QUESTION ONE (a) (i) Taxation of Pension Income In case of period income, the first Ksh.180,000 p.a. (15,000 p.m) is tax exempt if from registered pension schemes only. In case of lumpsum income, the first Ksh.48,000 p.a for each year of service up to a maximum of Ksh.480,000 is tax exempt where the income is from registered pension and provident funds. The first Ksh.1,400,000 withdrawn by dependants of a deceased person is tax exempt. (iii) Submission of Fraudulent Returns The penalties shall be: a fine not exceeding Ksh.200,000 and additional tax equal to 200% of tax evaded/concealed and/or 2 year imprisonment. Annual allowances are given on capital expenditure incurred in the mining of specific minerals as follows: 1 st year 40% of total capital expenditure year 2 7 10% p.a of total capital expenditure. No balancing allowance or loss arises from disposal of assets. (b) (i) Tax avoidance is arrangement of taxpayers affairs to reduce tax liability without resulting to tax evasion. The taxpayer will utilize loopholes in tax legislations. It is legal exercise that cannot result in penalties. such as: Taxpayers can engage in tax avoidance through tax planning activities buying assets to enjoy capital allowances instead of leasing engaging in exporting business where exports are zero rated instead of domestic sales use of debt capital where interest is tax allowable instead of equity capital decision as to whether to operate as a partnership, sole proprietorship or limited company.
Being granted low interest loan to purchase a house (employer pays Fringe Benefit Tax) instead of being granted a house (taxable housing benefit) (c) Incidence of Tax Implies the final resting place of tax burden. Once tax is imposed on one party, it can be shifted forward i.e. to the consumer through wholly or partial increase in selling price or backward (through partial or wholly reduction in cost of inputs). This concept is important to policy makers in the following ways: (i) (iii) (iv) It identifies which section of society can best bear the money tax burden To evaluate whether tax system conforms to canon of equality. It will affect elasticity of demand and supply of some commodities which will affect production and employment levels. Formulation of tax policies i.e direct or indirect taxes QUESTION TWO (a) (i) Taxation at Source This is where tax is withheld and the recipient only receives the income net of tax e.g. Pay As You Earn (PAYE) deducted from employment income, withholding tax on qualifying dividends and interest income etc. The person withholding the tax is a tax agent who will remit the tax withheld to the government by 20 th day of the following month (10 th day for PAYE) Taxation of wife s employment income Employment income of wife is laxed on graduated scale and is assessable on the wife if it is at arm s length i.e. it is not derived from: A partnership in which the husband is a partner A trust created by the husband A company in which the wife and/or husband hold 12.5% or more of voting power
of: (iii) Where wife is employee of the husband. If employment income is at arm s length, the wife will enjoy personal relief. Back duty This is tax in arrears which was not paid by a taxpayer by reason (a) (b) (c) nonpayment of tax non or underdeclaration of taxable income backdating of salary increment or gratuity received in lumpsum for services rendered in the past.
(b) Employment Income Mr. Mbotela (i) Salary 60,000 x 12 Overtime 10% x 720,000 Medical bills Car benefit: Higher of: (i) 2% x 300,000 x 12 = Fixed benefit on 2000cc = Gardener fixed benefit Seminar allowance Cash gift Pensionable pay before housing benefit Housing benefit 15% x 99,300 Less rent paid 2500 x 12 Total pensionable pay Less pension contribution lower of: (i) 30% x 1,111,950 = Actual amount 8000 x 12 = (iii) Set limit = Business Income Consultancy profits Less operating expenses Less WTA on furniture 12.5% x 4,000 Mrs. Mbotela Net profit Add back School fees for children 72,000 86,400 149,325 (30,000) 333,585 96,000 210,000 720,000 72,000 48,000 86,400 21,600 2,500 45,000 995,500 119,325 1,114,825 (96,000) 1,018,825 70,000 (18,000) (500) 51,500 1,070,325 50,000 108,800 158,000 Notes: Tax and snacks not taxable since the value is less than Sh.24,000 p.a. Assumed medical scheme is discriminatory hence medical benefit taxable. Interest from POSB is tax exempt Insurance compensation not taxable Tax liability Mr. Mbotela on Ksh.1,015,950
1 st Ksh.121,968 @ 10% Next Ksh.114,912 @ (15% + 20% + 25%) Surplus (1,070,325 466,704) @ 30% Less: Personal relief PAYE 7000 x 12 Mrs. Mbotela on Ksh.158,000 1 st KSh.121,968 @ 10% Surplus (158,000 121,968) @ 15% Less: Personal relief Net tax liability 12,196.8 68,947.2 181,086.3 262,230.3 (13,944.0) (84,000.0) 167,286.3 12,196.8 5,404.8 17,601.6 (13,944.0) 3,657.6
QUESTION THREE (a) Differences between taxation of cooperative societies and companies: Dividends to the extent of 80% are allowable expenses for primary cooperative (100% for secondary cooperative) societies which is not the case for companies. The societies cannot carry losses forward to be offset against future income but companies can. SACCO s are taxed on selected incomes i.e. 85% of gross nonqualifying dividends and 70% of gross rent income but companies pay tax on all business incomes. Cooperative Societies are not expected to pay instalment tax but companies must pay. Expenses incurred in generating income of a company are allowable but no expenses are allowable in determining taxable income of a SACCO. (b) (i) Using year 2005: Asset Q. Cost Investment deduction I.D @ 100% F. Building p. Machine F. Extension 2,500,000 300,000 1,800,000 2,500,000 300,000 1,800,000 4,600,000 Residual for IBD & WTA Class I @ 37.5% WDV 1.1.2003 Add: Fax machine Telephone set Computers Saloon car Less: Disposals WTA WDV 31/12/2003 600,000 (90,000) 510,000 (191,250) 318,750 II @ 30% 1,280,000 25,000 15,000 70,000 (230,000) 1,160,000 (348,000) 812,000 III @ 25% 1,700,000 1,000,000 R (175,000) 2,525,000 (631,250) 1,893,730 IV @ 12.5% 2,200,000 (420,000) 1,780,000 (222,500) 1,557,500
Adjusted Taxable Profits Reported net profits Add back disallowable expenses Directors remuneration private travel Audit fees tax appeal Bad debt General provisions embezzlement Miscellaneous expenses contributions Staff Xmas party Depreciation Less: Investment income Gain on sale of motor vehicle Capital Allowance ID Total WTA Net taxable income 600 250 70 180 75 30 500 850 600 4,600 1,393 Sh. 000 26,100 1,705 28,315 (7,443) 20,873 Notes: 1. Embezzlement by staff would be treated as allowable expenses on condition that if insurance compensation is received, it would be treated as taxable income. 2. Interest on loan borrowed to purchase machine is tax allowable. (iii) Tax payable = 20,872,000 x 30% = 6,261,600 QUESTION FOUR (a) Instruments on which stamp duty is changeable: Increase of share capital 1% Transfer of securities of unquoted firms Transfer of immovable property within and outside a municipality 4% and 2% respectively Lease agreement of 1 2 years 1% of annual rent Primary debenture/mortgage 0.5% Insurance policies Hire purchase agreements
Agreements such as partnership deeds. (b) (i) Motor vehicle licences A fee is charged on road and driving licences The fees is based on the period (4 months or 12 months) and engine size of the vehicle determined by cylinder capacity (CC) Training Level This is charged on the guests of hotels and clubs at 2% based on the hotel and club charges. (c) (i) Reported net profits Add back: Understated closing stock = 800,000 800,000 90% Transport costs private Gifts to staff Partner salaries 300 + 250 + 50 Depreciation Interest on capital Commission paid to partners Less: Overstated closing stock 2,200,000 2,200,000 90% Capital allowances Other incomes Adjusted business income 244,444 3,987,000 88,889 18,000 4,000 600,000 73,000 450,000 90,000 5,268,889 120,000 50,000 (414,444) 4,854,445 (iii) Distribution of profits QUESTION FIVE Partner Maina Njoka Otieno Total Salaries Interest on 300,000 150,000 250,000 150,000 50,000 150,000 600,000 450,000 capital Commission 30,000 2,228,667 30,000 30,000 90,000 3,714,445 Profit share 3:1:1 742,889 742,889 2,708,667 1,122,889 922,889 4,854,445
(a) Dumping means importing goods into Kenyan Market and selling them at a price below the fair market price of the same goods in the country from which goods were imported. It does not necessarily mean substandard goods. It also applies to selling of imported goods at a price below the fair market value of the same goods in the country from which were first imported, then exported to another country before being exported to Kenyan. (b) The measures to eliminate dumping are: high, antidumping duty. Imposition of a quota on the quantity of goods that can be imported from a given country or foreign institution. Preshipment inspection of goods Adequate documentation of all imports. (c) Import duty may be refunded if: It was paid in error (overpaid) Goods are returned to the seller Goods are destroyed or damaged while under customs control If goods are used to manufacture exports. (d) VAT A/c Input VAT 3/6 Purchases 16/110 x 80,000 9/6 Return in @ 0% 19/6 Bad debt relief 16/116 x 18000 25/6 Purchases 16/116 x 80,000 VAT Payable Output VAT 11,035 4/6 Sales 60,000 x 0% 0 0 7/6 Return out 16/116 2,207 2,483 x 16000 49,655 11,035 12/6 Sales 16/116 x 22,069 66,206 360,000 16,828 27/6 sales 16/116 x 16,000 sales 16/116 x 122,000 90,759 90,759
NB: VAT on merchandise b/f was accounted for in the previous month No input VAT is charged by unregistered suppliers but on supplying goods, the seller should charge VAT whether the buyer is registered or not.