basis, i.e. per volume or quantity.
Excise taxes are levied for a variety of reasons, the main reason being their ability to raise substantial revenue for the
government at relatively low administrative and compliance costs. The taxes are normally imposed at high rates on a few
commodities produced by a few large producers. Such goods tend to have low own price elasticity of demand, implying
minimum shifting of consumer purchase when prices change. Another reason for levying excise taxes is to correct the
negative externalities that arise from the consumption of the taxed products. For example, excessive smoking of cigarettes
and drinking of alcohol is harmful not only to the individual consuming the products but also to the society at large. The
relatively high taxes imposed on these products are therefore meant to ensure that the consumers internalize the cost to
the society. Finally, excise taxes are used to improve vertical equity of the tax system. They are levied on luxurious goods
that are consumed by the high-income individuals.
Consumption Taxes
Sales tax is levied on consumption of goods. This had been levied since independence. However, in 1990, Value Added
Tax (VAT) was introduced in Kenya to replace the sales tax. It is levied on consumption of both goods and services. The
difference between VAT and sales tax is that sales tax never included services. Value Added Tax is a multi-stage
consumption tax based on the destination principle. The tax is applied to the sale of goods and services at all stages of the
production and distribution chain. Only registered traders are required to charge VAT, and for one to qualify for
registration under VAT, one must have an annual sales turnover of Kshs. 3 million. VAT is currently charged at a standard
rate of 16 percent, with a lower rate of 14 percent applying to hotels and restaurants.
Customs Duties
Customs duty is currently charged on the CIF value of imported goods. The current structure of the tariff bands is: 0, 5,
15, 20, 25, 30, and 35 percent and sugar at 100 percent. Some imports from regional trading blocs like COMESA and the
East African Community are subject to customs duty at the rate of zero.
Tax Avoidance
The presumption that tax avoidance is a legal phenomenon may however not be completely right because most tax regimes
have enacted anti avoidance laws. The main feature of tax avoidance is that it is an advantage taken from weakness which
may be present in the laws. Avoidance offers a tax free exit through expert planning arrangements. It is an advantage taken
in relation to any tax inform of:
Relief or increased relief from the tax or the avoidance or reduction of a change tax.
The deferral of any payment of tax or
The avoidance of any obligation to deduct or account for any tax.
2. TAXABLE PERSONS
Those persons assessable or chargeable to tax are called persons by the Act. It includes individuals and artificial persons
but excludes partnership firms because its income is assessable on the partners.
3. RESIDENCE
It is a matter of physical presence. An individual is considered resident if:
i. The person has permanent home in Kenya and was present in Kenya for any period during a particular year
of income under consideration;
ii. He has no permanent home in Kenya but was present in Kenya;
For a total of 183 days a more in such year of income, or
For a period more than 122 days in the year of income and the two other preceding year of income.
4. RATES OF TAXES
After determining the taxable income, also referred to as assessable or chargeable income/loss of a person, the person is
taxed. Loss is carried forward on the basis of specified sources until the person makes a profit to off-set the loss. The loss
from one specified source can only be off-set against future income from the same specified source. Income is taxed at
the prescribed rates of taxation.
Companies newly listed on any securities exchange approved under the Capital Markets Act enjoy favorable corporation
tax rates as follows:
If the company lists at least 20% of its issued share capital listed, the corporation tax rate applicable will be 27%
for the period of three years commencing immediately after the year of income following the date of such listing.”
If the company lists at least 30% of its issued share capital listed, the corporation tax rate applicable will be 25%
for the period of five years commencing immediately after the year of income following the date of listing.”
If the company lists at least 40% of its issued share capital listed, the corporation tax rate applicable will be 20%
for the period of five years commencing immediately after the year of income following the date of such listing.
The corporate tax rate applicable to the company may therefore change if the percentage of the listed share capital exceeds
20% of the issued share capital. The applicable tax rate will depend on the percentage of the issued share capital listed at
the Nairobi Stock Exchange.
Taxable Employment Benefits - Year 2017- These rates include wife’s employment, self-employment and professional
income rates of tax.
Monthly taxable pay Annual taxable pay Rates of tax % in each
(shillings) (shillings) shilling
1 - 11,180 1 - 134, 164 10%
11,181 - 21,714 134, 165 - 260, 567 15%
21, 715 - 32, 248 260, 568 - 386, 970 20%
32, 248 - 42, 782 386, 971 - 513, 373 25%
Excess over - 42, 782 Excess over - 513, 373 30%
Personal relief Shs. 1, 280 per month (Shs. 15, 360 per annum)
Prescribed benefit rates of motor vehicles provided by employer
Monthly Annual
Capital allowances: (i) Saloon, Hatch Backs and
Estates
Wear and tear allowances Upto - 1200 cc 3,600 43,200
Class I 37.5% 1201 - 1500 cc 4,200 50,400
Class II 30% 1501 - 1750 cc 5,800 69,600
Class III 25% 1751 - 2000 cc 7,200 86,400
Class IV 12.5% 2001 - 3000 cc 8,600 103,200
softwares 20%
Industrial building allowance: Over - 3000 cc 14,400 172,800
Industrial buildings 10% (ii) Pick-ups, Panel Van
(Unconverted)
Hotels 10%
Farm works allowance 100% Upto 1750 cc 3,600 43,200
Investment deduction allowance: Over 1750 cc 4,200 50,400
2005 to date - 100% (iii) Land Rovers/Cruisers 7,200 86,400
OR 2% of the initial capital cost of the vehicle for each month,
whichever is higher.
Shipping investment deduction 40%
Mining allowance:
Year 1 40%
Year 2 – 7 10%
Commissioner’s prescribed benefit rates
Services Monthly rates Annual rates
Sh. Sh.
(i) Electricity (Communal or from a generator) 1,500 18,000
(ii) Water (Communal or from a borehole) 500 6,000
(iii) Provision of furniture (1% of cost to employer)
If hired, the cost of hire should be brought to charge
(iv) Telephone (Landline and mobile phones) 30% of bills
Agricultural employees: Reduced rates of benefits
(i) Water 200 2,400
(ii) Electricity 900 10,800
The current VAT rate is 16%
5. RELIEFS
These are incentives granted by tax authorities to either an individual taxpayer or body corporate in any given year of
income. The effect of such incentives is that it reduces the taxable income of an individual taxpayer and body corporate.
There are two types of tax reliefs in Kenyan tax system;
i. Personal relief
ii. Insurance relief
a) Personal reliefs
The personal relief is claimed and granted only to resident individuals. The relief reduces tax payable by an individual. The
general rule is that;
b) Insurance Relief
A resident individual will be entitled to an insurance relief at the rate of 15% of the premiums paid subject to a maximum
of Sh5000 p.m. (Sh. 60,000 p.a.) if he proves that;
He was paid premium for an insurance made by him on his life, or the life of his wife, or his child and that the
insurance secures a capital sum payable in Kenya and in the law full currency of Kenya.
His employer paid premium on the insurance of the life of the employee which has been charged to tax in the
hands of the employee.
Both employer and employee have paid premiums on the insurance.
N/B: Premiums paid for an educational policy with a monthly period of at least 10 years shall qualify for this relief.
6. WITHHOLDING TAXES
This is a tax that is withheld at source or at the point of payment. A resident person is required to withhold tax on various
payments, under section 35 of the Income Tax Act. Withholding tax is applicable on payments to both residents and non-
residents. Such payments include dividends, interest, royalties, management and professional fees and agency, consultancy
and contractual fees. The importance of deducting withholding tax is that it makes tax collection easy and it also ensures
that some incomes do not escape taxation. The withholding tax should be viewed as income tax paid in advance.
A person making payments of incomes subject to withholding tax is legally required to deduct the withholding tax or the
tax at source at appropriate rates before effecting the payment and:
Notes:
i. Qualifying interest in respect of Housing Bonds is limited to Sh 300,000 per year.
ii. Withholding tax on interest income received by a resident individual from the following sources is final:
Banks or financial institutions licensed under the Banking Act.
Building societies licensed under the Building Societies Act.
Central Bank of Kenya.
iii. Commissions payable to non-resident agents for purposes of auctioning horticultural produce outside Kenya are
exempt from withholding tax.
iv. Tax deducted at source on withdrawals from provident and pension schemes in excess of the tax-free amounts
made after the expiry of fifteen years or on the attainment of the age of fifty years, or upon earlier retirement on
health grounds are final.
v. Withholding tax on payments to resident persons for management and professional fees applies to payments of
Sh 24,000 or more in a month to both registered and nonregistered business. The tax rate in respect of
consultancy fees payable to citizens of the East African Community Partner States is 15%.
vi. The tax is subjected to payments made to non-resident telecommunication service providers and is based on
gross amounts.
Note: Various reduced rates of withholding tax apply to countries with double tax relief treaties with Kenya. The incomes
of the non-residents are taxed gross, that is, no expenses are allowed against the income. The withholding tax must be
remitted to the Domestic Taxes Department within 20 days of its being deducted. There is no further tax for the non-
resident after the withholding tax is paid as far as Kenya is concerned.
TAXATION OF INCOMES FROM DIVIDENDS, INTERESTS, RENT AND ROYALTIES
1. DIVIDEND INCOMES
Dividend means any distribution (whether in cash or property, and whether made before or during a winding up)
by a company to its shareholders with respect to their equity interest in the company, other than distributions
made in complete liquidation of the company of capital which was originally paid directly into the company in
connection with the issuance of equity interest.
Dividend paid by resident companies to the individual shareholders are taxable income. In comparison to
employment income which is brought to tax in the year it is earned, dividend income is taxable in the year it was
paid out. For tax purposes, the following amounts are taken to be dividend income:
o Cash dividends
o The distribution of profits in case of voluntary winding up (whether cash or non-cash).
o The issue of debentures or redeemable preference shares without any payment.
o Dividend in this case shall be higher of the nominal value or Redeemable value.
o The issue of debentures without any payment.
o Issuance of Debentures or redeemable Preference shares for part payment i.e. at a discount.
Non Taxable Dividend/Exempt: - These are dividends not charged or subjected to tax;
o Dividend received from an investment outside Kenya (foreign dividend).
o Dividend received by a resident company from another resident company where it controls 12.5% or
more of the share capital.
o Dividends received by Insurance Company from its life assurance Fund.
o The issuance of debentures or redeemable shares for free or for part payment in the care of a body
corporate.
Classification of Dividends; - Dividends are classified into two, namely;
o Qualifying dividend
o Non qualifying dividend
a) Qualifying dividend; - There are dividends which are subjected to withholding tax only. i.e withholding
tax in this case is a final tax. The withholding tax rate is 5% on the gross amount for residents. The non-
resident rate is 10% as final tax. Are paid out by:
- Private Companies
- Public Companies
- SACCOs (Savings and Credit Cooperative Societies
- Examples of SACCOs are; {Harambee SACCO, Mwalimu SACCO, Magereza SACCO, and Police
SACCO}
b) Non Qualifying dividend: - These are dividends paid out by Cooperative Societies other than SACCOs
.e.g.
- Kiambu Farmers Coop society
- Kariokor Women Coop society
- Tetu Farmers’ Cooperative Societies
The Withholding tax rate is 15% which is not a final tax. The Non qualifying dividend will be aggregated with
other incomes of that person and taxed further and any withholding tax suffered will be allowed as a set off tax.
Those paying dividend, except where dividend is exempted from deduction of withholding tax, must deduct the
withholding tax. If they fail to deduct the withholding tax, the Income Tax Department has power to collect such
tax from the person paying.
Therefore, withholding tax on qualifying dividend for residents is final tax. This means that there is no further
tax charged on dividend once the withholding tax has been paid. Dividends received by insurance companies are
not qualifying dividends and are taxed at corporation rate. W.e.f. 13.06.2008, Dividends received by financial
institutions is subject to withholding tax.
2. INTEREST INCOMES
Interest is defined as the amount paid for the use of money. For tax purposes, it is defined as interest payable in
any manner in respect of a loan, deposit and other debts or obligations e.g. loans by banks and financial
institutions, deposits to banks and financial institutions etc.
Those paying interest, except where interest is exempted from deduction of withholding tax, must deduct the
withholding tax. If they fail to deduct the withholding tax, the Income Tax Department has power to collect such
tax from the person making the payment. Therefore, interest is taxable; when it has been credited to one’s account
or when it has been paid out or when it has matured?
Interest Income exempt from taxation
o Interest arising from tax reserve certificates - These are certificates sold or issued by the government
and for the time being they are held by the government. Interest accrues which is fully exempt from
taxation. These certificates will then be used to pay taxes when tax becomes due.
o Interest from Post Office Savings Bank Account.
o Interest arising from government stocks and Nairobi City council stocks in the case of a non-resident
only.
o Interest on East Africa High Commission in the case of non-residents only.
o Interest arising from a registered retirement Fund. (Encourages savings for old age).
o Interest on a deposits in Home Ownership Savings Plan to purchase a permanent house for own
occupation through recognized financial institutions with effect from 1/1/96.
o Interest accrued or earned outside Kenya.
o The interest paid to a unit holder from a Unit Trust.:- A Unit Trust or a mutual fund organization is
one registered under the Unit Trust Act. It sells units (equivalent to shares) to the public and invests
the funds for a return. The unit holder gets a return (interest) from the Unit Trust tax free.
o The Unit Trusts are supposed to invest in shares and the government hopes this will help develop the
capital market (buying and selling of shares mainly in the Nairobi Stock Exchange). The withholding
tax paid by a Unit Trust on interest and dividend is final tax, which means that the Unit Trust is not
taxed further on the income.
o The interest paid to banks, financial institutions, insurance companies, building societies, Agricultural
Finance Corporation, and hire purchase companies.
Note;
o Interest on housing development bonds by approved institution such building society. The first Sh
300,000 of the interest will suffer withholding tax only otherwise any excess interest will be subject to
further taxation
o Interest received by a body corporate from financial institutions will be subject to withholding tax at
the rate of 15% but this will not be final tax. Interest paid by other person’s not financial institutions is
fully taxable.
Illustration
Mr. Omondi deposited Sh 300,000 in Housing Finance development Bonds in year 2004 and earned gross interest of Sh
450,000.
Required;
i. Calculate withholding tax on the interest.
ii. How much of the interest suffers further taxation.
Solution
Sh’000’
Gross income 450
Withholding tax at 10% x 450 45
Interest on further taxation (450 - 300) = 150
i. Qualifying Interest
This is the aggregate interest receivable by an individual in any year of income from financial institutions e.g. Banks,
insurance companies, treasury Bills and bonds. Interest is subject to Withholding tax as final tax at a rate of 15%; In the
case of Housing development bonds, the qualifying amount is the first Shs 300, 000; the rest is non- qualifying.
Non-residents: - They are taxed at a flat rate of 30% on gross rent income and this is the final tax. No expenses are
allowed against gross rent income.
Residents: - For residents, rental income will be brought to tax at the graduated scale rates for individuals and at the
corporation tax rate for the companies. However the following points are relevant in arriving at the net taxable rental
income:
The general principle is that expenses allowed as deductions from incomes where they are wholly and exclusively incurred
in the production or generation of the chargeable income. Expenses incurred prior to period of production are not
allowable
i. Interest on an overdraft or mortgage where funds have been raised to purchase the property. e.g mortgage
interest. Interest is allowable in full irrespective of the source of the loan provided that the premises have
been rented for 12 months. If let for less than 12 months, the amount is apportioned accordingly.
ii. Structural alterations to maintain existing rents. E.g. demolishing walls to create more room or to create a
fire outlet.
iii. Capital allowances e.g. Diminishing in value of any implements, utensils or similar articles if included in the
rentals. Wear and tear, industrial building allowance, investment etc. may be allowed as deduction.
iv. Legal costs and stamp duties on acquiring a lease of not more than 99 years.
v. Any reasonable advertising and promotional costs.
vi. Municipal water rates, land and ground rates.
vii. Repairs, renewals and replacements in order to maintain the existing rent e.g. repair of walls, water supply
network, fences, re-decorating etc.
viii. Rent collection costs, estate agent’ fees and legal costs in operation.
ix. Cost of valuation for insurance of the building and its contents as well as insurance premiums paid.
x. Expenses incurred during regular or normal inspection by the agent.
xi. Wages of any staff looking after premises including garden maintenance.
xii. If included in the rentals, heating, lighting as well as telephone bills.
xiii. If let furnished, an allowance for wear and tear and for replacement of furnishings and fittings.
Disallowed expenses
4. ROYALTIES
This is income earned by a person for rights granted to others to use his intellectual properties. These are incomes arising
from rights granted to other persons for the use of intellectual property. Royalties means a payment made as a
consideration for the use of:
Taxation of royalties
Taxation of royalties depends on whether one is a resident individual or a non-resident.
Non-residents: - They are taxed at a flat rate of 20% of gross royalty income. This is a withholding tax which is a final
tax. No expenses are allowed against the gross income.
Residents: - Expenses are allowed against gross royalty income to arrive at the taxable royalty. Expenses incurred prior
to the period of production of royalty income are not allowed e.g. expenses in the nature of researching, testing,
development before commencement of generation of the royalty income. The net royalty income will be aggregated with
other incomes of that resident individual and assessed on him using graduated scale rates in the case of an individual and
corporation tax rate in the case of a body corporate. There is a withholding tax at source at 5% to be set off against gross
tax liability of the person.
5. PENSION AND ANNUITIES
Pension fund is long-term as it continues after employment. Provident fund would normally cease upon ceasing
employment there are of 2 categories:
- Benefit as a contributor
- Benefit after employment
Benefit as a contributor; Contribution may be under;
i. Contributory scheme-both employer and employee contributes.
ii. Non-contributory scheme-Only where one party contributes, either employer or employee.
Generally, Employer’s contribution towards a registered or unregistered scheme on behalf of the employees is NOT
TAXABLE on the employee (except where the employer is not taxable or where it exceeds the tax exempt limit of Sh.
240,000 p.a.). The combined employer-employee contribution to a registered or approved fund or scheme on behalf of a
member is unlimited. However, the employee’s tax allowable amount or deductible contribution is limited to the lower of:
- 30% of Pensionable pay
- Employee’s actual contribution.
- Shs. 240, 000 per annum 0r sh.20, 000 per month. (Before 1.1.2006, it was Sh.17, 500 per month or 210,000 per
annum.)
Employer’s contributions to unregistered pension scheme or excess contributions beyond the allowable limit of Ksh.240,
000 by an employer not taxable in Kenya are taxable on the employees. Nontaxable Employer’s Contributions to
Registered or Unregistered Pension Scheme or Provident Fund
Contributions paid by a non-taxable employer to unregistered pension scheme or excess contributions paid to a registered
pension scheme, provident fund or individual retirement fund; shall be employment benefit chargeable to tax on the
employee
N/B: The first 1.4 million payable to the estate of a deceased person is TAX EXEMPT.
Note:
i. Maximum allowable Pension/ Provident Fund had been increased from 17500 per month to 20000 per
month (240000) w.e.f. 1st Jan 2006).
ii. Contribution made to NSSF( National Social Security Fund) also qualify as a deduction with effect from
1.1.97.However, Where an employee is a member of a pension scheme or fund and at the same time the
National Social Security Fund (NSSF) the maximum allowable contributions should not exceed Sh 20,000
per month in aggregate.
TAXATION OF EMPLOYMENT INCOME
Although the Act has not defined the term employment, it can be taken to mean any relationship between employer and
employee arising from an agreement whether expresses or implied in year a given year of income. However, the income
tax has defined the employer to include:
- Any person having control of payment of remuneration;
- Any agent, manager or other representative of any employer who is outside Kenya
- Any paying officer of Government or other public authority;
- Any trust, insurance company or body of persons paying pensions.
An employee has also been defined by the Act to include:
- Any holder of office for which remuneration is payable.
- Any individual receiving emoluments in respect of any employment, office, appointment or past employment.
The Kenyan income tax system adopts a PAYE system where employer is under statutory duty to deduct the income tax
on any income from employment or services rendered in a particular year of income. The system applies to all cash
emoluments and all credits in respect of emoluments to employees' accounts with their employers, no matter to what
period they relate.
Example 4
Mr. Moto is married to Jiko Makaa. Mr. Moto is a registered engineer and he is the proprietor of Meko Engineering
Services a firm of consulting engineers. He is nevertheless fully occupied as an employee of Jenga Construction Limited.
His company is therefore managed by his wife who draws Sh.50, 000 per month as salary. Jenga Construction Ltd.
provided the following emoluments to Mr. Moto for the year ended 31 st December 2012:
1. Salary of Sh.150, 000 per month (PAYE Sh.62, 000 per month).
2. Housing – Free housing is provided, with water and electricity. He pays a nominal sh.10, 000 per month.
Water consumed was for Sh.4, 800 and electricity consumed was for Sh.18, 000 during the year.
3. 1,000 ordinary shares for past years of service. Last valuation of shares was at sh.50 each. The issued share
capital is now 25,000 shares. The company paid a dividend of Sh.10 per share on 31 December 2012.
4. Company car of 2000 cc.
5. Leave pay equal to one month’s salary.
6. Life insurance premium per each household member of Sh.10, 000 per annum. This covers himself, wife
and son.
7. Pension at 10% per month. He contributes 5% towards the same scheme. The scheme is registered.
Meko Engineering Services made an assessed loss of Sh.400, 000 for the year of income 2012. Mr. Moto
owns property which he bought many years ago. Rent income account for the year 2012 is as follows:
Sh. Sh.
Gross rent 300,000
Less: expenses
Loan repayment 150,000
Interest on loan 125,000
Fencing 30,000
Caretaker wages 55,000
Insurance, rent and rates 25,000
Replaced broken doors 85,000 470,000
Loss to be carried forward (170,000)
Required:
(a) Taxable income of Mr. Moto for the year of income 2012.
(b) Tax payable by Mr. Moto for the year of income 2012.
(c) Mr. Moto is being invited by Meza Ranching Company Limited to be their manager and reside at the farm. What
will be the tax implications of this? Explain but do not compute if he takes up the offer and everything remains
unchanged other than the residence.
Example 5
Mrs. Ongera works with Anga Ltd. and has provided you with the following information for the year ended 31st December
2007. Pension from previous employment of Sh.20, 000 per month.
1. Salary sh.120, 000 per month (P.A.Y.E Shs. 42,000 per month)
2. Mrs. Ongera and her husband own a company whose taxable income was agreed at Sh.500, 000 after charging
husband’s salary of Sh.250, 000 per month (P.A.Y.E sh.60, 000 per month).
3. Anga Ltd. provided a company house to Mrs. Ongera in South B where rent of similar houses was Sh.20, 000
per month.
4. Mrs. Ongera works over-time and her over-time income averages Sh.10, 000 per month.
5. Mrs. Ongera enjoyed medical benefit of Sh.160, 000 during the year. She is a senior manager and the company
has medical cover for all its employees.
6. She obtained free consumables from the company as a Christmas gift worth Sh.30, 000 during the year.
7. Mrs. Ongera owns rental property at Komarock Estate and receives Sh.50, 000 as rental income per month.
During the year, she incurred Sh.60, 000 in renovations, repairs and painting before letting the property. She had
obtained a mortgage loan from Housing Finance Company amounting to Sh 3,000,000. She paid Shs 900,000
during the year of which Sh 500,000 was principal.
8. Mrs. Ongera owns 20% of the shares of Anga Ltd.
Required:
i. The taxable income for Mr and Mrs Ongera for the year of income 2007.
ii. Tax payable on the income computed above.
Example 6
Joel Kivu is a general manager with Ukweli Ltd. He has provided you with the following information on his income for
the year ended 31 December 2016.
1) He is paid a basic salary of Sh.75, 000 per month (PAYE Sh.15, 000 per month).
2) He is housed by the employer in a house leased at Sh 30, 000 per month. The house was furnished by the
employer at a cost of Sh 200, 000. His private telephone charges averaging Sh1, 800 per month are also paid by
the employer.
3) He is a member of a golf club where the employer contributes Sh 5, 000 per month for him.
4) He holds a life assurance policy with Maisha Assurance Company Ltd. The employer paid the premiums on the
policy for year 2016 amounting to Sh 48, 000.
5) He is a member of a registered collective investment scheme. During the year, he earned an income of Sh.40,
000 from the scheme. The scheme invests in shares and fixed deposit accounts.
6) He separated with his wife on 1 October 2016. With effect from 31 October 2016, he has been paying alimony
of sh20, 000 per month to his wife as required by a court order.
7) He is provided with a motor vehicle (2000cc) by the employer which was purchased on 1 st January 2006 at a cost
of Sh1, 500, 000.
8) He contributed Sh 25,000 per month towards a registered pension scheme.
9) On 1 December 2016, his monthly salary was increased by ten per cent backdated to 1 st July 2016.
10) He owns a pig-rearing farm in Limuru. The farm reported revenue of Sh 1,800,000 for the year ended 31
December 2016 before deducting the following costs: Shs
Salary to farm manager 300, 000
Wages to farm labourers 160, 000
Construction of pig stays 48, 000
Purchase of a plastic water tank 22, 000
Purchase of pig feed 410, 000
Cost of renovating the farmhouse 130, 000
1, 070, 000
Required:
(i) Taxable income of Mr. Joel Kivu for the year ended 31 December 2016.
(ii) Tax liability from the income computed in b (i) above.
Example 7
Alex Kipkoech is employed by Zintac Ltd. as a salesman. He provided the following information relating to his income
and that of his wife for the year ended 31st December 2015:
1) His monthly basic salary is Sh. 60,000 (PAYE Sh. 15,000 per month).
2) He is also entitled to a commission based on 5% of all extra sales he makes above Sh. 200,000 per month. His
sales for the months of March, June, August and October 2015 amounted to 250,000, Sh.300, 000, Sh.220, 000
and Sh.215, 000 respectively.
3) He lives in a company house and pays a nominal rent of Sh. 8,000 per month. The market rental value of the
house is Sh. 45,000 per month.
4) The company reimburses him for all out-of- pocket expenses incurred on the official use of his car. In the year
2007, the amount reimbursed was Sh. 90, 000; he had purchased the car in the year 2004 at cost of Sh. 800,000.
The car has an engine capacity of 1600cc.
5) The education fees for his two children amounting to Shs. 200, 000 was paid by the company during the year.
This amount was charged to the company’s income statement.
6) He earned a net interest income of Sh. 150,000 during the year from his investments in housing development
bonds.
7) He is contemplating purchasing a house for his residence in the near future. In the year 2015, he invested Sh.
100,000 in a registered home ownership savings plan and earned an interest income of Sh. 10,000.
8) He has a life insurance policy for self and family for which he pays a total premium of Sh.45, 000 per annum.
9) He has a farm which generated a surplus of Sh. 120,000 during the year. A tax of Sh. 15,000 had been deducted
under presumptive tax regulations.
10) His wife has invested in the shares of a quoted company. She received a dividend of Sh. 12,000 (net) from the
shares in the year 2015.
Required:
i. Compute the total taxable income of Alex Kipkoech for the year ended 31 st December 2015.
ii. Determine his tax liability from the income computed in (i) above.
Business Income
The Income Tax Act has defined business to include any trade, profession or vocation, and every manufacture, adventure
and concern in the nature of trade, but does not include employment.
i. Trade - Buying and selling for gain;
ii. Profession - Professional practice such as by a doctor, lawyer, accountant etc.
iii. Vocation - A calling or career;
iv. Adventure - Would include smuggling and poaching;
v. Concern - Would mean any commercial enterprise.
Business may be carried on for a short time or a full year. However, the period a business is carried on is irrelevant in
taxation of business income. Thus any business income is chargeable to tax whatever period of time the business is carried
on. Similarly, the Act charges tax on profits from any business that is whether income is earned legally or illegally.
Therefore, legality of the business is not recognized in tax law when it comes to taxing the business income.
Taxable Business Income
1. An amount of profit from ordinary business arising from buying and selling as a trade e.g. butchery, grocery,
manufacture, transport etc.
2. Where business is carried on partly within and partly outside Kenya, by a resident person, the gains or
profits is deemed to be derived from Kenya.
3. An amount of insurance claim received for loss of profit or for damage or compensation for loss of trading stock.
4. An amount of trade debt recovered which was previously written off.
5. An amount of balancing charge during cessation of business
6. An amount of trading receipt received from a business operating as a going concern.
7. An amount of realized foreign exchange gain.
8. Amount of discounts arising from a trading activities
9. Decrease in the specific provision for doubtful debts
Non-taxable Business Incomes
These are items of business income not chargeable to tax as provided for by the Income Tax Act. They include;
1. Profit on sale of assets.
2. VAT refunds.
3. Any income specified in the Act as tax exempt or non-taxable.
4. Any income subject to tax at source i.e. W/T on interest or dividends.
5. Foreign exchange gain not realized
6. Decrease in the general provisions for bad and doubtful debts
Business income in Kenya is chargeable to tax with respect to companies and partnership firms. For tax purposes,
determination of taxable income with respect to these forms of business organizations is almost similar except that in
partnership firms, once the taxable income has been determined, an amount will be distributed to each partner and tax
assessed on each individual partner using graduated scale rates of tax. Similarly, it is important to note that whether
expenses are allowable or disallowable and whether income is taxable or non-taxable is also considered when determining
taxable income for the year of income.
Taxation of Companies
- Section 3(2) of the Income Tax Act (ITA) provides that Income tax is charged on all the income of resident and
non-resident companies, which has accrued in, deemed to be or is derived from Kenya.
- An entity will be regarded as resident if it is under Kenyan laws, effectively managed and controlled or declared
to be resident in Kenya by the Cabinet Secretary by way of notice in the Kenya Gazette
- The corporation tax rates in Kenya is 30% of the taxable profit on residents and 37.5% on non-resident entities.
- The corporation tax rates proposed as incentives for new listed companies by Kenya Revenue Authority in the
year 2015 were as follows:
Special rates Rates Period
Newly listed companies through IPO % No. of years
- At least 20% of issued share capital listed 27.5% 3 years
- At least 30% of issued share capital listed 25% 5 years
- At least 40% of issued share capital listed 20% 5 years
- Listing through Introduction 25% 5 years
- Export Processing Zone 0% First 10 years
25% Next 10 years
- Special Economic Zone** Exempt -
Source: Finance Act, 2015
- Tax Losses incurred by a company before, 1st Jan 2016, the carrying forward of such losses was limited to 4 years.
However, Finance Act 2015 amended this to 9 years commencing 1 st Jan 2016.
- All companies in Kenya are expected to pay installment tax before the end of the year of income. Therefore,
the amount of tax payable shall be determined at the beginning of each year. This is based on the higher of:
The budgeted profits of the year or
25% of 110% of the tax assessed in the previous year.
- Once determined, the installment tax is payable as follows;
1st installment 25% of tax due by 20th day of the 4th month during the year of income.
2nd installment 25% of tax due by 20th day of the 6th month during the year of income.
3rd installment 25% of tax due by 20th day of the 9th month during the year of income.
4th installment 25% of tax due by 20th day of the 12th month during the year of income.
Final tax (tax Actual tax payable minus total installment tax paid on the last day of the fourth month
balance) after the end of the year of income.
1st installment 75% of tax due by 20th day of the 9th month during the year of income.
2nd installment 25% of tax due by 20th day of the 12th month during the year of income.
Final tax (tax Actual tax payable minus total installment tax paid on the last day of the fourth month
balance) after the end of the year of income.
- When determining the taxable income for body corporates in Kenya, incomes not subjected to tax are excluded
from taxable incomes. Similarly, expenses should be classified as either allowed or disallowed and adjusted
accordingly as follows;
Additional Information
1. Capital allowances were agreed with the Revenue Authority at Sh. 75,000.
2. Included in bad debts is a loan of Sh.15, 000 due from a former employee of the company who was dismissed in
October 2011.
3. Legal expenses include sh.20, 000 incurred in defending a manager against a traffic offence.
4. Insurance premiums include Sh.24, 000 paid to the National Hospital Insurance Fund (NHIF) as penalty for late
submission of contributions.
5. The company paid stamp duty of Sh.6, 000 relating to a piece of land purchased in August 2011. This payment
is included in the rent expenses for the year ended 31 December 2011.
Required:
(i) Compute the adjusted taxable profit or loss of Mali Limited for the year ended 31 December 2011.
(ii) Calculate the tax liability (if any) of the company for the year ended 31 December 2011.
Solution:
MALI LTD ADJUSTED INCOME
Shs “000” shs “000”
Reported net profit 4,200
Add back: disallowed expenses
Bad debts – employee loan 15
Legal expenses – manager 20
Insurance premium – penalty 24
Rent expenses – stamp duty 6
Depreciation 25
Purchase of furniture 26 116
Less:
Capital allowances (75)
Dividend and interest (200 + 4) (204)
VAT refund (12)
Gain on sale of M. Vehicle (14) (305)
Adjusted taxable income 4,011
5. Bad debts:
Sh.
Embezzlement by staff 21,600
Insurance compensation on embezzlement (12,000)
Bad debts written off 28,800
General provision for bad debts 120,000
158,400
6. Miscellaneous expenses:
Sh.
Acquisition of a 100 year lease on business premises 28,000
Directors Christmas party 24,000
Subscription to a trade association 30,000
A.S.K show contribution 10,000
Donation to children’s home 41,600
133,600
Required:
Determine the adjusted taxable profit or loss of Mapato Ltd. for the year ended 31 December 2007
SOLUTION:
MAPATO LTD
Sh. Sh.
Reported Net profits 218, 600
Add back: disallowable expenses
Depreciation 344,760
Travelling expenses – directors 400,000
Pension scheme (directors) 160,000
Compensation-wrongful termination 220,000
Audit fees – tax appeal 32,000
– discontinued business 68,000
Bad debts – general provision 120,000
100 year lease 28,000
X- Mass party 24,000
ASK show 10,000 1,406, 760
1,625, 360
Add: insurance compensation (embezzlement) 12, 000
Less: investment income (all non-business income) (284, 636)
Adjusted taxable income 1, 352, 724
N/B:
i. Embezzlement of staff of Sh. 21,600 is treated as allowable expense but compensation as taxable income. This
is the practice for strictly cash and stock embezzlement or loss.
ii. Interest paid on borrowings made to generate investment income but not exceeding the amount of investment
income is tax allowable expense.
iii. Donations to charitable organizations are allowable expenses.
Example 1
A, B and C are in partnership business trading as X enterprises ltd. They share profits and losses in the ratio of 2:2:1. In
the year 2007, they reported a loss of Sh. 200,000 after charging the following items.
Sh.
Depreciation 100,000
Salaries: A 400,000
B 300,000
C 200,000
Interest on capital A 100,000
C 100,000
Commission B 200,000
Stationery 50,000
Office expenses 100,000
Required:
Calculate the adjusted partnership profit/ (loss) and its distribution among the partners.
Suggested Solution
X enterprises
Computation of adjusted Business Income
Sh. Sh.
Loss as per account (200,000)
Add back: Depreciation 100,000
Salaries A 400,000
B 300,000
C 200,000
Interest on Capital A 100,000
C 100,000
Commission B 200,000 1,400,000
Partnership income 1,200,000
Therefore taxable income will be assessed on each individual partner using graduated scale rates of tax.
Example 2
Ali and Salama are in partnership trading as Alisa enterprises and sharing profits and losses in the ratio of 3:2 respectively.
They have presented the following profit and loss account for the year ended 31 December 2007:
Income: shs Shs
Sales revenue 6,882,000
Proceeds from sale of fixed assets 190,000
Refund of VAT 41,250
Interest on post Bank savings account 8,750
Dividend (net) 42,800
Total income 7,164,800
Expenditure:
Cost of sales 1, 591, 500
National Hospital Insurance Fund (NHIF) contributions 108, 750
National Social Security Fund (NSSF) contributions 170, 000
Lorry maintenance expenses 1, 005, 750
Salaries to partners 800, 000
Household expenses-Ali 96, 250
Repairs and maintenance- buildings 75, 000
Advertising 156, 750
Insurance premiums 125, 000
Interest on loan 200, 000
Subscriptions to trade associations 40,000
Donations - none approved charitable organization 20,000
Legal expenses 98,000
Income tax 240,000
General expenses 86,650
Bad debts 61,750
Water and electricity 81,000
Depreciation 19,500 4,975,900
Net profit 2,188,900
Additional information:
1. Included in sales revenue were goods valued at Sh. 150,000 consumed by the partners. These goods had cost Sh.
80,000 which was included in cost of sales.
2. Insurance premiums include Sh. 70,000 incurred on the life insurance policy of Salama.
3. Bad debts comprise:
Sh.
Increase in general provisions 20,000
Increase in specific provisions 41,750
61,750
4. Interest on loan and legal expenses relate to a mortgage acquired by Ali for purchase of his house.
5. Salaries to partners comprise:
Sh.
Ali 500,000
Salama 300,000
800,000
6. NSSF and NHIF contributions relate to the employees of the firm.
Required:
i. The adjusted partnership profit or loss for the year ended 31 December 2007.
ii. An allocation of the adjusted profit or loss between the partners.
Suggested Solution
Alisa Enterprise
2007 Computation of adjusted profit (loss)
Sh Sh.
Reported profit 2,188,900
Add:
Goods consumed at cost 80,000
Insurance 70,000
Bad-debts-Increase in gen-provisions 20,000
Interest on loan 200,000
Legal expenses 98,000
NHIF 108,750
NSSF 170,000
Salaries to partners 800,000
Household expenses-Ali 96,250
Donations 20,000
Income tax 240,000
Depreciation 19,500 1,922,500
Deduct:
Goods consumed at selling price (150,000)
Proceeds from sale of fixed assets (190,000)
Refund of VAT (41,250)
Interest on Post Bank savings A/C (8,750)
Dividend (42,800) (432,800)
Adjusted partnership profit 3,678,600
Partner’s allocation
Ali Salama Total
Salaries 500, 000 300, 000 800, 000
Share of profit 1,727, 106 1, 151, 440 2,878,600
2,227,106 1,451,440 3,678,600
Example 3
A, K and M are in a partnership of selling imported clothes, handbags and shoes. They have provided the following
information for the year of income 2011.
Sh.
Net loss after deducting the following: (1,080,000)
Rent 180,000
Legal costs 75,000
Salaries and wages 300,000
Donations: Turkana Food Relief Fund 50,000
Electricity and water 35,000
Repairs to business premises 65,000
Stationery 12,000
Vehicle expenses 90,000
Audit and accountancy 24,000
Advertising 65,000
Depreciation: Car 10,000
Building 33,000
Salaries: K 240,000
M 240,000
A 360,000
Interest on capital: K 80,000
M 80,000
A 120,000
Bad debts 40,000
Loss on sale of shares 8,000
Political party membership: K 6,000
Withdrawals by M 5,000
Dresses taken by A for her own use 12,000
School fees paid for A’s children 55,000
Additional Information:
1. Wear and tear deductions were estimated at Sh.16,000
2. Fifty per cent of vehicle expenses were for personal use.
3. Salaries and wages include Sh.30, 000 paid to A’s daughter for assisting in the business during the school holidays.
4. Rent analysis:
Payment for Partners residence Sh. 80, 000
Business Sh.100, 000
5. Legal costs included a payment of Sh.15, 000 paid to an arbitrator to settle a personal dispute between K and M.
6. Bad debts analysis:
Sh.
General provision 10,000
Specific provision 12,000
Written- off 8,000
A’s son (defaulter) 10,000
40,000
7. Advertising:
Sh.
Advertising campaign 28,000
Cost of new sign board 5,000
Sale of clothes 9,000
A’s birthday expenses 23,000
65,000
8. Other incomes (included in trading profit) Sh.
Dividends from shares KCB Ltd., 19,000
Rental income: Sub-letting business premises 22,000
Gain on sale of furniture 13,000
54,000
Required:
(a) Taxable income(loss) for the partnership business and distribution among the partners for 2011 if they share
profits and losses in the ratio 2:1:1
(b) Determine the taxable income of each partner.
Suggested solution
A, K & M Partnership
Taxable Income (LOSS) for the Year 2011
Sh.’000’ Sh.’000’
Net Loss reported (1,080)
Add disallowable expenses:
Legal costs- personal dispute resolution 80
Salaries and wages – A’s daughter 15
Donations – Turkana Food Relief fund 30
Motor vehicle expenses- personal use 50
Advertising 45
New sign board 5
A’s birthday expenses 23
Depreciation – car & building 43
Salaries:
K 240
M 240
A 360
Interest on capital:
K 80
M 80
A 120
Bad debts:
General provision 10
A’s son (defaulter) 10
Loss on sale of shares 8
Political membership - K 6
Withdrawals by M 5
Dresses taken by A for her own use 12
School fees paid for A’s children. 55 1,517
437
Deduct non-taxable income and income taxed separately:
Dividends from KCB shares 19
Rental income 22
Gain on sale of furniture 13 (54)
Deduct allowable expenses:
Wear and tear deductions (16)
Adjusted partnership profit 367
-
CAPITAL ALLOWANCES
These are tax incentives offered for capital expenditures to investors or businesses. They are tax allowable and that a
company will not be taxed on them. These allowances are also referred to as deductions under the Second Schedule to the
Income Tax Act. They include;
a. Investment deductions (ID)
b. Industrial building deductions (IBD)
c. Wear and Tear deductions
d. Farm works deductions
Investment Deductions
- This is an allowance granted to an investor who incurs capital expenditure on industrial building and machinery used
for manufacturing as an incentive to encourage investments mainly in the manufacturing sector. Therefore, these
allowances are granted in order to encourage:
Development of industries in normal manufacture, tourism and shipping.
Exportation to earn more foreign exchange.
Foreign investors to invest in Kenya.
To encourage development of industries outside the main urban centers of Nairobi and Mombasa.
- Currently, an investor can claim as much as 100% capital allowance with respect to investment deduction. For capital
expenditures intended for manufacturing purposes exceeding sh.200 million set up outside Nairobi, Kisumu or
Mombasa, an investor can claim 150% allowance.
- The following are different types of investment deduction
Normal investment deduction for ordinary manufacture
Investment deduction bonded manufacture
Shipping investment deduction
Investment deduction in respect of hotel building certified by the commissioner of income tax
a. Investment deduction from normal manufacture
This a type of investment granted to any person who incurs capital expenditure on:
Construction of an industrial building which is used by him or his lessee, an installation therein of new
machinery for manufacture.
Purchase of new machinery which is installed in a building not previously used for manufacture and such
machinery is not installed as a replacement of machinery previously in use in the business.
Construction of building used by the owner or lessee for manufacture purposes
Purchase of and installation of machinery into or setting up the machinery for use as may be appropriate to be
used for manufacture.
Construction of a Hotel building certified as an industrial building by the commissioner. Claims made by hotels
relate to building cost only and not items generally considered machinery.
Specified civil works are eligible for the allowance:
- roads and parking areas
- railway lines and related structures
- water, industrial effluent and sewerage works
- communications and electrical posts and pylons and other electrical supply works
- security walls and fencing
Workshop machinery for the maintenance of machinery used for manufacturing.
- In case a building is converted into a factory and new machinery installed for manufacture then
both machinery and building qualify for the allowance. Note that in the case of the building only
conversion cost qualifies:
- It is possible to construct an industrial building and do part installation of machinery. Machinery
would qualify for ID in respective years of the part installation.
- Power generation equipment also qualifies for investment deduction with effect from 1st July
2000
Mining Allowances
- This refers to capital allowances granted to a person carrying on the business of mining. The following costs are
qualifying costs for mining allowances;
i. Cost of exploring and prospecting for minerals.
ii. Cost of acquiring rights over the mine and minerals but does not include cost of land/site.
iii. Cost of buildings and machinery (mining equipment’s) which will have little or no value if mining
ceased.
iv. Cost of development and general administration and management incurred prior to
commencement of production or during a period of non-production (temporary stoppage).
- Mining operation is usually expected to last for 7 years. The deductions are granted as follows:
Year Rate (%)
1 40%
2 10%
3 10%
4 10%
5 10%
6 10%
7 10%
- Corporation tax rate for mining concerns is 27.5% for the first 4 years and thereafter the normal rate of 30%
EXAMPLES ON CAPITAL ALLOWANCES
Example 1
Mr Njoroge enterprises manufactures animal feeds in kiambu with effect from 1st Jan, 2012. He constructed the factory
building at a cost of Sh 900,000 and installed machinery costing Sh 600,000. He prepares accounts to 31 December each
year.
Required;
1. Calculate the investment deduction for year 2012.
Example 2
Molo Co. Ltd., a company dealing in hardware, prepares its accounts to 30 June each year. The following information
relates to the year ended 30 June 2008.
i. Written down value of assets brought forward for Income Tax purpose:
Class I Class III Class IV
37½% 25% 12½%
Sh Sh Sh
Written Down Value 30.6.2007 175,000 180,000 87,000
ii. Disposals during the year:
Cost Net Book Sales
Value proceeds
Sh Sh Sh
Isuzu Lorry 280,000 175,000 260,000
Motor car (purchased in 1.3.2007) 2,160,000 1,015,000 800,000
iii. Additions during the year
Sh
Mercedes Benz sports car for director 4,000,000
Second-hand Tractor 80,000
Trailer occasionally used by tractor 80,000
Shop fittings 60,000
Computer bought 1.3.2008 250,000
Telephone system bought 1.9.2007 72,000
iv. The office safe which cost Sh 30, 000, in 2002 was traded-in for a more modern safe costing Sh 40,000. The
old safe was valued at Sh 20,000 and the company paid the balance of Sh, 20, 000 to acquire the new safe.
The net book value of the old safe was Sh 22,968 at 30.6.2008.
Required
Calculate the wear and tear deductions due to the company for the year 2006.
Example 3
Mapato Ltd. is a manufacturing company operating in Nairobi industrial area. The following information was
obtained from the books of the company for the year ended 31st Dec, 2007;
i. The reported profits for the year before capital allowances amounted to Sh4, 296, 000.
ii. The written down values of assets for capital allowance purposes as at 1 st Jan, 2007 were as follows;
Computers shs. 390, 000
Plant and Machinery shs. 3, 640, 000
Tractors shs. 940, 000
Furniture and Fittings shs. 120, 000
Motor vehicles shss. 740, 000
iii. The building was constructed on 1 January 2002 and put into used on 1st Jan, 2003. It had a written down
st
v. The company constructed a perimeter wall at a cost of Sh150, 000 which was completed on 1 July 2007.
vi. On 1 September 2007, the company incurred Sh200, 000 on electrical posts which were fixed within the
premises for use in power distribution.
vii. A recreation hall was constructed for the employees and used from 1 November 2007. The cost of
construction was Sh.800, 000.
viii. The company reported a loss of Sh2, 500, 000 for the year ended 31 December 2006 and a profit of Sh1, 800,
000 for the year ended 31 December 2007. The company has not accounted for capital allowances or loan
interest for year 2006 and 2007.
Required:
For each of the two years ended 31 December 2006 and 2007, determine for Maji Matamu Ltd;
Capital allowances due for the year 2006 and 2007
Adjusted taxable income
Example 5
Mr Delamere, a farmer, incurred the following capital expenditure in his farm for the year ended 31 st Dec 2014;
Shs.
Extension to labour line 30, 000
Fenced paddocks 15, 000
T E X T
Required:
Compute the capital deductions for the year 2014.
Example 6
Madini Mining Company Ltd. has been prospecting for gold in Kakamega District since 1995. In year 2005, the
company discovered huge deposits of the mineral and commenced mining operations on 1 July 2005. The following
expenditure was incurred on 1 July 2005.
Sh.
Patent rights paid to the government 4,800,000
Payment of local council licence fees 840,000
Construction of labour quarters at site 1,200,400
Construction of godown in Kakamega town 2,680,000
Construction of godown at site 780,000
Purchase of specialised machinery for mining 1,960,000
Transportation of specialised machinery for mining to site 450,000
Purchase of a ten ton lorry 1,920,000
Purchase of tools and implements for mining 90,000
Purchase of computers 360,000
Purchase of furniture and fittings 1,400,000
Purchase of a Toyota Hilux pick-up
Additional information:
i. The company had incurred exploration expenses amounting to Sh. 1,500,000 as on 1 July 2005.
ii. The administration expenses incurred prior to 1 July 2003 amounted to Sh. 3,000,000
Required:
Compute the capital allowances due to Madini Mining Company Ltd. For the years ended 31st December 2005, 2006 and
2007.
ADMINISTRATION OF VALUE ADDED TAX
VAT is tax on spending which is collected by businesses and passed on to the Government. VAT is charged on
the supply of goods or services in Kenya and on the importation of goods into Kenya.
Before VAT may become chargeable in respect of supply of goods or services, the following requirements must
be fulfilled:
A supply of goods or services must take place;
The supply must be a taxable supply;
The goods or services must be supplied by a taxable person;
The supply must be made in the course of furtherance of business carried on by the supplier;
The supply must be made in Kenya.
DEREGISTRATION
It is the process of removing a registered trader from the VAT register. Any trader wishing to be de-registered
for any reason may apply to the commissioner of Domestic Taxes.
De-registration may be requested on the following grounds
- Closure of business.
- Sale/transfer of business.
- Death of a trader.
- Legal incapacitation (Bankruptcy).
- Insolvency.
- Change of business status e.g. Partnership to limited company.
- If the turnover falls below the prescribed limit.
Deductible Input Tax = Taxable Supplies (SR + ZR) x Input Tax suffered.
Total Supplies (SR+ZR+ER)
Example
Mr. Y a registered trader incurred input tax of Sh.5000 on purchase of his stock. Out of this stock, he sold as follows:
Goods taxable at 16% worth Sh. 20,000, zero rate goods worth Sh.20, 000, and exempt goods worth Sh.10, 000. He will
claim the following Input Tax.
Deductible Input Tax = Taxable supplies x Input Tax
Total supplies
20,000 + 20,000 x 5000 = Sh 4, 000
20,000 + 20,000 + 10,000
XYZ LTD
VAT ACCOUNT FOR THE MONTH OF NOVEMBER 2016
INPUT TAX KSHS OUTPUT TAX KSHS
Purchases xx Sales xx
Imports xx Provided services xx
Services (electricity) @ 12% xx Exports xx
Bad debts relief xx Debit note issued xx
Inventory claim (previously overstated) xx Credit note received (return outwards) xx
Debit note received xx
Credit note issued (return inwards) xx
VAT payable xx VAT refundable xx
xx xx
N/B:
1. Bad debt relief – is where a taxpayer claims VAT paid on goods sold on credit on which bad debts has arisen
because the individual is declared bankrupt or the company is declared insolvent.
2. Inventory claim – this relates to the inventory held by the entity (taxpayer) at the time of registration. Taxpayer
is required to claim input VAT tax on inventory 30 days from the date of registration and this relates to inventory
held with taxpayer within the last 12 months from the date of registration.
The following are prohibited inputs i.e. you cannot claim input VAT;
Passengers cars except for hire business
Domestic electrical and electronic appliances
Entertainment services
Hotel and restaurant services
Accommodation services
Supplies to staff housing and other similar establishments for staff welfare.
N/B:
a)Input tax is however deductible where the mentioned goods are purchased as stock in trade.
b)Input tax on office expenses are deductible unless prohibited as given above or used in facilities related to the
welfare of the staff e.g. expenses related to staff canteen.
VAT DUE FOR PAYMENT OR CREDIT
All registered traders are required to pay any VAT payable by the 20 th day of the month following the month to
which tax relates to.
Payment is made together with a document known as the VAT return. The return is known as VAT 3.
Whether there is any VAT payable or not, a VAT return must be submitted.
Payment of VAT can be made at any VAT regional office or to the central bank of Kenya.
REMISSION, REBATE AND REFUND OF VAT
a) Remission of VAT
- This refers to the waiver by the commissioner of income tax of any tax payable by a tax payer i.e. the
taxpayer’s tax is written off.
- Where a remission is granted under certain conditions, the tax shall become payable in the event of breach
of the condition.
- Remission can be given in the following situations;
Purchase of goods for use in new investment aimed at net foreign exchange earnings.
Purchase of goods for government approved projects
Goods purchased for use in refugee camp in Kenya
Capital equipment for use in the manufacture under bond or EPZ
Goods purchased for use by Kenya armed forces
b) Refund of VAT
- Refers to repaying (paying back) by the commissioner of the tax that t the taxpayer had paid to the
commissioner.
- Refund of the VAT tax may occur in the following situations;
Where payment has been made in error e.g. overpayment of VAT, use of wrong rates,
miscalculations etc.
Where input tax persistently exceeds output tax and it’s a regular feature of the business.
Where goods are imported, VAT charged and then exported before being used, VAT paid will be
refunded.
When payment for supply of goods and services have not been received (bad debts) under sec 24.
A refund of bad debts is made within 5 years.
NB: - VAT refund for bad debt is claimable if;
o The debtor had been declared legally insolvent.
o The debt has been outstanding for more than three years.
Where input VAT was charged on goods purchased, civil works, building constructed etc. for
making manufacturing taxable supplies before an individual became registered. Such claim for
refund is made in form VAT 5 within 30 days from the date of approval of registration by
commissioner of VAT.
DOCUMENTS ACCOMPANYING CLAIM FOR REFUD UNDER SEC 24 (BAD DEBTS)
i. Confirmation from liquidator that a debtor has become insolvent and proof of debt amount.
ii. Copies of relevant tax invoices issued at the time of supply to the insolvent debtor.
iii. A declaration that the debtor and taxpayers are unrelated companies/parties/persons.
iv. Records or documents showing input tax paid by the taxpayer e.g. VAT a/c, bank pay-in-slip etc.
Documents to be attached to a claim for refund of VAT sec 24(a) of the VAT Act Cap 476 requires certain documents to
be attached to a claim for a refund of VAT. These documents are as follows;
i. A copy of tax invoice provided in respect of each taxable supply upon which the claim is based.
ii. Records or other documents showing the tax has been accounted and paid on each supply upon which the
claim for a refund of tax is based.
iii. A declaration by him that he and the bures are independent of each other.
iv. Evidence that every reason effort has been made to have the debt settled.
v. A document issued to him by the person with whom he proves
Examples on VAT
Illustration 1
Given below were purchases and sales of ABC Ltd. for September 2015. The prices were inclusive of VAT at the standard
rate of 16%.
September 1: purchased 400 units @ kshs. 5, 600 per unit.
September 2: sold 40 units @ kshs. 7, 200 per unit.
September 5: sold 80 units @ kshs. 7, 200 per unit.
September 10: sold 200 units @ kshs. 7, 200 per unit.
September 20: purchased 300 units @ kshs. 6, 400 per unit.
September 25: sold 80 units @ kshs. 7, 200 per unit.
September 30: sold 200 units @ kshs. 8, 000 per unit.
Required:
a. VAT account for the month of September 2015.
b. On what date is VAT due for payment.
Illustration 2
The following information was extracted from the records of Panda Traders, a registered business for VAT purposes, for
the month of December 2010:
Date Transaction Amount (Kshs.)
2 Cash sales 400, 000
4 Credit sales 560, 000
6 Credit sales 120, 000
6 Returns inwards 80, 000
9 Credit purchases 600, 000
10 Credit note received 40, 000
13 Cash purchases 250, 000
15 Cash sales 340, 000
20 returns outwards 60, 000
23 debit note issued 35, 000
29 cash received from debtors 220, 000
Required: A VAT account for the month of December 2010 showing the VAT payable by or refundable to panda traders.
(Assume transactions are quoted as exclusive of VAT at the rate of 16%).
Illustration 3
MetaMeta Traders Ltd. deals in a wide variety of taxable and non-taxable supplies. During the month of December 2013,
the company recorded the following transactions:
December 2: Purchased goods on credit from BB Ltd. for Kshs. 150, 000 at standard rate.
December 3: Received credit note from BB Ltd. for Kshs. 30, 000.
December 8: Sold computer spare parts to the Ministry of Finance for Kshs. 200, 000.
December 10: Paid Kshs. 50, 000 to Benki Ltd. for safe custody of business documents.
December 18: Exported goods for Kshs. 800, 000 to Malawi; a country in the Southern Africa
region.
December 21: Supplied standard rated goods for Kshs. 1, 380, 000 to Webu Ltd. on credit.
December 22: Exempt supplies amounted to Kshs. 60, 000.
December 24: Paid electricity and water expenses for Kshs. 48, 000 and Kshs. 10, 000 respectively.
December 28: Paid Kshs. 80, 000 for management and financial services to Benki Ltd.
December 30: Purchased goods at standard rate for Kshs. 400, 000.
The above transactions were reported as exclusive of value added tax (VAT) at the rate of 16% where applicable.
Required: Prepare a VAT account for the month of September 2013.
Illustration 4
KK Ltd operates electronic shop in Nairobi town. The following transactions took place during the month of March 2016:
March 1: Purchased 10 cameras for a total of kshs. 500, 000.
March 4: purchased flash bulb for a total of kshs. 200, 000.
March 4: purchased slide projectors for kshs. 1, 000, 000.
March 5: sold 5 cameras each @ 25% above cost price.
March 6: purchased 200 watches at kshs. 1, 500 each.
March 8: sold 2 slide projectors for a total of kshs. 500, 000.
March 9: sold flash bulb that cost kshs. 100, 000 for kshs. 150, 000.
March 12: purchased 50 stop watches for a total of kshs. 50, 000.
March 15: purchased 100 alarm clocks at a total value of kshs. 80, 000.
March 18: sold the remaining 5 cameras each at 25% above cost price.
March 20: sold 3 slide projectors for a total value of kshs. 750, 000.
March 22: sold 100 watches at kshs. 2, 000 per watch.
March 25: sold 70 alarm clock each at 30% above cost.
March 27: sold 50 stop watches for a total of kshs. 75, 000.
Required: Prepare VAT account for KK Ltd given that prices are exclusive of VAT.
ADMINISTRATION OF INCOME TAX
The constitution of Kenya authorizes the government to levy taxes. The government imposes taxes though
statutes and therefore taxes are creatures of statute. Taxing powers are delegated by the people to the
representative legislative bodies which include;
The Central government and local bodies e.g. Counties, Corporations, town committees are authorize to impose
taxes.
Each June of the year, the Cabinet Secretary for Finance makes budget proposals in Parliament which deal with
the means of financing public expenditure and changes in taxation.
These proposals will then be debated upon by Parliament i.e. the Finance bill goes through the parliamentary
procedures and becomes the Finance Act on the day it passes in Parliament (Doesn’t require presidential assent).
No person has got authority to impose taxes except the government or a public authority that has got authority
through parliament.
A Board of Directors, consisting of both public and private sector experts, makes policy decisions to be
implemented by KRA Management. The Chairman of the Board is appointed by the President of the Republic
of Kenya. The Chief Executive of the Authority is the Commissioner General who is appointed by the Minister
for Finance.
The Authority is a Government agency that runs its operations in the same way as a private enterprise. In order
to offer better single-window services to taxpayers, KRA is divided into five regions as follows:
Rift Valley Region
Western Region
Southern Region
Northern Region
Central Region
In terms of revenue collection and other support functions, the Authority is divided into the following
departments:
Customs Services Department
Domestic Taxes Department- headed by the Commissioner of Domestic Taxes
Road Transport Department
Support Services Department
Each department is headed by a Commissioners T U D Y T E X T
In addition to the four divisions, the Authority had seven service Departments that enhance its operational
efficiency. These are as follows:
Investigations and Enforcement Department
Human Resources Department
Finance Department
Board Corporate Services and Administration Department
Internal Audit Department
Management Information Services Department
Research and Corporate Planning Department
PROCEDURE
To enable the Domestic Tax Department to carry out the administration of tax, the Legislation contains a series
of provisions which enable the tax office to obtain information about tax payers, i.e. persons who are, or may be
liable to tax (income tax). This is a very important requirement for any effective system of taxation. This is fulfilled
by the requirement of the law that any liable person must submit a return of Income.
It is a fact in Kenya that there are very many liable persons who are not at present within the tax net. In order to
identify these persons and often potential taxpayers, the system of Personal Identification Number was
introduced in 1992. At the time of its introduction the following transactions with the relevant departments
required the production of PIN.
i. Commissioner of Lands:- Registration of title, and stamping of Instruments
ii. Local Authorities:- Approval of plans and payment of water deposit
iii. Registrar of Motor Vehicles: - Registration, transfer and licensing of motor vehicles.
iv. Registrar of Business Names:- New registration
v. Registrar of Companies:- New registrations
vi. Insurance Companies:- Underwriting of policies
vii. Ministry of Commerce:- Import and Trade licensing
viii. Commissioner of Domestic Taxes:- Application for Registration
ix. Central Bank of Kenya: - Licensing and control of activities of financial institutions.
Purpose of PIN
To bring more persons to taxation and as such to improve tax compliance.
To assist in the reduction of tax evasion.
To link employee file or return with employers returns.
TAX ASSESSMENT AND RETURNS
Returns
There are three main categories of returns:
Installment tax return.
Self-assessment tax return
Compensating tax return.
The first two returns will be required from all tax payers whether individual or body corporate while the
compensating return is required only from a body corporate.
a. Installment tax return
Was introduced 1st January, 1991 to replace or modify what was called the provision return which was
required after year end. Installment return is required as the year progresses. It shall be submitted by both
individual and body corporate liable to tax.
There are 4 installment returns that require to be submitted by the 20th of the 4th, 6th, 9th, 12th month
as financial year progresses.
A tax payer won’t be required to pay installment tax if:
o To the best of his judgement and belief, he will have no income chargeable to tax.
o He has reasonable ground to believe that the whole of the tax he is to pay will be recovered
through PAYE.
Since installment return and the tax are required before year end, the estimate income and tax thereon:
o Would be based on last year’s performance raised by 10%.
o Current year’s performance plus an estimate for the unexpired period of the year.
The amount of installment tax payable by the person for the current year would be lesser of:
o The amount equal to the tax that would be payable by that person if his total income for the current
year was an amount equal to the installment income, or
o The amount specified in the preceding years assessment multiplied by 110%.
General penalties
Failure to pay tax by the due date attracts a penalty of 20% of that outstanding tax.
If that tax isn’t paid by the due date then interest at the rate of 2% per month is payable for each
month the tax remains outstanding.
N/B: For agricultural tax payers, they are required to pay installment tax as follows 75% by the 20th of
the 9th month, 25% by the 20th of the 12th month.
Advantages of installment tax
o Early collection of taxes from the government.
o It is convenient to the tax payer to pay tax in bits.
o It reduces tax evasion.
ASSESSMENT
An assessment is the determination or ascertainment of total chargeable income chargeable to tax and computation of tax
thereon.
KINDS OF ASSESSMENT
i. Installment assessment
This assessment based on estimate income for the year under consideration for the purpose of ascertaining
installment tax payable in the course of year in equal installments.
ii. Self-assessment
It’s an assessment by a tax payer himself whereby he declares his taxable income and computes tax thereof.
The due date for payment of self-assessment tax (or balance after installment taxes) is by the end of the 4th
month of the following year.
Self-assessment tax return is to be submitted by the end of the 6th month of the year.
iii. Normal assessment
This assessment is issued by CDT on the basis of final return of income submitted. CDT may call for
additional information, documents, schedules etc before accepting the income/loss per final return or as
adjusted.
Note that with effect from year of income ended 31st December, 1992 the normal assessment became a self-
assessment based on self-assessment return.
iv. Estimated assessment
Is an assessment issued by the Income tax Department where:
o A tax payer has failed to submit a self-assessment return.
o When the CDT doesn’t agree with the return furnished by the tax payer.
The estimated assessment will contain estimates using the commissioner best of judgement.
v. Amendment assessment
It is not a new assessment as such rather it is an assessment used to correct an error on earlier assessment
and will normally arise after an objection has been made.
vi. Additional assessment
It is used by the Income tax department when they notice additional income not disclosed or the tax payer
under assessed himself. This normally follows an in-depth examination into the tax payer’s affairs when tax
department receives information from another source where tax payer claims relief which he is entitled to.
NB. In case of fraud or willful negligence on the part of the tax payer, penalties could be charged up to
200% on the tax of such income declared.
APPELLANT BODIES
A taxpayer has a right to appeal against some decisions made by CDT regarding assessment which the taxpayer does not
agree with. The appeal is made to appeal bodies established under the Act.
a) Local committee
The local committee is an appeal body. It is an independent body and not part of the Domestic Taxes Department. The
Minister in charge of Finance, by a notice in the gazette appoints a local committee for any given area eg Kisumu Local
Committee, Mombasa local Committee, Nyeri Local Committee etc. The duties of a local committee are to hear and
determine appeals lodged by taxpayers on matters of tax dispute. Note that only a taxpayer can appeal to the local
committee
The members of the local committee are appointed by the minister in charge of Finance and consist of:
i. The chairman and
ii. Not more than eight other members—the quorum for a meeting of the Local Committee is the chairman and
two other members
A member of the local committee holds office for a period of two years unless:
i. The member tenders a resignation, or
ii. The minister revokes the appointment:
o For failure to attend three consecutive local committee meetings; or
o For being unfit to perform the duties of his office by reason of mental or physical disability.
The Cabinet Secretary has made and can make rules under the income tax act referred to as the Income Tax (Local
Committees) Rules for the Local Committees to follow relating to:
o The manner in which an appeal may be made to the Local Committee.
o The procedure for hearing an appeal and the records to be kept by the Local Committee.
o The manner to convene, the place, date and time to hold a Local Committee meeting. d) Scale of costs that
may be awarded by the Local Committee.
o General matters for the better carrying out of Local Committee appeal.