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Title: Taxation Notes(Accounting)
Description: Taxation refers to a compulsory contribution to the government by the citizenships which is used to pay for expenses incurred in the common interest of all without preferred / special benefits conferred to a tax pay.
Description: Taxation refers to a compulsory contribution to the government by the citizenships which is used to pay for expenses incurred in the common interest of all without preferred / special benefits conferred to a tax pay.
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INTRODUCTION TO TAXATION
INTRODUCTION
Def:
1
...
2
...
3
...
Characteristics of Taxation
1
...
However, taxes are only paid by those who come under its jurisdiction
...
It is not levied for any specific service rendered by the government as such
individuals cannot ask for any benefit if any return for taxes levied i
...
there is the
absence of a direct quid pro quo (something for something) between the tax payers
and the tax authority
...
3
...
e
...
g
...
Functions of the Government
i)
...
ii)
...
iii)
...
g
...
Development Function
Development of various sectors of the country cannot be possible without
government intervention
...
Reasons why the Government Levies Tax
1
...
These include national security,
basic health, electricity, water, education, etc
...
2
...
During inflation and deflation period, taxes are up and (down
according) to reduce the purchasing power (disposable income) of individuals and
to discourage spending hence reducing inflationary pressure during period of
deflation
...
In this way the increase and
decrease in taxes helps to check the big fluctuation in prices thereby maintaining
economic stability
...
Fair distribution of income
Taxes can be used to influence income distribution whereby high income earning
individuals are levied much more than low income earners
...
By so doing, the resources are redistributed to the welfare of the society
...
Protection of fragile economy
Tax variance and incentives can be used to protect local industries e
...
high taxes
imposed on imports with local substitutes and tax holidays given to locally
produced goods and as such, the demand for lead goods will increase by that of
imported goods will decrease leading to growth in local industries
...
5
...
They are hereby
tracked to discourage their production and consumption
...
Provision of Social Facilities
Taxes are also imposed on the citizens for the government to be in a position to
provide social facilities to its citizens
...
As a tool of generating employment opportunities
The government imposes a variety of taxes as a means of creating more
employment opportunities for its citizens
...
t
...
g
...
Public Goods
The main distinguishing feature of a public good is that it is used by the community or the
society at large
...
This feature is referred to as non-excludability
...
g
...
Non-excludability gives rise to the phenomena called free-riding which refers to a
situation where consumers enjoy the benefits of a good/services without paying for it
...
g
...
The solution is for the government to levy taxes to finalize public goods
...
Principles: Are the desirable characteristics that may be used in choosing / establishing
a tax system
...
The principle of equity (equality)
This principle provides that every member of the state should contribute towards
the support of the state in accordance with their respective abilities
...
e
...
It means that every person should pay tax according to the ability to pay hence the
rich should pay more than the poor
...
2
...
e
...
Certainty
mains the amount of tax and the method of payment should be certain to the tax
payer and the government i
...
the tax payer and government ought to be certain as
to how much the time and manner and collection of taxes
...
The principle of convenience
This stipulates that the time and manner of paying tax should be convenient to
taxpayer i
...
taxes should be imposed in such a way that the time and method of
payment is convenient to the taxpayer e
...
VAT payment is convenient to the
taxpayers because it’s included in the prices of the community hence the tax payers
pay their tax only when they have the means to buy
...
The principle of economy
Every tax should satisfy the principle of economy in two ways:
a) Should be economical to the state to collect the tax
...
b) Should be economical to the taxpayer
...
5
...
6
...
e
...
A good tax system should be such that it can be changed
to meet the revenue requirement of the state
...
g
...
7
...
It requires that the government should be able to raise the tax rates
when it needs more revenue
...
g
...
However, care must be taken to ensure that tax rates
are not raised unduly high as this will have adverse effects on the productive
capacity of the economy
...
The principle simplicity
A tax system should be simple and plain to the tax payer i
...
the system should not
be complicated
...
This minimizes the chances of
corruption on oppression of taxpayers by the tax authority
...
The principle of diversity
Every tax system should be diverse since a single or a few taxes will neither meet
the revenue requirement of the state nor will they be equitable
...
Assignment:
How does the Kenya tax system score against the principles of a good tax system?
(20 marks)
...
Administrative collection arrangement
2
...
Rates of tax
1
...
Direct Taxes
Is one whose impact and incidence lies on one person
...
Incidence: The final resting place of the tax burden i
...
the person who
pays the tax
...
Advantages
• Are ultimately related to the ability to pay
...
• Can be used to reduce income inequalities
...
• These taxes can be inculcate* the spirit of civil responsibility among the tax
payers
...
Disadvantages
• It generally violates the principle of convenience
...
• It has effects on the will to work and save leading to reduction on the will to
work on the part of the taxpayers and this tendency is bad for the economy
as it will also cause a reduction on the will to save
...
b)
...
g
...
Advantages
• Are not easy to evade since the taxes are included in prices of commodities
/ services
...
• They satisfy the principle of convenience since they are paid by the people
who have the means to buy only
...
• They are less burdensome since they are not felt directly
...
• They help in checking consumption of harmful goods
...
• They go against the principle of least aggregate sacrifice
...
However, such a correction can only be partial and as such cannot provide
adequate revenue to the economy
...
The imposition of heavy indirect taxes tends to
raise the prices of commodities which may lead to inflation
...
A person who buys a product
on which indirect taxes have been imposed may not know that he is paying
taxes to the government
...
Bases of Tax
Is the legal description of the object for taxation e
...
the base of excise duty is
usually on the production and packaging of a specified goods
...
The base of each tax has to be defined legally and
it is to be quantified for the purpose of determining the tax liability of an individual
...
g
...
The authorities while determining the tax base are expected
to give due consideration to various cases like those of:
a
...
Administration
c
...
3
...
Progressive tax
c)
...
Regressive tax
d)
...
Progressive Tax
A tax is called progressive when with increased income; the tax liability not only
increases in absolute terms but also faster as a proportion of income
...
Regressive Tax
A tax is called regressive when the tax liability has a proportional income falls with
the increase in income
...
Digressive Tax
Half the behavior of tax is like that of progressive tax only that the level of
progression is very mild (little)
...
Proportional Tax
If on the other hand the tax liability increases in the same proportion as the
increase in income, then it is called proportional tax
...
Advantages of Progressive Tax
i
...
ii
...
iii
...
Disadvantages of Progressive Tax
i
...
ii
...
Advantages of Proportional Tax
i
...
ii
...
iii
...
Disadvantages of Proportional Tax
i
...
iii
...
It has high cost of collection compared to tax prospects
...
TAXABLE CAPACITY
It is the capacity of individuals to pay tax to the government
...
The ability to
pay taxes mainly depends on the per capita income in excess of the subsistence level
...
The term taxable capacity can be used in two meanings;
a)
...
It is not possible to achieve because the
objective of the government is not to maximize its revenue by overtaxing its citizens
...
Relative taxable capacity
It’s that limit beyond which additional taxation will produce economically harmful
results and out-weigh the gains to the community from the use of the money raised
through taxation
...
Factors Governing Taxable Capacity
The fact is that taxable capacity is not rigidly fixed
...
The following are therefore the factors affecting the taxable capacity of a nation;
1
...
2
...
3
...
4
...
g
...
5
...
A popular
government can stimulate the spirit of the people and prepare them to pay higher
taxes
...
6
...
It is only on a stable income that long-term financial arrangements can be
made
...
Inflation
It lowers the purchasing power of the people and this has adverse effect of the
taxable capacity
...
Income tax in Kenya is governed
by the income tax Act Cap 470 of the Laws of Kenya which consists of 14 parts, 133
sections and 12 schedules
...
The income tax
falls under the jurisdiction of the KRA which is headed by the commissioner general
...
The departments include:a
...
The domestic taxes department
c
...
Support services department
In respect of income tax, the country is divided into geographical and functional areas
known as tax districts
...
Role of Kenya Revenue Authority
1
...
2
...
3
...
4
...
5
...
6
...
7
...
8
...
KEY TERMS
Year of Income: Income tax Act Cap 470 defines the year of income as a period of 12
months commencing on 1st January and ending on 31st December each year
...
Residence: Is a matter of physical presence and it’s not related to a person’s citizenship,
nationality /domicile
...
i)
...
➢ Has no permanent home in Kenya but has been in Kenya for an average
period of 122 days during the year of income under consideration and two
proceeding years
...
ii)
...
➢ Its management and control is exercised in Kenya
...
Importance / Implication of Residence
...
In relation to individuals
➢ They are eligible to claim personal reliefs but non-resident individuals do not claim
such reliefs
...
➢ Resident individuals are allowed certain expenses while non-resident individuals
are taxed on gross income
...
In relation to legal persons
➢ The corporation tax rate for residence bodies is lower than that for non-resident
bodies
...
➢ Residence companies are allowed certain expenses while non-residence
companies are not
...
They include;
1
...
3
...
5
...
7
...
8
...
1
...
Employment is the relationship that
exists between the employer and the employee
...
b) Any agent, manager or any other representative in Kenya of an employer who
is outside Kenya
...
d) Any trustee / insurance company / any other body paying pension
...
g
...
It also includes an employee who retires and also earns pension while staying in
Kenya where the pension is earned from a registered pension fund
...
➢ Cash payments:
They include:
a)
...
b)
...
g
...
c)
...
Usually such
expenses are in the name of the employee but paid for by the employer e
...
water
bills, school fees, telephone, electricity, subscription to clubs, medical including any
amount for subsistence e
...
transport and entertainment
...
d) Amounts that are beamed to be gains / profits from employment derived in
Kenya i
...
any amount that is paid to a resident person for employment of services
rendered inside / outside Kenya are taxable
...
e
...
➢ Non-Cash payments:
They include:
a)
...
g
...
The value of the benefits in kind that are taxable should aggregate to Kshs
...
a
...
3,000 p
...
) or more in any year of income
...
e
...
36,000 p
...
b)
...
The taxable value of the motor vehicle benefit shall be the greater of:
The commissioners quantified benefit based on the cc rating
...
m
...
a
...
Note: Where the car is leased / hired, the employee is taxed on the cost of
leasing / hiring the vehicle
...
Housing benefits: Arises when an employee is housed by an employer in a
house either owned by the employer / leased by the employer and the employer
pay rent directly on accounts of the house occupied by the employee
...
Ordinary employees- Housing benefit will be the higher of;
15% of employment income (both cash and non-cash benefits)
Fair market value / rent paid by employer
...
Agricultural employees- Housing benefit will be the higher of;
10% of employment income (both cash and non-cash benefits)
Fair market value / rent paid by employer
...
Directors other than Whole Time Service Directors- Housing benefit will be
the higher of;
15% of total income (income from all sources) including wife’s
income not earned at arm’s length i
...
not independent
...
iv)
...
Housing benefit in this case shall be the higher of’
15% of employment income (both cash and non-cash benefits)
Fair market value / rent paid by employer
...
Note 2: where an employee pays nominal rent towards the house provided by the
employer, such an amount will be deducted against the housing benefit
...
Exceptional Cases
There are certain circumstances that will provide a strong case for employment
not to be taxed on the benefits of the house provided by the employer
...
g
...
b) Where housing is of necessity and or an employee proximity to her place of
work e
...
doctors, nurses, matrons
...
g
...
iv)
...
v)
...
The taxable benefits are the quantified benefits as provided by the
Commissioner of Income Tax (CIT)
vi)
...
e
...
I
...
A tax known as
fringe benefit tax was introduced and shall be taxable rate ruling
...
For non-full / whole time services
directors, the value of benefit is given up to a minimum of 1,000,000
...
g
...
(viii) Retirement benefits
Are amounts of contribution by employers on behalf of employees to
pension / provident firms / schemes whether registered or not
...
240,000 p
...
(Kshs
...
m
...
If it is taxed on the employer, it will not be taxed on
the employee and vice-versa
...
O
...
P)
Individuals who do not own a permanent home, can make a tax deductable
contribution to an approved institution towards the purchase of a house
...
48,000 p
...
(Kshs
...
m
...
The accumulated funds can be withdrawn tax
free to purchase / construct a house
...
Any interest earned by the depositor on the H
...
S
...
3,000,000 is exempt from tax with effect from 1st January
2007
...
150,000 p
...
provided the premises concerned is
occupied by the individual claiming the deduction
...
RELIEFS
A relief is a set-off against taxes payers
...
The reliefs include;
1
...
Non-resident individuals / corporations
do not get personal reliefs as from 1st of January 1997, all other reliefs (family,
single and special single reliefs) were abolished and replaced with personal relief
which applies to all individuals equally from the year 2005 to present, the rate of
personal relief Kshs
...
a
...
1,162 p
...
2
...
60,000 p
...
or 5,000 p
...
with
effect from 1st January 2007
...
With effect from 1st January 2007, a
relief of 15% of premiums paid is allowable on health and educational policies
...
60,000 p
...
with effect from 1st January 2007
...
Only premiums paid in respect of an insurance policy taken on or after 1 st
January 2003 qualify for this relief
...
Only premiums paid on education policy with a maturity period of at least
10 years qualify for this relief
...
No relief shall be granted in respect of premiums for an insurance policy
which secures a benefit and which may be withdrawn anytime at the option
of the insured
...
Disallowable expenses / Deductions not allowed
These expenses are not allowed to be set-off against the income from employment
e
...
travelling expenses from home to place of works and back
...
Cost of normal clothing
...
Cost of meals when on long duties
...
Amount paid to employment agents to find employment
5
...
Computation of Income Tax from Employment Income
First ascertain the gross income from employment and then add to its incomes from other
sources (if any)
Compute the gross tax liability and deduct from it reliefs and any other deductions e
...
PAYE so as to ascertain the net tax liability
...
Otata
Computation of gross income for the year ended……
Employment Income
Basic Salary
Overtime
Bonus
Commission
Shs
...
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
Example 1
Mr
...
450,000p
...
Calculate his
gross tax liability and the tax due
...
Korir
Calculation of Tax Liability
Total employment income
Kshs
...
a
Kshs
...
@10%
12,196
...
80
114,912
98,208
@20%
@25%
22,982
...
00
Gross Tax Liability
76,968
...
00
63,024
...
Korir
Calculation of Tax Liability
Total employment income
Kshs
...
a
Kshs
...
@10%
@15%
@20%
@25%
12,196
...
80
22,982
...
00
76,968
...
00
63,024
...
Juma’s salary was Kshs
...
m
...
3,500 p
...
He also
had rental income of Kshs
...
Required: Compute the tax due to Mr
...
Juma
Computation of total taxable income for the month
Employment Income
Salary
House Allowance
Kshs
...
Juma
Computation of Tax due for the month
Total employment income
Kshs
...
m
Kshs
...
@10%
@15%
@20%
1,016
...
40
1,612
...
80
1,162
...
80
Question:
Mr
...
377,000 p
...
32,700)
...
Odhiambo
...
Odhiambo
Computation of Tax due
Total employment income
First
Next
Next
Next
Kshs
...
a
...
121,968
114,912
114,912
25,208
@10%
@15%
@20%
@25%
Kshs
...
80
17,236
...
40
6,302
...
00
13,944
...
00
Less: P
...
Y
...
00
Net Tax Due
12,074
...
Kioko is employed as an Accounts Clerk in Mambo Leo Sacco
...
m
...
Kshs
...
Kioko for the month and his net tax
liability if he paid PAYE of Kshs
...
Mr
...
Other Sources
Bonus
Overtime
Salary in due of leave
Tips from customers
Kshs
...
Kioko
Computation of Tax due
Total employment income
First
Next
Next
Gross Tax Liability
Less: Personal Relief
Tax Due
Kshs
...
m
...
10,164
9,576
2,510
@10%
@15%
@20%
Kshs
...
40
1,436
...
00
2,954
...
00
1,792
...
A
...
E
(1,700
...
80
Question:
Mr
...
a)
...
He was provided with a gardener, watchman and a cook whose salary was paid for by
the company of K£800 each
...
Goods valued at K£2,000 were given free during the Christmas holiday furnished house
was provided at Yako estate which was leased by the company at Kshs
...
m
...
d)
...
50,000
e)
...
f)
...
1,200,000 outstanding which he had
acquired in 1998 at an interest rate of 4% p
...
The employer also paid insurance premium of Kshs
...
a
...
24,000 had been deducted from his salary and the prescribed market
interest rate applicable is 8%
...
Jeremiah
Computation of total taxable income for the year 2018
Employment Income
Basic Salary
Gardener; Prescribed rate 14,400
Watchman; Prescribed rate 14,400
Cook; (800x20)=16,000; prescribed rate 18,000
Christmas holiday gift (2,000x20) 40,000-36,000 = 4,000
Furniture (1% x 50,000)
Car benefits; cc rating 1200 cc = 43,200
25% x cost = 24/100 x (30,00x20) = 144,000
Insurance premiums = 20,000
Loan Interest benefit 1,200,000 x (8%-4%) = 4%
House Benefits
155 x 1,866,500 – 80,000 = 199,975
Or (25,000 x 12) – 80,000
Total Taxable Income
Kshs
...
Jeremiah
Computation of Tax due per year
Total employment income
First
Next
Next
Next
Next
Kshs
...
a
...
121,968
114,912
114,912
114,912
1,619,796
Gross Tax Liability
Less: Personal Relief
Insurance Relief
Net Tax Due
@10%
@15%
@20%
@25%
@30%
Kshs
...
80
17,236
...
40
28,728
...
80
572,782
...
00)
(3,000
...
00
Assumptions:
1
...
INCOME OF A MARRIED WOMAN
Upto 1994, a married woman was accessed separately for her business income,
professional income and employment income
...
The income of a married woman living with her husband is all the time deemed to be the
income of the husband and taxed on him
...
Where a married woman is not living with her husband, each of the spouses for the
purposes of the Act shall be treated as if they were unmarried
...
b) They are separated in such circumstances that the separation is likely to be
permanent
...
Note: Mere physical detachment of spouses due to the demand of work does not
constitute separation
...
Wife’s Employment Income
This means the gains / profits of a married woman living with her husband (from
employment) including pensions and withdrawals from registered funds /
schemes
...
For the wife’s
employment income to be accessed to tax separately, it must be derived from an
employment income i
...
employment income of the wife must have been derived
at arm’s length (independently of the husband) Wife’s employment income will not
be accessed on her separately if it is derived;
a) As a partner in a partnership where the husband in a partner
...
c) From a company by where the husband and or wife (or both of them) jointly
control 12
...
d) As a trustee / manger of a trust created by the husband for the benefit of
their children
2
...
The qualifying professions include; medical, survey,
dental, veterinary, surgeon, engineering, accounting and company secretary
...
Where a married woman derives professional income from a professional practice
where the husband is a partner / has control, such income will not be accessed on
her separately
...
b) Where a man is married to more than one wife, the income of the wife is
deemed to be the income of the husband
...
3
...
This will however not
include any income derived by her while providing any services / goods to a
business, partnership / a company owned by the husband
...
It entails; business carried on by a married woman on a full-time basis without the
control of the husband
...
Employment income where the husband has control
ii
...
Professional income where the husband has control
iv
...
Rental income
vi
...
In all the above cases, such incomes will be taxed alongside the husband’s
income as an aggregate
...
John Mantu and his wife Susan Mantu had the following income for the year 2008
...
John Mantu:
➢ Salary as an internal auditor K£36,000 p
...
(PAYE Kshs
...
John and reimbursed by his employer in full K£3,000
- Maintenance and repair K£2,000
- Road license and insurance K£5,000
➢ Entertainment paid for by Mr
...
➢ Life insurance premiums paid for him by his employer K£1,000
➢ Pension payments by employer for job;
- Approved pension scheme K£ 12,800
- Unapproved pension scheme – not registered with the commissioner of
income tax in the prescribed manner K£15,000
➢ Medical bills paid for by employer K£9,000
➢ Interest :- Post office savings bank (postbank) K£900
Tax reserved certificate K£100
Fixed deposit account (gross) K£750
➢ Dividends :
Kenya Companies (NET) K£425
From Uganda and Tanzania (NET) K£850
➢ Rent income
- Gross rent
Less Loan interest
-
9,050
-
19,550
Less: Structural operations
as a result of which rent was
increased
-
8,550
(17,600)
1,950
Mrs
...
a
...
3,600)
➢ Tips from customers K£600
➢ Part-time sales of clothing K£300
➢ Life insurance premium for her own life paid for by her employer K£400
➢ Free lunches provided by employer valued at K£100
Required:
a
...
John Mantu in respect of the year 2008
...
b
...
Susan Mantu tax payable thereon
...
Mr
...
720,000
100,000
40,000
100,000
20,000
240,000
300,000
180,000
255,000
Total Employment Income
Income from Other Sources
Fixed deposit account
Rent Income:
Kshs
...
181,000
Total Taxable Income
1,955,000
15,000
210,000
225,000
2,180,000
Information not used;
1) Petrol paid for by employer because it is a reimbursement
...
3) Postbank interest because it is tax exempts
...
5) Dividends from Kenya companies (net) are non-qualifying income
6) Dividends from Uganda and Tanzania (net) are not taxable because they are
incomes from foreign countries
...
Mrs
...
36,000
8,000
44,000
Other Sources;
Tips from customers
Part-time sale of clothes
12,000
6,000
Total Income
62,000
Mrs
...
62,000 p
...
Kshs
...
1,016
...
40
1,915
...
00
6,932
...
A
...
E
13,694
...
00
12,532
...
00
Net Tax Due
8,932
...
ASSESSMENT OF BUSINESS INCOME
A business is defined under Section 2 of the Act to include; any trade, vacation or
profession, including manufacture, adventure / concern in the nature of trade but doesn’t
include employment income
...
However, the process of selling goods and
services may not on its own constitute business e
...
when a person undertakes to sell his
/ her own property for a profit this is not business
...
i
...
a person qualified upon
undergoing qualified examination
...
c) Vocation which means passing one’s life while earning a living e
...
self
employment
...
g
...
g
...
e) Concern: any commercial enterprise
...
In taxing such incomes and thus the use of the phrase
“for whatever period of time”
...
Income:
The following items of income wherever they arise, will for part of the gains / profits from
the business and will be taxed subject to the rules under the ITA
...
➢ Where a resident person carries on a business partly in Kenya and partly outside
Kenya
...
➢ Amount of insurance claiming receipt for loss of profit damage / compensation for
the loss of trading stock loss
...
➢ An amount of a balancing charge
...
➢ An amount of realized foreign exchange gain
...
Not-Taxable / Disallowed Incomes
The following receipts are not considered as incomes for tax purposes:
➢ Incomes from overseas investments (foreign) incomes
...
➢ Addition of capital introduced by the owner or campus
...
g
...
➢ Any other income that is exempted from taxation under the first schedule under
the ITA
...
The nature of business is very important in determining the expenditure which is wholly
and exclusively incurred in the production of income e
...
for a butchery, obvious
expenditures will be; cost of meal, salary, transport, maintain once of weighing machines,
rent, cost of sharpening knives, electricity, water bills etc
...
Allowable Expenses
The following expenses are allowable against taxable income:
➢ Trade bad debts written off
...
Amount of bad debts written off
ii
...
➢ Any amount of capital expenditure for the prevention of soil erosion in a firm land
e
...
construction of gabions, wind-brakes etc
...
➢ The pre-trading expenses (that are incurred before commencement of business)
which would be allowable if the business was operating e
...
the cost of recruiting
and training staff before the hotel opens for business
...
➢ With effect from 1st June 1990, the legal cost and other expenditure including
capital expenses related to issue of shares / debentures / similar securities offered
for purchase to the general public
...
g
...
➢ If there is a rent increase as a result of the structural alteration, the expenditure in
this case is disallowed against rent income
...
These
are not machinery / plant in which where entire deduction is given
...
g
...
➢ The amount of contribution to a university, college / research institution approved
by the CIT for scientific research e
...
JKUAT, Egerton, KU
...
➢ Contribution by the employer on behalf of employees to NSSF and NHIF
...
are capital expenditures and hence not
allowed
...
g
...
➢ Capital deductions under the 2nd schedule of the act i
...
i
...
Industrial building deductions
iii
...
v
...
Wear and tear deductions
Farm works deductions
Shipping investment deductions
Mining deductions etc
...
Disallowable Expenses (expenses not allowed)
➢ The amount of capital expenditure, loss/exhaustion of capital e
...
depreciation
written off of all assets, loss on sale of assets
...
➢ The amount of tax paid and any other kind of tax paid
...
➢ Contributions to pension and provident funds / skills which are not registered
with the CIT
...
➢ The amount of loss from a hobby business
...
➢ Amount of lease / higher rentals relating to lease-higher agreement entered
into with effect from 17th June 1998 (those lease-higher agreement) entered
into before the above date were allowed expenses
...
Note: Hobby business (farming) the owner should consume atleast 30% or
more of the total production for it to qualify as hobby business / farming
...
Format: Approach 1
Name of Business
Computation of total taxable income for the year…
...
xxx
xxx
xxx
xxx
Kshs
...
Kshs
...
xxxx
xxx
xxx
xxx
xxx
xxxx
xxxx
xxxx
Assessment of Income of a Sole Proprietorship
Example 1
Mr
...
Net profit as per the account
60,000
Adjustments for:
Alterations to buildings
25,000
Increase in general provisions
4,000
Life Insurance premiums
14,000
Staff contracts and work permit
45,000
Fines and Penalties
18,000
Entertainment
5,000
Donations
2,000
Depreciation
20,000
Required: Calculate Mr
...
Mr
...
Add back: Disallowable expenses
Alterations to buildings
Increase in general provisions
Life insurance premiums
Fines and Penalties
Entertainment
Donations
Depreciation
Total Taxable net profit
60,000
25,000
4,000
14,000
18,000
5,000
2,000
20,000
148,000
Assumptions:
i
...
ii
...
iii
...
Example 2
Mr
...
Onyango and his wife are owners of a green groceries shop in Kisumu
...
Profit / Loss Account
Kshs
...
Wages & Salaries
Wife’s drawings
Audit / accountancy/legal fees
Travelling expenses
Motor Expenses
Repairs to machinery
Depreciation
Rates and Water
Insurance
Electricity
Telephone
Postage and Stationery
Leaking Roof Repairs
210,000
50,000
70,000
115,000
105,000
70,000
215,000
48,000
20,100
70,000
12,000
4,100
15,000
Kshs
...
ii
...
iv
...
Included in motor expenses is an amount of Kshs
...
The family lives behind the shop and the estimated private use of the premises is
Kshs
...
The family took goods worth Kshs
...
This was treated as a
business expense
...
The agreed wear and tear deductions were Kshs
...
Required: Compute the adjusted profit / loss for income tax purposes in respect of green
groceries shop
...
Net loss as per the question
Add back: Disallowed expenses:
Motor expenses
Rent
Drawings
Telephone (15% of 12,000)
Wife’s drawings
Depreciation
Leaking Roof Repairs (16,667/50,000 x 15,000)
Less: Allowable expenses omitted
Wear and tear deductions
Kshs
...
Shao Mallo runs a baker at Nakuru
...
Sales
Postbank interest
Dowry for daughter
Harambee collection for his hospital bill
Inheritance from uncle
Sweepstake winnings
Kshs
...
Mr
...
Net profit as per the question
Add back: Disallowed expenses:
Electricity Family
Rent-Family
Subscription to golf club
Drawings
School fees
Loss on sale of motor cycle
Payment of his tax
Wedding party for daughter
Medical expenses for family
Harambee for local MP
Less: Disallowable exempt incomes/non taxable
Postbank interest
700
Dowry for daughter
4,500
Harambee collection for his hospital bill 30,000
Inheritance from uncle
8,000
Kshs
...
Juma presented the following for the year ended 31st December 2019
...
”000”
Kshs
...
Opening and closing stock each been understated by 10%
2
...
50,000 relating to gains on sale of
furniture
...
Salaries and wages include salaries to Mr
...
300,000 for the year ended
31st December 2009
...
Transport cost includes Kshs
...
5
...
6
...
120,000
Required:
a
...
b
...
Juma had a gross taxable employment income of Kshs
...
a in another employment
...
135,400 for the year
...
Juma
Computation of Taxable Profit for the year 2019
Kshs
...
(000)
3,832
300
18
75
4,225
120
50
(170)
4,055
Mr
...
Taxable Profit
Kshs
...
4,055,000
Add
...
Mary Meno is a professional dentist who practices in Nairobi
...
Gross professional fees received
Subscription to profession association & Publication
Subscription to wildlife magazines
Donations to children’s home
Debt collection expenses (dental patients)
Wages for dental assistant
Kshs
...
3,000) 120,000 (net)
Required:
i
...
Mary Meno for the year ended 31st December
2019
...
Calculate the tax payable by Mrs
...
iii
...
Mary Meno
Computation of taxable income for the year 2019
Gross professional fees received
Kshs
...
1,000,000
34,000
24,000
120,000
1,178,000
Subscriptions to professional associations 20,000
Debt collection expenses
60,000
Replacement of surgical instruments
40,000
Total taxable income
(655,000)
523,000
Determination of tax payable by Mrs
...
523,000
Kshs
...
12,196
...
80
22,982
...
00
16,888
...
80
13,944
...
80
ASSESSMENT OF PARTNERSHIP INCOMES
Partnership:
This is the relationship that subsists between two or more persons carrying on a business
with the view of making profits
...
This applies equally as far as income tax Cap 470 is concerned
...
Each of the partners shall be taxed on his/her share of income or
profits as a distinct individual
...
➢ Remuneration paid / payable to him/her from the partnership
...
➢ Commissions paid and any other benefit derived by the partner from partnership
...
Note: Interest on drawings should be subtracted from what the partner earns from the
partnership before sharing the profits
...
When a partner’s adjusted share is a loss, this can be off-set against any other income that
he/she may have earned in that year or it can be carried forward and off-set on any other
income in future years without limit
...
• Amounts transferred from reserves to profit and loss account
...
Disallowed Expenses
They include among others:• Salaries to partners
• Interest on capital
• Commissions paid to partners etc
...
Kshs
...
Y
Shs
...
Total
Shs
...
Total taxable income
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxxx
xxx
xxx
xxx
xxxx
xxxx
xxxx
xxxx
xxxx
Example 1:
Ulopa, susan and Nancy partnership provides you with the following information in
respect of the firm
...
Net profit as per accounts
After charging: Salaries & wages
- Ulopa
- Susan
- Nancy
Special advertisement
Legal charges
Installment tax paid
Commission
- Ulopa
- Susan
- Nancy
Depreciation
Bad debts
Donation to famine relief
General reserves
Local taxes on property
Rent from property
Profit on sale of shares
Interest on deposits
Interest on drawings - Ulopa
- Susan
- Nancy
Shs
...
90,000 but these were
not included in the above computation
...
Adjusted taxable partnership profit
b
...
Tax due to each partner
...
’000’
Net Profit as per the accounts
Add back: Disallowable expenses
Depreciation
Salaries & wages - Ulopa
- Susan
- Nancy
Special advertisement
Installment tax paid
Commission - Ulopa
- Susan
- Nancy
Donation to famine relief
General reserves
Local taxes on property
Less: Allowable expenses omitted/non-business income:
Rent from premises 132
Profit on sale of property
100
Interest on deposit
120
Interest on drawings- Ulopa
45
- Susan
35
- Nancy
45
Adjusted taxable partnership profit
Kshs
...
2) I have allowed legal charges because I have assumed that they are part of the
normal business
...
Ulopa, Susan and Nancy Partnership
Distribution Schedule
Ulopa
‘000’
40
45
(30)
329
384
Susan
‘000’
20
35
(20)
329
364
Nancy
‘000’
70
45
(15)
329
429
Total
‘000’
130
125
(65)
987
1,177
Other Sources
Rent from property
Interest on deposits
44
40
44
40
44
40
132
120
Total Taxable Income
468
448
513
1,429
Salaries & Wages
Commission
Interest on drawings
Share of profit
Determination of tax payable by Ulopa
Total taxable income
Kshs
...
121,968
114,912
114,912
114,912
1
...
12,196
...
80
22,982
...
00
3,888
...
80
13,944
...
80
Determination of tax payable by Susan
Total taxable income
Kshs
...
121,968
114,912
114,912
114,912
18,704
First
Next
Next
Next
Next
Kshs
...
80
17,236
...
40
28,728
...
20
@10%
@15%
@20%
@25%
@30%
Gross Tax Liability
Less: Personal Relief
Net Tax Due
86,755
...
00
72,811
...
513,000
Kshs
...
296
@10%
@15%
@20%
@25%
@30%
Kshs
...
80
17,236
...
40
28,728
...
80
95,032
...
00
81,088
...
The final accounts as at 31st December 2019
was as follows:
Profit & Loss Account
Shs
...
2,300,000
150,000
80,000
132,000
100,000
120,000
2,882,000
The partners have provided the following information in support of the accounts:i
...
iii
...
v
...
vii
...
However, the closing stock
at 31st December 2008 of Kshs
...
Salaries and wages include salaries amounting to Kshs
...
Advertising include Kshs
...
Legal charges include a sum of Kshs
...
Capital allowances have been agreed with the CIT at Kshs
...
Mr
...
120,0000 from rent
...
135,000 from the assessment of the year of income
2016 of the partnership
...
Safi has got no other income
...
Mr
...
2,000,000 from horse bet winnings
...
135,000 from the assessment of the year of income
2016 of the partnership
...
Compute the total taxable income from the partnership – business
...
Prepare the partnership distribution schedule
...
Calculate the income tax due to each partner for the year of income 2019
...
’000’
Kshs
...
6
40
70
50
329
489
...
7
Total
‘000’
40
210
95
987
1,444
52
...
6
39
...
4
529
...
3
3,426
Determination of tax due by Unga
Total taxable income
Kshs
...
121,968
114,912
114,912
114,912
115,696
First
Next
Next
Next
Next
Kshs
...
80
17,236
...
40
28,728
...
80
@10%
@15%
@20%
@25%
@30%
Gross Tax Liability
Less: Personal Relief
Net Tax Due
115,852
...
00
101,908
...
529,300
Kshs
...
12,196
...
80
22,982
...
00
18,778
...
80
13,944
...
80
Determination of tax due by Ngano
Total taxable income
First
Kshs
...
121,968
@10%
Kshs
...
80
Next
Next
Next
Next
114,912
114,912
114,912
1,847,596
@15%
@20%
@25%
@30%
17,236
...
40
28,728
...
80
Gross Tax Liability
635,422
...
00
Net Tax Due
621,478
...
The three partners, Mbaya, Mzuri and Malaika share profits
and losses equally
...
Kshs
...
Salaries and wages analysis
Partners – Mbaya
- Mzuri
- Malaika
NSSF Contributions
1,5512,440
42,000
14,000
14,000
14,000
42,000
Kshs
...
Lighting and Heating
Office
Partners’ homes
Kshs
...
Advertising
Subscription for law magazine
Mayor’s Christmas tree
Advertising sale of old furniture
Partners golf subscription
Kshs
...
Motor vehicle running expenses
Partners cars
Partners’ mileage on duty
Firm’s cars
v
...
Wear and tear allowance agreed with the income tax department for the year is
Kshs
...
Kshs
...
Kshs
...
Workings:
W1 –Depreciation on car and furniture
Partners’ cars
40,000
Add: Furniture
60,000
100,000
W2 –Total partners salaries Mbaya + Mzuri + Malaika
90,000 + 84,000 + 84,000 = Kshs
...
82,800
LINO SADO ADVOCATES
COMPUTATION OF INCOME TAX FOR THE YEAR
Kshs
...
Net Profit as per the accounts
42,000
Add back: Disallowable expenses
Depreciation – Car & Furniture (W1)
100,000
NSSF
30,000
Salaries & Wages (W2)
258,000
Heat & Light: Partners’ Homes
36,000
Advertising – Mayors Christmas tree
2,000
- Partners’ golf subscription
15,000
Motor Vehicle expenses: Partners cars
40,000
Firm’s cars Private use (W3)
9,200
General expenses: Life insurance on partners
11,000
Interest on capital – Mzuri
10,000
- Malaika
13,000
- Mbaya
10,000
576,200
Less: Disallowable income
Wear and tear
140,000
Interest on drawings – Mbaya
30,200
Profit on sale of furniture
6,240
Adjusted Net Profit
(176,440)
399,760
Partners Distribution Schedule
Mbaya
Interest on capital
Salaries & Wages
Interest on Drawings
Share of profits
Mzuri
Malaika
Total
10,000
90,000
(30,200)
46,320
13,000
84,000
46,320
10,000
84,000
46,320
33,000
258,000
(30,200)
138,960
116,120
143,320
140,320
399,760
ASSESSMENT OF INCOMES OF CORPORATIONS
Corporation tax is charged on the incomes of companies
...
Under
companies, attention will be paid to the following:i
...
These
are tax allowable expenses as directors are employees of the company
...
Transactions between the company and the directors or shareholders
...
e
...
iii
...
➢ Formation / preliminary expenses
➢ Dividends and other distributions from profit / any other appropriation
items
...
e
...
Dividends Received:
These are dividends received by a company and other distributions from other
companies
...
In this case, dividend income is not
added to trading income and withholding tax is not set off against the tax liability
...
5% or more of the voting powers of
the paying company, then these dividends are not taxable
...
g
...
e 30% for
resident companies
...
g
...
All such are regarded as corporations and where any of their
incomes subject to certain provisions of income tax is taxable shall be taxed as
incorporation
...
For the year of income 2019, the following
accounts were provided
...
”000”
5,000 Sales
15,000
20,000
Depreciation on plant and
Machinery
Salaries and wages
Directors’ sitting allowance
Interest on loans
Commissions
Discounts allowed
600
700
450
300
300
500
Gross profit b/d
Discount received
Bad
debts
recovered
Dividends (net)
Kshs
...
MANGA LTD
Computation of Adjusted taxable profit for the year 2019
Kshs
...
”000”
Net Profit as per the accounts
13,450
Add back: Disallowable expenses
Depreciation – Plant &Machinery
600
Provision for inflation
300
14,350
Less: Disallowable income
Bad debts recovered
Dividends (net)
3,000
500
Adjusted Net Profit
(3,500)
10,850
Calculation of corporation tax
=
=
=
Adjusted taxable net profit x corporation tax rate
10,850,000 x 30/100
Kshs
...
Question:
Chumex Ltd prepares its account to 31st December each year and as proposed
...
Repairs and renewals
o Redecoration of an existing building
o Renovation to new building
o Partitioning and carpeting of office
Kshs
...
3,000
5,000
4,000
12,000
ii
...
Bad debts
This was an account of previous company employee who cannot be traced
...
Preliminary expenses
o Legal fees on issue of shares at stock exchange
o Payment of stationery before commencement
of business
1,000
1,000
2,000
2,000
1,000
3,000
v
...
40,000
o Gifts to retiring staff
5,000
50,000
vi
...
viii
...
Capital allowances for the year have been agreed by Kshs
...
Required: Compute the tax liability for Chumex Ltd for the year 2019
...
Kshs
...
NSSF contributions were the contributions paid by the employer on behalf of the
employees
...
Staff service agreements were entered after starting the business hence allowable
...
The lease was capable of going / exceeding 99 years hence disallowed
...
1,500
Question:
Millers Ltd is a manufacturing company located at Nairobi’s Industrial area
...
Investment income
o Dividend from KCB (net)
o Interest from fixed deposit account (KCB)
o Interest on treasury bills
o Dividends from subsidiary company
ii
...
1,864,000
284,636
216,324
2,364,960
1,020,000
273,600
216,000
158,400
844,760
133,600
218,600
2,364,960
Kshs
...
220,000
1,020,000
Kshs
...
Interest expenses
o Interest on bank overdraft
o Interest on bank loan from foreign bank
o Interest on loan to purchase invest
...
Audit fees and expenses
o Audit fees
o Tax appeal against assessment
o Book keeping fees
o Audit expenses paid in relation to a discontinued business line
v
...
Bad debts
o Embezzlement by the accountant
o Receipt from insurance
o General provision
Miscellaneous expenses
o Acquisition of 100 yrs lease on biz premises
o Directors Christmas party
o Kenya National Chambers of Commerce contr
...
MILLERS LTD
COMPUTATION OF ADJUSTED PROFIT/LOSS FOR THE YEAR 2009
Kshs
...
Net Profit as per the accounts
218,000
Add back: Disallowable expenses/allowable incomes omitted
Bad debts ; embezzled
21,600
General provisions
120,000
Miscellaneous: 100 years lease
28,000
:Thomas Barnados Home
41,600
Directors pay for wrongful termination of contract 220,000
Book keeping
48,000
Tax appeal
103,200
Depreciation
844,760
1,427,160
Less: None taxable income /allowable expenses omitted
Interest fixed deposit
58,760
Treasury bills
93,876
Interest on bank loan (foreign)
50,400
Interest on bank overdraft
151,200
Profit on sale of shares
216,324
Adjusted Net Profit
MILLERS LTD
TAX LIABILITY FOR THE YEAR 2019
(
)
FARMING INCOME
Farming is not defined by the Act but a farmer is defined as any person who carries on
pastoral, agricultural or other similar operations
...
Farming is not one of these activities is included in the general term business
...
Capital Expenditure
1
...
It also allows as a deduction any expenditure of capital nature
incurred by the owner / tenant of agricultural land on clearing such land or on
clearing and planting on it permanent / semi-permanent crops with are defined in
Section 2 e
...
Coffee, tea, sisal, bananas, flowers, etc
...
As a capital expenditure: This is covered fully under capital expenditure on
agricultural land (farm works)
...
For farm buildings, only 50% of the farm
house may be claimed i
...
annual allowance is 1½ of the total defined cost for the
year which the expenditure was incurred and a similar allowance for the following
year
...
which are usually looked
after by the farms servants with wages and materials which are included in the general
debt in the farm accounts
...
Stock
From the point of view of farming, stock includes; livestock, livestock produce and
harvested crops owned by the farmer for accounts purposes
...
e
...
Death of the Farmer
Section 17 says that the farmer who made an election and the section dies, carrying on
business (farming) his executors / administrators are to be charged on the same price or
if higher the open market value of the closing stock
...
b) Capital expenditure incurred in clearing and planting on farmland (both crops and
animals)
c) Farm Works Deductions (FWD)
d) Purchase of livestock, seeds, fertilizer, pesticides etc
...
Question:
Mr
...
Sale of livestock
Sale of milk and skins
Sale of poultry
Dipping expenses
Cattle feed
Livestock keeper: wage
Subscription – KFA
- Gor Mahia FC
Insurance cover on livestock
Interest paid on AFC loan
Kshs
...
Kaparo
MR
...
Kshs
...
Ole Shangiti is a mixed farmer in Narok District
...
Incomes
Sale of maize of NCPB
Sale of milk to KCC
Sale of vegetables
Sale of eggs
Less: Expenses
Purchase of fertilizer
Purchase of pesticides
Travelling expenses
FWD (agreed with CIT)
Motor expenses
Advertising
Electing stand at ASK ground
Insurance premiums for livestock
Vegetables destroyed by heavy rains
Net Profit
Kshs
...
10,000
5,000
400
6,000
21,400
800
600
500
800
600
700
800
400
600
(5,800)
15,600
Additional Information
a
...
Ole Shangiti uses ⅓ of the motor expenses for personal use
...
Advertising includes; Kshs
...
c
...
Required:
Compute Mr
...
MR
...
Kshs
...
Kinuthia is a farmer who started farming on 1st January 2018 and has chosen not to
take in account the value of stock in arriving at his profit
...
Incomes
Winning prizes at ASK Nyeri
Sale of other livestock and produce
Disposing entire poultry stock
Sale of all standing timber
K£
Less: Expenses
Clearing bush for planting coffee
1,000
Capital works to prevent soil erosion
1,200
Purchase of seeds and fertilize
3,000
Purchase of pigs to replace poultry
2,000
Interest paid to bank on loan to finance
planting
240
Wages of farm labourers
2,400
Motor Lorry expenses
360
Repairs to fencing dip and dairy sheds
440
Hire of pick-ups truck for farm deliveries 400
Subscription to rift Valley sports club
50
Hail storm damage to pyrethrum(Insured)1,200
Insurance premiums against damage (crops) 200
Wages (housegirls & children’s nuns)
360
Maximum butchery bad debts w/o
200
Depreciation of dairy machinery
250
Depreciation of tractor and lorries
2,000
Life insurance – Mr
...
4,000
15,000
4,000
5,000
28,000
(16,000)
12,000
Additional Information
1
...
2,000,000 is to be paid out on his death
...
He received dividend from KGGCU of K£1,000 less withholding tax of K£50
...
Farm produce consumed by his household amounted to K£550 during the year
...
He received a salary from local co-operative society for works as a field officer
amount to K£2,500 p
...
5
...
6
...
7
...
20,000
4,000
8,000
1,000
5,000
10,000
4,000
2,000
48,000
60,000
60,000
Dairy building
Farm housing
Fences, dips and dams
Planted wind breaks
Tractor
10 tonne lorry
Dairy Machinery
Standing timber
Other farm land
Saloon car
Computer system
Required:
Tax computation for 2018 from all sources
...
Investment Deductions
Qualifying deductions
Dairy farming
Dairy machinery
2
...
W & TD
Tractor
10 tonne lorry
Saloon car
Computer system
W& TD
WDV
QC
4,000
8,000
1,000
48,000
Rate
100%
100%
ID
20,000
4,000
24,000
Residue
-
Rate
50%
50%
50%
50%
2018
2,000
4,000
500
24,000
30,500
2019
2,000
4,000
500
24,000
Class I(37½%) Class II(30%) Class III(25%) Class IV(12½%)
5,000
10,000
60,000
60,000
15,000
60,000
60,000
(5,625)
9,375
Summary Class I - 5,625
“
“ II - 18,000
“
“ III - 15,000
Total W & TD
QC
20,000
4,000
38,625
(18,000)
42,000
(15,000)
45,000
Summary CD I - 24,000
FWD - 30,500
W & TD - 38,625
93,125
-
MR
...
K£
Net Profit as per the accounts
12,000
Add back: Disallowable expenses/allowable incomes omitted
Farm Produce consumed by his household
550
Salary from the local co-op
30,000
Boarding fees for children
300
Life insurance Mr
...
2
...
4
...
6
...
Investment Deduction / Allowance (ID)
Industrial Building Deduction (IBD)
Wear and Tear Deductions (W & TD)
Farm works Deductions (FWD)
Balancing Deduction / Charge
Diminution
Investment Deduction (ID)
You will recall that depreciation is not allowed as an operating expense for tax
purposes, but its place, capital deductions are granted
...
These are granted in respect of capital expenditure on
• Cost of an industrial building and machinery used for manufacture
• Cost of a ship
• Cost of a hotel building
...
Shipping investment deduction
...
a)
...
Upto 31st December 1994, ID
was granted as varied rates whereby investment in buildings and machinery situated
outside the principle cities of Nairobi and Mombasa were granted higher ID relative
investments situated within the two cities
...
This was prompted by the fact that most investor no longer
invested far from the two cities as it was their intention to get the better of the two worlds,
i
...
higher ID and proximity to the two cities
...
g
...
Note: ID is granted once and for all in the first year of use of the industrial building
and machinery therein
...
As from 1st January 1992, a building used for manufacture will qualify
for or ID on its own provided it had not been used for any other purpose prior to
being used for manufacture
...
e
...
3) On the construction of an hotel building which is certified to be an industrial
building under the tourist Act
...
Such are the buildings and structures which
contribute / relate to the use of the building and include;
a
...
Railway lines and related structures
c
...
d
...
e
...
As from 1st January 1995, machinery for purposes of ID will mean; machinery and
equipment used directly / indirectly for the purpose of manufacture and will include
machinery used for the following purposes
...
Reduction of environmental damage
...
Workshop machinery for the repair of machines
...
1) The cost of land on which the building is constructed
...
g
...
3) Cost of items and structures that are only supplementary to the manufacture e
...
Administration expenses, transport, security, salaries and wages etc
...
Rates:
1995 – 30th June 2000
60%
st
st
1 July 2000 -31 December 2001 100%
2002
85%
2003
2004
2005 – Present
B
...
e
...
In these 3 years, the
manufactured goods by such concerns will be destined to foreign markets through
exportation
...
Should a
manufacturer seize to manufacture under bond, prior to the expiry of the 3years
the deductions which had been granted will be clawed back i
...
withdrawn and be
treated as a taxable income in the year of seization
...
The
investor under bonded manufacture will be able to recover 100% of the qualifying
expenditure
...
Shipping Investments Deduction (SID)
It is granted to resident ship owners in the shipping business i
...
the qualifying
business which the ferrying of goods / passengers over the Kenyan waters for hire
or for rewards
...
The purchase of new power driven ship of more than 495 tonnes tare
weight
...
On the purchase and subsequent re-fitting for the purposes of a qualifying
business of a used power driven ship of more than 495 tonnes tare weight
...
In the first year of use of the ship for the qualifying basis
...
Additional Notes on ID
1
...
When an existing building is extended by further construction, the extension will
be treated as a separate building and will qualify for ID if it’s used for manufacture
...
Where a building is sold before use:
a
...
By a person other than the builder; the qualifying cost to the buyer shall be
the lower of the price paid and the construction cost
...
More than once before use; the last price shall be the qualifying cost
...
A building that qualifies for ID shall automatically qualify for IBD, however, the
reverse is not true
...
As from 1st January 1987, IBD & W&TD shall be granted on buildings and
machinery respectively based on the residue after ID
...
Michieka is a manufacturer of bolts and nuts in the Industrial Area of Kisii Town
...
MICHIEKA
COMPUTATION FOR ID FOR THE YEAR 2009
Qualifying Deduction
Buildings
Machinery (new)
Machinery (old)
Total ID
Qualifying Cost
20,000
4,000
3,500
Rate
100%
100%
100%
ID
20,000
4,000
3,500
27,500
Residue
-
Example 2
Mr
...
a company manufacturing nails in Kisumu
...
4,000
8,000
6,000
4,000
3,600
800
6,000
MR
...
Part II gives relief in respect of expenditure on machinery used in any business
...
The reason why special provisions exist in relation to agriculture, which is different in its
nature from all other business activities, is self evident but the following two paragraphs
from the Coats Commission report are of interest in relation to mining operations
...
The working life of an asset used by a
mining concern depends not merely on its own life but also on the life of the particular
mine in which it is installed
...
Even things which are physically detachable such as winding year are likely to be
unsellable in practice, they will probably be adapted to the conditions of the particular
mine and will be useless elsewhere
...
It depends on two things, the extent of the ore and the maintenance of
world prices at a level which makes extraction from the particular mine economical
...
A good deal of mining in East Africa is of marginal type and could be
brought to an end by a drop in price obtainable for the ore
...
The provisions of Part III of the second schedule will be considered under the following
headings;
a) In respect of what a claim be made?
b) Who is entitled to claim?
c) What is the entitled to claim?
d) Miscellaneous provisions
...
In respect of what can a claim be made
A claim may be made in respect of expenditure incurred in any year of income e
...
Capital expenditure incurred in Kenya by any person carrying on mining
operations, expenditure on development, administration and management before
production / during a period of non-production
...
Cost of prospecting and exploring the mine
...
Cost of acquiring rights over the mines and the minerals
...
3
...
4
...
5
...
The deductions are not calculated on time basis
...
Who is entitled to claim?
Paragraph 17(1) provides that a deduction may be claimed by a person carrying
on business of mining and who incurs expenditure
...
c)
...
Normally the whole of the expenditure is written off over
seven years
...
Miscellaneous Provisions
i
...
ii
...
iii
...
INDUSTRIAL BUILDING DEDUCTION (IBD)
Is a special deduction that is granted in respect of capital expenditure on industrial
buildings as per the second schedule of the ITA which states “Where a person incurs
capital expenditure on the construction of an industrial building and the industrial
building is used for business carried on by the person / the lessee, a deduction called IBD
shall be made in computing the persons gains / profits from the business”
...
e
...
The life of an industrial building may be less than 40years due to the type of
construction / the use to which the building is put
...
Note: Effective 1st January 2010, the rate shall be 10% for 10 years on a straight line
basis
...
For the purpose of business carried on in; milling factory / any other purpose e
...
soap making, juice, biscuits, detergents manufacturing, beer making, posho mills
etc
...
For the purpose of transport e
...
docks, tunnels, electricity and hydro-powers
undertakings
...
For the purpose of business which consist of manufacture of goods / materials or
subjection of goods to any process
...
For the purpose of business which consists of the storage of goods / materials;
Which are to be used in the manufacture of other goods / materials
...
Which having been manufactured / subjected in the course of business to
any process have not been delivered to the purchaser
...
g
...
For the purpose of a business consisting of; ploughing / cultivating
agricultural land but not by the farmer
...
For the purpose of a business which may be declared by the minister for
finance in the Kenya Gazette as an industrial building
...
Similarly, where a
building is used for more than 12 months, the IBD will be extended proportionally
to the period it was used
...
b) Where a building in use is sold and continues to be used as an industrial building
by the purchaser or its lessee, the new owner will inherit the residue of
expenditure not yet claimed by the former owner, thus the price paid for such a
building (purchase price) shall be irrelevant for the purposes of IBD to the
purchaser
...
❖ By the builder, the qualifying cost shall be the price paid
...
❖ Where a building has been put to use and subsequently dis-used and then
used again for the purposes of determining the residue of expenditure and
national IBD is computed in respect of the dis-used period
...
Example1
Mr
...
He started
his business on 1st January 2004 when the qualifying ID was 60%
...
850,000)- 2004
Purchase of motor vehicles (2007)
New Machinery (2008)
Tractor and Trailer (2006)
Security wall (2004)
Required:
Calculate ID and IBD for the year 2008 only
...
4,000,000
8,000,000
6,000,000
4,000,000
800,000
6,000,000
MR
...
Eligible investment within satellite towns adjoining, Nairobi, Mombasa and
Kisumu shall qualify for ID at the rate of 150%
...
ID on residential buildings built for rental purposes to low income earners in a
planned development areas shall attract a rate of 5%
...
Educational buildings and hotels – 50%
...
Filming equipments by a licensed local producer 100%
...
Export processing zone 100% (EPZ)
...
Mining investment deduction, this is given on capital expenditure incurred on
mining
...
Such assets will suffer loss in value due to a number of reasons e
...
wear
and tear usage, breakdown, economic factors, obsolescence, etc
...
These allowances are also incentives to
investors who would make investments in capital items
...
Wear and tear deductions are therefore a capital
allowance granted in respect of machinery
...
The second schedule paragraph 7 states “Where during the year of income, machinery
held by a person if used by the person for the purpose of his business, there shall be made
in computing the persons gains / profits and deduction referred to as wear and tear
deduction
...
Wear and tear deduction is granted in respect of machinery
...
The person must own such machinery
...
The machinery must be used by the person for business
...
The machinery must be used anytime in the year of income
...
It will include and other forced asset other
than land, buildings and loose tools, e
...
Computers, printers, motor vehicles, tractor,
combined harvester, bicycles etc
...
The
aggregation of machinery for the purpose of wear and tear deductions is referred to as
pooling of machinery
...
Class / Pool for wear and tear deduction
Class I- 37½%: This is the class of heavy class machinery and moving harvesters, cranes,
trailers, lorries (Zor=3 tonnes), forklifts, trains, breakdowns, buses
...
Class III- 25%: This was introduced with effect from 1st January 2010
...
Class IV- 25%: Class of all other self propelling machinery e
...
lorries (less than 3 tonnes)
saloon cars/ motor vehicles (if not commercial a limited notional cost of Kshs
...
Class V- 20%: Introduced with effect from 1st January 2010 and will cover
telecommunication equipments for telecommunication operators
...
Class VII- 12½%: Class for all other machinery that do not qualify for any other class
above e
...
wheelbarrows, cuts, bicycles, trolleys, plant and machinery (residue) office
partitions, carpets, neon lights, billboards, shock corners e
...
c
Class VIII- 5%: Was introduced with effect from 1st January 2010 and include company
software
...
Item
Class i
37
...
xx
xxx
xx
xx
xxx
Less: Disposals
Bicycles
Combined Hv
...
5% 12
...
12
...
5%
(shs
...
)
Class iii
25%
(shs
...
5%
(shs
...
D
...
D
...
Class I
xx
Class II
xx
Class III
xx
Class IV
xx
Xx
Classes / Pools
a)
...
5%): This comprised of heavy earth moving machinery that were self
propelling e
...
Tractors, combine harvesters, trailers, buses, forklift,
breadkdowns, trains, lorries (more than 3 tonnes)
...
Class II (30%):
This was a class of office machinery bought on or after January 1st
1992 e
...
computers, printers, typewrites, fax machines, telephones
etc
...
c)
...
g
...
b)
...
5%): This was a class for all other machinery that did not qualify for any
other class above e
...
Additional Notes
...
Written down values is the residue amount after granting W & TD in the previous
year which is brought forward in the next year
...
Additions: The cost of an asset which qualifies for W & Td as an addition is:
• Historical cost of the qualifying asset whether new or old / whether made
in the business or purchased from outside
...
g
...
• In a trading or part-exchange situation, the trading of part-exchange value
plus cash paid shall be taken as additions
...
• For non-commercial vehicles, i
...
vehicles mainly used for non-commercial
purposes, the qualifying cost is restricted to a maximum of Kshs
...
• From 1st January 1987, when machinery qualifies for W & Td and also for
ID, additions for W & TD shall be residue after ID
...
Disposals: the values that qualify for W & TD on disposals are:
• The amount of cash proceeds or cash equivalent on the sale of a wear and
tear machinery
...
• On the disposal of a non-commercial vehicle, the disposal proceeds / cash
equivalent up to a maximum of 2 million
...
• In a continuing business;
Where the sales proceeds are greater than the WDV in any class of
wear and tear the it is said to be a trading receipt which is treated as
taxable gain / profit
...
On seization business;
If the amount of sale proceeds are greater than the WDV in any class
of wear and tear, the excess is referred to as the balancing charge
which a taxable gain
...
Further Additional Information on W & TD
1
...
2
...
3
...
4
...
5
...
g
...
6
...
7
...
8
...
e
...
DIMINUTION
Items such as implements and loose tools, e,g, utensils in a hotel, spades on the
construction site, containers in the distribution firm, crates in a bakery, etc are not
formally depreciated by use of the convention method of depreciation
...
For tax purposes such items will
not qualify for W & TD, they will qualify for diminution i
...
loss in value
...
Summary – Capital Deduction / Allowance
ID
IBD
- Ordinary manufacture – 100%
- Bonded manufacture / EPZ
- SID
- MID
- 2½%
Example 1:
Mr
...
Kshs
...
Isaiah Abdi for the year ended 31st December
2019
Mr
...
12
...
5%
(shs
...
)
Class iii
25%
(shs
...
5%
(shs
...
Computers & print
...
Lorry (> 3 tons) 700,000
700,000
900,000
500,000
1,400,000
2,000,000
2,000,000
4,000,000
8,000
480,000
488,000
W & TD
(262,500)
(420,000)
(1,00,000)
(61,000)
WDV
437,500
980,000
3,000,000
427,000
Summary
Class I
Class II
Class III
Class IV
Total
Kshs
...
on 1st January 2019
...
Goodwill
200,000
Land
8,000,000
Buildings
17,000,000
Tractors
1,650,000
Lorries (>3 tonn)
1,970,000
Furniture
1,200,000
Milling Machines 12,500,000
Mercedes Benz
Security Wall
Workers’ Quarters
Boilers
Sorter and conveyer
Office Equipment
Kshs
1,320,000
400,000
6,000,000
2,000,000
2,400,000
1,150,000
During the year, the following assets were sold:
1 tractor
Furniture
Office equipment
Kshs
...
Peugeot 504 saloon
875,000
Delivery van
766,000
Office equipment
415,000
Tractor
An executive desk
Kshs
1,770,000
95,000
Required:
Compute the W & TD for Onyango Productions Ltd for the year ended 31st December 2019
, showing the WDV as at that date and assuming that the opening balances have been
agreed by the CIT
...
12
...
5%
(shs
...
)
Class iii
25%
(shs
...
1,150,000
Milling machine
3,620,000
1,150,000
1,320,000
Class iv
12
...
)
2,000,000
2,400,000
1,200,000
12,500,000
18,100,000
Additions:
Peugeot 504
Delivery Van
Office Equip
...
4,490,000
875,000
766,000
415,000
1,565,000 2,961,000
(350,000)
1,215,000
(350,000)
(1,000,000)
2,961,000 16,945,000
W & TD
(1,683,750) (364,500)
(740,250)
WDV
2,806,250
2,220,750
Summary
Class I
Class II
Class III
Class IV
Total
850,000
95,000
18,195,000
(2,118,125)
14,826,875
Kshs
...
commence business on 1st July 2014
...
D
...
Kshs
...
11,400,000
...
Toyota saloon car
Lorry
Tractor
Furniture
Land
Kshs
...
480,000
920,000
50,000
Forklift
Saloon Car
Printer
Kshs
2,240,000
4,500,000
Plant
Packaging machines
A tractor was damaged through a road accident during the year and insurance company
paid Kshs
...
Required:
Capital allowance for the year 2018
MANU TREE FELLERS LTD
COMPUTATION OF ID FOR THE YEAR ENDED 31ST DECEMBER 2018
Qualifying Item
Land
Building Machine
Building
Cost
6,240,000
5,550,000
11,400,000
Rate
100%
100%
100%
ID
6,240,000
5,550,000
11,400,000
Total ID
Residue
23,400,00
MANU TREE FELLERS LTD
Computation of Wear and Tear Deductions for the year upto 31
...
2018
Class i
37
...
)
Milling Machine
Tractor
1,720,000
Lorries(200tons)7,800,000
Packaging machine Crushing machine Sorter & converyor 2 pick-ups
1 lorry
780,000
Saloon car
-
Class ii
30%
(shs
...
)
1,800,000
544,000
Class iv
12
...
)
3,440,000
3,500,000
3,680,000
6,240,000
-
Furniture & Fitti
...
20,960,000
-
2,344,000
2,700,000
500,000
4,000,000
400,000
200,000
1,100,000 9,044,000
136,000
16,996,000
280,000
17,276,000
(50,000)
1,050,000
(920,000)
(2,240,000)
(4,500,000)
8,124,000 10,536,000
W & TD
(7,860,000) (315,000)
(2,031,000) (1,317,125)
WDV
13,100,000
Summary
Class I
Class II
Class III
Class IV
Total
735,000
Kshs
...
This deduction is allowable only to commercial farming and once determine, it’s a
deductable allowance
...
a
...
Previously the rate was 33½% p
...
of qualifying cost
on the straightline basis i
...
The 50% rate took effect on 1st January 2007
...
Farm / Agricultural Land:
Is land occupied wholly and mainly for;
a)
...
e
...
b)
...
2
...
g
...
gabions
...
FWD on the same will be granted only in respect of one farm house
except for limited companies in agricultural business where the value of the firm
house will not be restricted since other farm houses are treated as labour quarters
...
Full FWD shall be made for farm works constructed during the accounting year
without restriction, provided that farming business has been carried out for
one whole year
...
Where items qualifying for FWD are sold to another farmer, the new farmer can
only claim the residue of the expenditure of farmer (old farmer)
...
3
...
4
...
Example 1
Mr
...
Farm house
24,000
Wind brakes
800
Labour quarters
6,000
Cowshed
900
Required: Calculate the FWD for Mr
...
MR
...
C
Rate
(K£)
(%)
12,000
800
6,000
900
50
50
50
50
2018
(K£)
2019
(K£)
6,000
400
3,000
450
9,850
6,000
400
3,000
450
9,850
Note:
When computing FWD, take note of the following:
➢ The value of the farm works on which FWD is computed, all farm works are written
off in two years
...
Example 2
Mr
...
During the year 2018, he incurred the following
expenditure on farm works
...
180,000
60,000
60,000
Fencing
Painting labour
Kshs
30,000
12,000
Required:
Calculate the FWD for the years 2018 and 2019
...
SIRMA
Calculation of Fwd
Qualifying Item
Q
...
Kurgat a farmer erected a farm house in January 2006 for Kshs
...
Jan
...
2017: Irrigation system
150,000
Oct: 2017: Milking machinery
99,000
He sold the farm on 1st January 2018 to Mr, Kemei another farmer and the sale agreement
gave the following particulars
...
540,000
80,000
180,000
120,000
75,000
Farm house
Cattle dip
Labour quarters
Irrigation system
Milking machinery
Required:
Capital deductions due to Mr
...
Cattle dip
Farm house(⅓x360,000)
Labour quarters
Irrigation scheme
Total
Calculation of Fwd
Mr
...
Kemei
Q
...
H
...
The tax so
withheld should be paid over to the collector of it within 30 days of deduction
...
T on certain payments
...
Examples of W
...
T
a
...
e
...
of kshs
...
a on
graduated scale rates of tax
...
H
...
240,000 p
...
– granted scale rates of tax
...
To a non-resident;
- Management and professional fees – 20%
...
- Retirement annuities – 5%
...
H
...
Ease to collection: in that the payer of the income after deducting W
...
T is required
to pay it over to the I
...
department
...
Earlier receipt of tax by the I
...
D department as it does not have to make an
assessment before receiving payment
...
Ensure that certain payments do not escape being taxed thus the paying of tax is
the responsibility of the person paying the income and this tax must be paid to the
I
...
D department within 30 days after deduction
...
The
person who deducts those taxes while some paying income to the individuals is required
to remit this amount to the IT department
...
This
procedure is known as set-off of taken:
Examples:
1
...
A
...
E
2
...
H
...
Annuities paid under a will
The set-off of tax must be made in the same year of deduction took place
...
INSTALLMENT TAX
This system became effective from 1990 and it involves all incomes except employment
income which is subject to PAYE
...
Through the PAYE system,
employees are being taxed within the current year of income, but under the installment
tax payment system
...
O
...
The effective implementation date being
1st January 2008 for IT purposes TOT is the final tax
...
5M during the year of income
...
Employment income
ii
...
Business incomes subject to final withholding tax e
...
bank interest, dividend
income, incomes earned from government bonds and treasury bills and
payment paid to non-residents
...
Where it is not applicable persons with receipts of income, but with annual
turnover below Kshs
...
Note:
a
...
b
...
Benefits of TOT
i
...
ii
...
iii
...
Simplifies record keeping
v
...
a
Records kept
➢ Cash book
➢ Sales receipts and invoices
➢ Purchases receipts and invoices
➢ Bank statements
RETURNS AND PAYMENTS
TOT tax payer shall submit quarterly return
...
Payment shall be made on / after the 20th day of the month immediately following the end
of the quarter
...
VALUE ADDED TAX (VAT)
It was introduced in Kenya on 1st January 1990
...
VAT is applicable to goods as well as services e
...
estate agency, management consultancy,
engineering services etc
...
VAT is a multi-stage tax that is collected at every stage of handling goods and services and
passed on to the government
...
The basic VAT are contained in the VAT Act of 1989 and nay legislations arising thereafter
...
Generally, any persons who
makes / intends to make supply or goods / services will be treated as a taxable
person and will be required to register for VAT
...
c) Supply of goods: VAT is chargeable on supply of goods/services
...
• The provision of taxable goods to another person (giving goods free of
charge to another person)
• Appropriation by a registered person of taxable goods for own use i
...
• The making of a gift of any taxable or service which will include the leaning
of goods / any goods supplied in satisfaction of the deed or goods retained
by a taxable person when he ceases to be a taxable person or provision of
•
samples unless, such samples are fully distributed for the furtherance of the
business and have a value of less than Kshs
...
The letting of taxable goods on leasing or any other transfer
...
The amount of tax is the value
for tax multiplied(x) by the tax rate
...
Generally the value for tax
of supply will depend on what is given in exchange of supply i
...
the consideration
which is given as follows:
• Consideration of supply includes any payments that are given to cover cost
of making a supply
...
The value of tax shall be based
on that amount
...
• If the consideration of the supply is not in money work e
...
barter
transaction or consideration is partly in money and partly in something else
e
...
part exchange, the value of tax is the open market value for the
transaction
...
In determination the price of any goods for purposes of ascertaining value for
tax charges for the following items must be included;
1
...
b)
...
d)
...
2
...
3
...
Note: Where taxable goods are sold in returnable containers and the containers were
purchased / imported and input tax charged therein, then no tax will be chargeable in
respect of the containers where tax has been charged in respect of the returnable
containers which are then returned to the suppliers, the supplier will be entitled to take
credit for the tax for his next subsiding return
...
Place of supply: The place of supply is the location of goods when they are allocated to
a customer’s order
...
The supply is deemed to have taken place outside Kenya and therefore
outside the scene of Vat
...
Time of supply (tax point): this refers to when a supply is deemed to have taken place
and tax becomes due and payable then or at the earlier of the following
...
An invoice is received in respect of the supplier
...
When the goods are supplied in a continuous basis / metered supply basis e
...
electricity, water, tax is chargeable on the 1st determination (day) 1st meter
reading and subsequently at each determination / meter reading
...
Compulsory Registration
The 6th schedule of VAT requires that any person shall be registered compulsorily
for VAT if:
i
...
5,000,000 or more in a period of 12 months
...
If the person is a designated dealer in designated goods other than
designated jewelry, pre-recorded music and timber and has supplied /
expects to supply the taxable goods, services / both, the value of which
exceeds Kshs
...
iii
...
iv
...
v
...
Provides legal and arbitration services
...
Provides computer services
...
Provides reports advice, information or similar technical services
...
Supplies services of architects and interior designers
...
Offers consultancy engineering services
xi
...
Agency services excluding insurance brokers, stock-exchange brokers and
tea and coffee brokers
...
Security and investigation services
xiv
...
Offers telecommunication services
xvi
...
Clearing and forwarding services
xviii
...
In each of the above cases, the taxable person shall within 30 days in which he becomes a
taxable person, apply in a prescribed manner, for registration to the commissioner of VAT
...
Voluntary Registration
It’s permissible under the law but is granted at the discretion of the commissioner
...
Input and Output TAX
Input tax
i
...
e
...
ii
...
iii
...
Thus, input tax is the VAT taxed on business purchased and expenses including goods and
services applied in Kenya imports on removal of goods from the works
...
A registered person may make a taxable supply and
therefore charge VAT on the invoice tax to his customers thus output tax is the Vat that’s
received / recovered from sales / provision of taxable supplies in Kenya
...
Standard Rate Supplies: these are supplies of goods and services on which VAT is
chargeable at a specified standard rate (currently 16%)
2
...
No tax will be charged on the supply but
b)
...
The rate of tax which chargeable
on zero rate supplies 0%
...
Examples of zero rated supplies;
➢ ETR machines
➢ Goods / taxable services that are exported
➢ Feeding bottles for babies
➢ Supplies to EPZ
➢ Computer hardware and accessories
➢ Napkins and napkins liners
➢ Medical supplies etc
...
Exempt Supplies: Where a person makes exempt supplies, he is not regarded as
carrying out a taxable supply
...
A person who makes only exempt supplies will not be able to deduct input
tax suffered from the commission
...
g
...
Example 1
A firm purchases goods worth Kshs
...
The
prices are inclusive of VAT
...
Solution:
Input tax (VAT)
VAT = Purchase price x Rate
Purchase price (including VAT)
=
116% =
100,000
16% =
?
16% =
100,000 x 16 =
116
Cost price excluding (VAT)
Output tax
=
=
VAT
=
=
=
Kshs
...
86,207
Selling price (excluding VAT)
86,207 + (75% x 86,207)
Kshs
...
P including VAT
Kshs
...
24,138
150,682 + 24,138
C
...
=
Kshs
...
P
=
175% x 100,000
=
=
=
Kshs
...
175,000
Ledger Accounts:
Dr
...
Shs
Bank a/c 100,000 VAT a/c 13,793
Dr
...
Shs
Purc
...
c/d 10,345
24,138
24,138
Dr
Bank a/c
Cr
Shs
...
Sales a/c 175,000
Purchases 100,000
Dr
Sales a/c
Cr
Shs
...
VAT a/c 24,138
Bank a/c 100,000
Example 2
A firm purchases goods worth Kshs
...
After
processing, the goods were sold for Kshs
...
Required:
Prepare the necessary ledger accounts
...
Example 3
Saika Ltd a manufacturer purchased raw materials at Kshs
...
The company then incurred conversion cost estimated at 40% of the material cost
...
Complete products were sold to Chemka
wholesalers who then incurred conversion const of 50% of the total cost
...
Required:
Assuming that Vat was charged at 16% on all products, compute the total Vat payable
...
1,000,000
(137,931)
Purchase price (excluding VAT)
Add: Conversion cost (40% of 862,069)
Total Cost
862,069
344,828
1,206,897
Add: Profit mark up(40% x 1,206,897)
482,759
Selling price (excluding VAT)
1,689,656
Add: VAT (16% x 1,689,656)
Selling price including VAT
270,345
1,960,001
Vat payable
=
=
=
Output tax – input tax
270,345 – 137,931
Kshs
...
1,689,656
844,828
2,534,484
253,448
Selling price (excluding VAT)
2,787,932
Add: VAT (16% x 2,787,932)
Selling price including VAT
446,069
3,234,001
Total Vat payable
=
=
132,414 + 175,724 = 133,821
Kshs
...
175,724
Example 4
The following transactions relate to Manpower Ltd
...
1st June:
3rd June:
4th June:
6th June:
7th June:
9th June:
12th June:
19th June:
25th June;
27th June:
B/f for Kshs
...
Purchased vatable merchandise for Kshs
...
60,000
Purchased merchandise from a trader at Kshs
...
This trader was
not registered for Vat purposes
...
16,000 was returned to suppliers
...
25,000 was returned by customers
...
360,000
A customer who had purchased merchandise on 12th for Kshs
...
Purchased merchandise as follows:
o From suppliers registered for Vat purposes Kshs
...
40,000
Sold merchandise as follows:
o To customers registered for VAT purpose Kshs
...
122,000
Required:
VAT account for the month ended 30th June 2008 (where applicable, transactions are
inclusive of VAT at the standard rate)
Date
3
...
08
9
...
08
19
...
08
25
...
08
30
...
08
VAT A/C
Details
Value
Rate
(Kshs
...
)
11,034
3,448
2,483
2,483
71,311
90,759
Date
4
...
08
7
...
08
Details
Sales
Purchase
s Returns
12
...
08 Sales
27
...
08 Sales
27
...
08 Sales
Value
(Kshs
...
%
0
0
16/116 2,207
360,000 16/116 49,655
160,000 16/116 22,069
122,000 16/116 16,828
90,759
TAXATION OF CO-OPERATIVES
Incomes of co-operative societies became taxable from 1st January 1995
...
Designated societies are those societies that are registered under Co-operative
societies Act
...
Designated Primary Co-operative Societies
These are those societies whose members are individuals
...
Chargeable income of these societies is computed as follows;
a
...
Deduct from the above figure dividend and bonus contribution to members
but such dividends and bonuses should not exceed 80% of the chargeable
income
...
Designated Secondary Co-operative Societies
These are those societies whose members are other co-operative societies mainly
primary co-operative societies
...
Tax is chargeable as in
designated primary co-operative above
...
Apex Co-operative Societies & Co-operative Unions
Computation of income is same as under primary and secondary co-operative
societies
...
ii
...
Co-operatives are legal entities and therefore taxed at corporation tax rate
prevailing (currently 30%)
Example 1
The following information relates to Fanya Kazi Farmer’s Co-operative Society
Operating Income
Dairy activity
Crop activity
Surplus & Loss A/c
Non-operating income
Dipping fees
Dividend income
Rent income
KFA bonus
Shs
...
1,272,800
258,340
26,000
11,000
15,000
12,000
1,572,240
Less: Expenses
Depreciation on motor vehicle
Bank charges
Entertainment (note 1)
Advertising
Donations (note 2)
Ushirika day celebrations
Rent and rates
Stationery
Postage and telephone
Interest on AFC loan
Accountancy fees
Salaries and wages (note 3)
Depreciation on buildings
Staff travelling
Repairs and renewals (note 4)
Legal expenses (note 5)
General expenses (note 6)
Bad debts written off (note 7)
Motor expense
Shs
...
675,750
895,480
The following information is given in relation to the above accounts
...
Entertainment was only for staff and customers except Kshs
...
2
...
8,000
- ABC research on potato disease Kshs
...
9,000
Kshs
...
Salaries and wages analysis
- Net salaries
- Payee
- NSSF (from employer)
- Retirement funds contribution
-
Kshs
...
16,000
Kshs
...
8,400
Kshs
...
Repairs and renewals included in repairs and renewals is the cost of a new bicycle
for the messenger for Kshs
...
5
...
This is for legal fees retired to the collection of the societies’ debts
except Kshs
...
6
...
20,000
- Cost of filing annual returns
- Kshs
...
62,000
Kshs
...
Bad debts w/o of the Kshs
...
20,000 was included in respect of surplus
machinery paid after payment of a deposit of Kshs
...
8
...
277,000
...
Assume that dividends of Kshs
...
Also assume that the society is to be taxed under section 19A (3) of
the income tax act
...
Fanya Kazi Farmers Co-operative Society Ltd
...
Net operating profit as per the accounts
Entertainment
600
Donation: To local church
8,000
Salaries & wages: Payee
16,000
o Retirement funds contribution
8,400
Legal expenses; fee for advocates
26,000
Repairs and renewals
6,000
General expenses- cost of installing heater
20,000
Bad debts
20,000
Depreciation on motor vehicles
120,000
Ushirika day celebrations
3,600
Depreciation of buildings
90,000
Less: Allowable expenses omitted /disallowable incomes
Capital allowances
277,000
Dividend income
11,000
Less: Dividends to members
Lower of 600,00 or (80% x 926,080)
Net taxable income
Tax due
=
=
326,080 x 30%
Kshs
...
895,480
318,600
1,214,080
(288,000)
926,080
600,000
326,080
TAXATION OF DESIGNATED SACCOS
These are saccos which carry on the business of savings and credit to their members e
...
Harambee, Stima, Mwalimu, Telposta, Afya etc
...
b) 70% of total rental income that the society receives from renting its premises
...
The law recognizes that a person cannot make profit from
himself and hence when dealing with incomes of co-operative societies
...
g
...
The interest earned in this case
is not earned, is not taxed because it is mutual
...
When a sacco gets involved in activities which are not its primary
objective then they are considered liable for tax
...
Where it acquires a building and property and receives rent from it e
...
Ufundi
...
Where it acquires a firm from which the main produce is the product is of a society
as a firm distinguishable from the product of its members as individuals
...
When it has dividends and other investment incomes and
iv
...
Summary:
1) All co-operative societies are run like other business units and all expenses which
are wholly and exclusively incurred in the production of goods and services
(income) are allowed as deductions for the income
...
3) Interest on members loans are not taxed
...
5) Co-operative societies are legal entities taxable at corporation tax rate i
...
currently
30%
...
K£
Interest on loan to members
60,000
Interest on savings account
3,500
Interest on fixed deposits account
35,000
Rental income
1,500
100,000
Less: Expenses (all allowable)
(34,500)
Net Income
65,500
Required:
Compute the total income of the sacco and the tax due
...
Computation of Total Income for the year ended 31st December 2019
K£
Interest on savings a/c (85% of 3,500)
2,975
Interest of fixed deposit a/c 85% x 35,000)
29,750
Rental income (70% of 1,500)
1,050
Total taxable income
33,775
Tax due
=
=
30% x 33,775
K£10,132
...
RETURNS
Introduction
The domestic tax department normally sets returns of income to all persons who are in
their records to declare incomes from all their sources liable to taxation at the
commencement of the year
...
A taxpayer will inform the income tax
department about the details of his/her tax position through submission of an annual
return of income
...
Taxable Income / Loss
b
...
g
...
Claim for relief
d
...
g
...
e
➢ Individuals i
...
Natural persons
➢ Companies i
...
Legal persons, co-operatives, saccos, trusts
...
Types of Returns
By 1993, there were 5 types of returns some of which have been abolished
...
Provisional Return of Income – abolished
...
Final Return of Income – abolished
3
...
It was introduced for the year of income ending 31st December 1992 and
thereafter
...
Ordinarily, the commissioner will accept the
taxpayer’s assessment unless he feels it is unreasonable
...
4
...
The
purpose of the installment returns is to facilitate the taxpayers in declaring income
and assessment as the year progresses
...
The taxes are spread
out in terms of installments
...
5
...
It should be submitted by resident companies only
...
This is done through the maintenance of a dividends
tax account
...
Contents of the Return of Income
File number
The date stamp
Full name and address of the tax payer
Originating tax district
Sources of income including any deemed income e
...
wife’s income
Any interest on amounts borrowed
...
ASSESSMENT
This is tax bill issued by the commissioner of income tax to all taxpayers for each
year of income
...
Where income has been declared, the appropriate rates of tax shall be used to
arrive at the tax payable by a taxpayer for the year of income
...
A notice of assessment is also a “Measurement of Income” that is issued by
the commissioner for each year of income
...
Section 73 of the ITA, states that the CIT will assess every person who is chargeable to tax
as quickly as possible after the submission of returns 7 years after the year of income to
which the assessment rates
...
We have the reason to believe that the return is not true or correct, he will on
the basis of the best of his knowledge determine the person’s income and assess him
accordingly
...
For the year of
income, 1990 and thereafter the commissioner will make an installment assessment in
respect of the person concerned where the person changeable did not submit an
installment return
...
Note:
Assessment of the tax payable is based on the returns submitted
...
Contents of an Assessment
The notice of assessment is a standard form issued by the CIT and will contain the
following information amongst others
...
A notice to the person named there in i
...
taxpayers that has been assessed under
that ITA
...
Information on the person that he has the right to object where he does not agree
with the assessment (ordinarily the commissioners will not entertain objection
against an assessment)
3
...
4
...
5
...
e
...
6
...
The CIT is required to issue a notice of assessment within the requisite time i
...
Self Assessment
2
...
The amend assessment can either be amended upwards or
downwards
...
Estimated Assessment
It is issued by the CIT on any income that the CIT estimates for the best of his
judgment where;
a) The taxpayer has failed to submit an installment return
...
c) The CIT does not agree with the taxpayer’s self assessment return
d) Returns have been made but the accompanying account does not satisfy the
commissioners
...
Additional Assessment
It is issued where the commissioner had issued the original / the first assessment
and has reasons to believe that the taxpayers has been under assessed
...
Objections, Appeals and Reliefs in Respect of Errors, Offences and Penalties
...
However, if they feel that they have been unfairly assessed, they have the right
to object to the assessment made in the prescribed manner to the commissioner of income
tax
...
However, where one taxpayer feels
that the income as per assessment arising from the commissioner is too high he has the
right under one, ITA to object such an assessment and an appeal shall be registered for
hearing (Note) that a taxpayer will not be allowed to appeal against his / her own self
assessment in errors so as to be a relief of error or mistake
...
e
...
❖ It must state the grounds of objection i
...
the reason why one objection is lodged
...
❖ The 10 days of service are taken to be one maximum time that mail would have
been delivered to any address of Kenya or abroad
...
The amount of tax payable
Allowances or deductions made or omitted to have been made when computing
income / loss
Imposition of penalties under Section 72 of ITA
...
The CIT is obligated to register one objection
...
There are certain instances when one taxpayer will not be able to meet the 60 days
deadline in which a notice of objection should be made provided there are good
grounds, Section 54 of ITA provides that taxpayers can lodge a late notice of
objection
...
a) He / she was prevented from objection in time by reason of sickness
...
c) There was no unreasonable delay on the part of the taxpayer
...
d) Put it in writing
...
e
...
In this case,
the CIT will accept the late notice of objection on the grounds that;
❖ The return of income for one year and the accounts where applicable
had been submitted to the commissioner
...
❖ There was not unreasonable delay on the part of taxpayer
...
How a Valid Notice of Objection is dealt with
...
The CIT can amend the assessment in accordance with the objection i
...
the CIT can
agree with the taxpayer’s grounds of objection
...
The CIT can amend the assessment in light of the objection with some adjustments
i
...
an agreed amended assessment is issued by the CIT with both parties agreeing
...
The CIT can amend the assessment i
...
4
...
The CIT may refuse to amend the assessment
...
5
...
6
...
A taxpayer who is aggrieved by the manner in which a notice of objection against an
assessment has been dealt with by the commissioner can seek further recourse of appeal
to appellate bodies i
...
Appeal bodies established under the ITA or through any other
courts in Kenya including the local committee, income tax tribunal, high courts and courts
of appeal
...
The minister for finance
established it by a notice in the Official Kenya Gazette
...
E
...
The Kisumu Tax District Local Committee or The
Thika Tax District Local Committee, etc
...
Moreso, designs taken by the commissioner that may not go down well with the taxpayer
...
The local committee consists of 9 members appointed by the Minister for Finance and will
consist of;
A chairman
Not more than 8 other members
The period of office for the local committee is usually 2 years unless;
A member tenders a resignation
A minister revokes a member’s appointment for reasons of;
Fail to attend 3 consecutive meetings (LC) or
A member being unfit to perform duties of his office due to reasons
mental or physical disabilities
...
The manner in which an appeal will be made to a local committee
2
...
The manner in which they convene meetings, the venue, and time to hold a local
committee meetings
4
...
5
...
A taxpayer has a right to appeal to LC against the CIT decision against him, mainly the CIT
refusal to amend an assessment after the taxpayer has lodged a valid notice of objection
...
e) The CIT may refuse to make a refund of taxes
...
Procedure of Appeal (LC)
1
...
2
...
3
...
the
taxpayer should submit the following documents to the clerk of the LC
...
It will state the grounds of appeal and shall be
submitted in original plus 9 copies
...
Will give the sequence of events which took place
regarding the assessment, objection and eventually the appeal
...
Similarly, the statement shall be the original plus 9 copies
...
The notice of the intention to appeal to the LC, which
was sent to CIT
...
Against which the appeal is being lodged e
...
When all the appeal documents have been filed in time to the clerk of the
LC, the clerk will register the Appeal for hearing
...
In this case, the LC can give a taxpayer an extension of time within which to lodge
an appeal stating why the appeal was not lodged in the specified time
...
It
consists of;
Chairman
Not less than 2 and more than 4 other members i
...
min 3 and a max of 5
...
The tribunal is
governed by IC (tribunal) rules
...
The commissioner is empowered to reject certain business transaction, where he is for
the opinion that they avoid / reduce taxes
...
If the taxpayer objects and the
subsequent assessment, he has the right to appeal to a tribunal e
...
of such taxes which
the taxpayer may object and which the commissioner may fill are suspect are;
➢ A child being paid very high salaries for performance of minor duties
...
The commissioner is empowered to reject each transactions and raise an assessment
accordingly
...
i
...
where the CIT is satisfied that there has been a short fall and
where the CIT directs for the distribution the taxpayer can appeal against such kind of
direction
...
e suspended for being paid 1st and the relevant offices are informed
...
Where the taxpayer is not satisfied with the decision of the tribunal, he can make an appeal
to the high court by giving a notice within 15 days after he has been served with the
decision
...
Appeals to the high court will only be on the questions of law or mix law and facts
...
The Appellate must file in court, the following;
a) Memorandum of Appeal listing the Grounds of Appeal
b) A statement of facts, giving sequence of events leading to the decision which is
being appealed against
...
Note:
A taxpayer cannot appeal to the courts
a) Against CIT refusal to accept a late objection since the LC’s decision is final
...
If the LC refused, there will be no further appeals
...
Failure to comply with the notice
2
...
e
...
Submitting fraudent returns
4
...
If a taxpayer commits any offence then the commissioner can impose penalties on
him/her or he / she can be imprisoned
...
b
...
d
...
m
compounded
...
Failure to furnish or notify non-receipt of final 5% p
...
tax payable while failure
continues
...
or double of the difference
between norminal and
charged tax due to false
information
...
f
...
h
...
j
...
20% penalties on unpaid
amount plus 2% p
...
Where final tax assessed is more than 10% above 2% interest p
...
estimated tax
...
8,000 or 6 months
imprisonment or both
...
10,000 as from 1997
...
Not less than Kshs
...
Fraudlent Returns
Kshs
...
Negligence of authorized tax
Where the additional tax
charged results from the
negligence
from
unauthorized tax agent a
penalty
of
upto
Kshs
...
Title: Taxation Notes(Accounting)
Description: Taxation refers to a compulsory contribution to the government by the citizenships which is used to pay for expenses incurred in the common interest of all without preferred / special benefits conferred to a tax pay.
Description: Taxation refers to a compulsory contribution to the government by the citizenships which is used to pay for expenses incurred in the common interest of all without preferred / special benefits conferred to a tax pay.