Free Principles of Taxation revision questions and answers

i. The management of recurrent expenditure by the county government.
ii. Developing a framework for prudent financial management at the county level.
iii. Promoting adherence to the principles of fiscal responsibility throughout the PFM structures and processes.
iv. Adoption and usage of ICT systems for prudent financial management.

Withholding tax can be advantageous for governments because it ensures a steady and predictable flow of tax revenue, even before a taxpayer has the opportunity to file their returns. It also reduces tax evasion since the tax is deducted at the source of income (such as from salary, interest, or dividends).

However, for the taxpayer, it can be seen as a downside because it is deducted automatically from income, meaning that they might not have control over the timing or amount of tax paid. In cases where a taxpayer has paid too much withholding tax (for example, if their actual tax liability is lower), they may need to wait until they file their returns to claim a refund, which can create cash flow issues.

So, while it ensures government revenue and reduces the risk of tax evasion, withholding tax can create a cash flow burden for taxpayers if not managed properly.

Under Kenyan tax rules on industrial building allowance, where an industrial building is sold before use by the builder or contractor, the qualifying cost to the purchaser is the purchase price paid for the building, not the construction cost, selling price, or written down value.

Customs duty plays a crucial role in protecting a country’s economy, residents, jobs, and the environment. By imposing duties and restrictions on certain goods, the government can:
• Control the flow of goods: This includes regulating imports and exports to ensure that only safe, compliant, and legal goods enter or leave the country.
• Protect domestic industries: Imposing customs duties on certain goods can help shield local industries from unfair foreign competition, fostering job creation and economic growth within the country.
• Protect jobs: By regulating imports and prioritizing local products, customs duties can help preserve jobs in industries that could be vulnerable to cheap imports.
• Protect the environment and public health: Some goods may be prohibited or restricted due to environmental concerns or health and safety risks, and customs duties can be used as a tool to control the import of such items.
So, customs duty helps in controlling not only economic factors but also broader societal interests, such as public health and environmental protection.

The certificate of origin officially certifies where the goods were produced.

Presumptive tax is generally for small businesses or individuals whose income is difficult to determine accurately.
 It is based on estimated or presumed income rather than actual profits.
 It applies to small traders, micro-enterprises, and low-income professionals.
 It makes compliance easier and ensures contribution to revenue.

In Kenya, Capital Gains Tax (CGT) is chargeable on the whole of a gain that accrues to a company or an individual upon the transfer of property situated in Kenya, whether the property was acquired before or after 1st January 2015.

Output VAT = 16% of 200,000 = 32,000
Input VAT = 30,000
VAT payable = 32,000 – 30,000 = KES 2,000

The anti-dumping duty is imposed to protect local producers from unfair competition caused by imported goods being sold at prices lower than the local market price.

i. Ensuring economic growth: A budget allows the government to regulate the imposition of taxes in various sectors. Investment and expenditure factors contribute to the growth of a nation’s economy.

ii. Proper allocation of resources: Budgeting helps the government in allocating resources in a useful and sustainable manner, thereby ensuring that funds reach where it’s required the most.
iii. Growth of business and trading: When the government allocates resources, Businesses and enterprises revise their policies accordingly, thereby contributing to the country’s economic prosperity.
iv. Mitigating economic divide: Through budgeting, the government is able to introduce public economic welfare policies for the underprivileged sections of society, thereby minimizing economic disparity and inequality
v. Administering Operation of Public sector undertakings: Through budgets, the government is able to focus appropriately on companies in the public sector by introducing policies to aid their growth, thereby contributing immensely to the country’s economy by providing employment to a lot of people and generating revenues.

A charitable donation of clothes from abroad is not automatically exempt from customs duty. Duty may apply unless special approval for a remission is granted.

i. To promote credibility and public confidence.
ii. To help keep projects and programs on track.
iii. To assess capacity and learning tools and support capacity development.
iv. To improve performance, and enhance ownership, and stakeholder performance.
v. To achieve evidence-based policy and make decisions.
vi. To help formulate and justify budget requests through the allocation of resources.
vii. To promote credibility and public confidence.
viii. To help improve the quality of projects and programs.
ix. To identify what works well, what does not, and the reason why.

• When supply is more elastic than demand, producers can more easily adjust their supply in response to price changes, so they are less able to bear the tax burden. In this case, the tax burden falls more heavily on the buyers, as producers can pass on a larger portion of the tax.
• When demand is more elastic than supply, consumers are more responsive to price changes, meaning they will reduce their quantity demanded significantly if prices rise. As a result, producers bear a larger portion of the tax burden because they can't easily pass the tax onto consumers without losing sales.

Deduction = 150% × 300 million = KES 450 million

For investments in machinery outside Nairobi (Non-EPZ) that meet specific value thresholds, the investment deduction rate is 100% or 150%, depending on the total capital expenditure incurred. The specific rate depends on the amount invested and the location:
a) 100% Investment Deduction: This rate applies to general qualifying investments in buildings and/or machinery used for manufacturing anywhere in Kenya, including outside Nairobi, regardless of the investment amount
b) 50% Investment Deduction: This enhanced rate is available for substantial investments located outside of Nairobi, Mombasa, and Kisumu municipalities, provided specific conditions are met:
 The investment value in that income year is at least KES 250 million.
 Alternatively, a 150% rate applies if the cumulative investment value over the preceding three or four years (depending on the specific date of the Finance Act in force) in those areas is at least KES 1 billion (previously KES 2 billion).

Charitable donations into the country are taxable unless exempted by the National Treasury and provisions of the 5th Schedule of the East African Community Customs Management Act.

i. The grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments.
ii. In the case of an objection to an assessment, the tax payer must ensure that he or she has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute; and
iii. Ensure that all the relevant documents relating to the objection have been submitted.

Specific duty is a type of customs duty calculated based on physical measures such as weight, volume, length, or number of units, rather than the monetary value of the goods.

i. Imported goods should be declared within twenty-one(21) days after the commencement of discharge or on arrival(in the case of vehicles).
ii. Required importation documents(e.g. Certificate of Conformity, Valid commercial invoice, Bill of landing, Certificate of origin, Freight invoice, etc.)
iii. Duties and taxes payable such as:
• Import duties
• Excise duties
• VAT
• Import Declaration Fees(IDF)
• Railway Development Levy( RDL).

Property rates are usually assessed based on the market value of the property, which is the estimated amount the property could sell for in the open market. This ensures that the tax is fair and reflects the true value of the land or building.
 Cost price the original purchase price, not current value
 Rental income might be used for income tax, not property rates
 Historical cost outdated value, doesn’t reflect current market conditions

The submission of final VAT returns is still required up to the effective date of deregistration; a taxpayer does not stop filing immediately upon application.

Shipping Allowance -applies to the purchase of a new and unused power-driven ship of more than 125 tons gross or the purchase and subsequent refitting for the purpose of that business of a used power-driven ship of more than 125 tons at 100% investment deduction. Conditions include:
i. The shipping investment deduction was not previously deducted.
ii. The load capacity must be more than 125 tons.
iii. The ship must be used for commercial purposes over the Kenyan waters.

It is an offense under the regulations to issue receipts manually or without using a KRA-approved ETR device. Penalties may apply for non-compliance.

i. Transparency: The budget process must be done openly and reliable information availed to all stakeholders on time to enable their contribution and decision-making
ii. Comprehensiveness: The budget must be detailed with relevant information.
iii. Authority and accountability: The government must be held accountable for the implementation of the budget and must act within it and keep the commitments made.
iv. Periodicity: The budget should be for a set period (i.e. quarterly, semi-annually, or annually).
v. Predictability: The budget should allow economic actors to plan thus enhancing delivery to the citizens.
vi. Contestability: The budget allows economic actors to compete fairly and be able to question the government on the budget or its priorities.
vii. Allocative efficiency: The budget’s expenditure must be based on priorities and the effectiveness of public programs.

A taxpayer may authorize any person to act as their tax representative. This person can handle tax matters, including filing returns, making payments, and corresponding with the Kenya Revenue Authority (KRA) on behalf of the taxpayer.

The typical contents of a notice of assessment include:
 Taxpayer details: Name, address, and Tax Identification Number (PIN).
 Assessment period: The year or period to which the assessment relates.
 Type of tax: Income tax, VAT, or other applicable taxes.
 Taxable income: Income or amount on which tax is assessed.
 Tax rate applied: The rate used to calculate the tax liability.
 Tax payable or refundable: Amount due to the tax authority or refund due to the taxpayer.
 Basis of assessment: How the tax was calculated (e.g., self-assessment, Commissioner’s assessment).
 Payment instructions: Due date and methods for settling the tax.
 Objections and appeals: Information on how to object or appeal the assessment, if necessary.

Amortization is the process of gradually paying off a debt or intangible asset over a period of time through regular payments. There are two main contexts for the term:

a) Loans/Debts: Amortization refers to spreading out loan payments over time so that each payment covers both interest and principal, gradually reducing the loan balance to zero by the end of the term. Example: Monthly mortgage payments that reduce both the loan amount and interest.

b) Accounting/Intangible Assets: Amortization is the systematic allocation of the cost of an intangible asset (like patents or software) over its useful life. This is similar to depreciation, which applies to tangible assets.
In essence, amortization is the process of spreading costs or payments over time.

Deregistered VAT persons are not permanently exempt from tax. Deregistration only means the business is no longer required to charge or remit VAT. The business may still be liable for other taxes, such as income tax, PAYE, or excise duty, and can also re-register for VAT if its turnover exceeds the threshold in the future.

Specific duty refers to a type of customs duty charged as a fixed amount per unit of goods imported or exported.
 The unit can be based on weight, volume, length, or quantity (e.g., KES 50 per kilogram of sugar).
 Unlike ad valorem duty, it does not depend on the value of the goods.
 Provides predictable revenue and is easier to calculate for standard items.

Specific duty is fixed per unit, so it does not increase with price; it actually places a relatively higher burden on cheaper goods.