PAPER NO. 8 PRINCIPLES OF TAXATION UNIT DESCRIPTION
This unit covers the competencies required to compute tax obligations for individuals and
business entities. Competencies include: Applying taxation concepts and regulations in determining tax obligations, determining tax liabilities for different sources of income, computing investment allowances, accounting for value added tax in business transactions and accounting for customs duty and excise duty, and Miscellaneous charges.
LEARNING OUTCOMES
• Identify the types of taxes
• Apply the rules of taxation
• Compute tax and prepare income tax returns for employed individuals
• Compute tax and prepare income tax returns for small business establishments
• Account for VAT and file returns
• Compute customs and excise duty and miscellaneous levies and file their returns
CONTENT:
1. Apply taxation concepts and regulations in computing tax obligations
1.1 Definitions
1.1.1 Tax
1.1.2 Income tax
1.1.3 Value Added Tax
1.1.4 Excise duty
1.1.5 Customs duty
1.1.6 Advance tax
1.1.7 Instalment tax
1.1.8 Capital gain tax
1.2 Purposes of taxation
1.3 Statutory deductions
1.3.1 Pay As You Earn (PAYE)
1.3.2 NSSF
1.3.3 NHIF
1.4 Classification of taxes by rates
1.4.1 Progressive
1.4.2 Digressive
1.4.3 Regressive
1.4.4 Proportional
1.5 Classification of taxes by effect
1.5.1 Tax effect
1.5.2 Tax impact
1.5.3 Tax incidence
1.5.4 Direct taxes
1.5.5 Indirect taxes
1.6 Tax shifting
1.6.1 Forward shifting
1.6.2 Backward shifting
1.6.3 Factors that determine the tax shifting
1.7 Principles of taxation
1.7.1 Equity
1.7.2 Economy
1.7.3 Convenience
1.7.4 Certainty
1.7.5 Simplicity
1.7.6 Elasticity
1.7.7 Flexibility
1.7.8 Productivity
1.7.9 Diversity
1.8 Tax evasion
1.8.1 Ways of tax evasion
1.8.2 Measures the government can put in place to prevent tax evasion
1.9 Tax avoidance
1.9.1 Ways of tax avoidance
1.10 Sources of taxable income
1.11 Rules of taxing an income
1.12 Residence
1.12.1 Body corporates
1.12.2 Individuals
2. Determine tax liabilities for different sources of income
2.1 Employment income
2.1.1 Definitions
2.1.1.1 Employment
2.1.1.2 Employer
2.1.1.3 Employee
2.1.2 Taxable cash and non-cash benefits
2.1.3 Allowable deductions against employment income
2.1.4 Non-taxable employment benefits
2.1.5 Computation of taxable employment income and tax thereon
2.2 Business income
2.2.1 Definitions
2.2.1.1 Trade
2.2.1.2 Profession
2.2.1.3 Vocation
2.2.1.4 Adventure
2.2.1.5 Concern
2.2.2 Criteria of taxing a business income
2.2.3 Reasons why accounting profit and taxable profit are different
2.2.4 Format of computation of adjusted taxable business income and tax thereon
2.3 Investment income
2.3.1 Dividends
2.3.2 Interests
2.3.3 Capital gains
2.3.4 Rental
2.3.5 Royalty income
2.4 Farming income
2.4.1 Allowable farming expenses
2.4.2 Computing of the adjusted taxable income
2.4.3 Hobby farming
2.5 Withholding tax
2.5.1 Incomes subject to withholding tax
2.5.2 Withholding tax rates
2.5.3 Advantages and disadvantages of withholding tax
3. Compute investment allowances
3.1 Buildings
3.1.1 Hotel building
3.1.2 Building used for manufacture
3.1.3 Hospital buildings
3.1.4 Petroleum or gas storage facilities
3.1.5 Educational/hostels building
3.1.6 Commercial Building
3.2 Machinery
3.2.1 Manufacturing machinery
3.2.2 Hospital equipment
3.2.3 Ships or aircraft
3.2.4 Motor vehicles and heavy earth moving equipment
3.2.5 Computer software, calculators, copiers and duplicating machines
3.2.6 Furniture and fittings
3.2.7 Telecommunication equipment
3.2.8 Film equipment by a local producer
3.2.9 Machinery used to undertake operations under prospecting rights and exploration under mining rights
3.2.10 Purchase of right to use fibre optic cable by telecommunication operation
3.2.11 Farmworks
3.2.12 Other machinery
4. Account for value added tax (VAT) in business transactions
4.1 Definitions
4.1.1 Value Added Tax
4.1.2 Input tax
4.1.3 Output tax
4.1.4 Supply
4.1.5 Time of supply – tax point
4.2 Registration and deregistration of business for VAT
4.3 Rights of a VAT registered person obligations of VAT registered person
4.4 Offences in relation to VAT Value of a supply – Value for VAT
4.5 Types of supplies
4.5.1 Standard rate
4.5.2 Zero rate
4.5.3 Exempt
4.6 VAT rates and computations
4.7 Privileged persons and institutions
4.8 Changes that must notified to the commissioner.
4.9 VAT records
4.10 VAT returns
4.11 Remission, rebate and refund of VAT
5. Account for Customs and excise duty, miscellaneous charges and levies
5.1 Definitions
5.1.1 Customs duty
5.1.2 Excise duty
5.1.3 Specific duty
5.1.4 Advarolem duty
5.1.5 Bill of lading
5.1.6 Clean report of finding
5.1.7 Import declaration form
5.1.8 Bond security
5.1.9 Port release order
5.1.10 Customs receipt
5.2 Warehousing
5.2.1 Bonded warehouse
5.2.2 Customs warehouse
5.3 Goods subject to customs control
5.3.1 Dutiable goods
5.3.2 Excisable goods
5.3.3 Restricted goods
5.3.4 Imported goods
5.3.5 Goods pending importation
5.4 Refund of duty
5.4.1 Circumstances under which duty may be refunded
5.5 Prohibited and restricted measures
5.5.1 Prohibited imports
5.5.2 Prohibited exports
5.5.3 Restricted imports
5.5.4 Restricted exports
5.6 Goods liable to forfeiture.
5.7 Dumping
5.7.1 Government measures to prevent dumping.
5.8 Pseudo taxes
5.8.1 Stamp duty
5.8.2 Airport tax
5.8.3 Catering levy
5.8.4 Petroleum levy
5.9 Levies and charges imposed by the county government
5.9.10 Property Rates
5.9.11 Cess
5.9.12 Entertainment taxes
6. Administration of income tax
6.1 Personal identification number: Issue, uses, cancellation of a PIN
6.2 Registration and deregistration of tax payers
6.3 Administration of tax laws
6.4 Function and powers of the commissioner
6.5 Taxpayer’s tax representative: Appointment, liabilities and obligations
6.6 Tax Returns and Assessments: Self-assessment, Default assessment, Advance assessment, Amendment of assessments
6.7 Collection, recovery, enforcement and refund of taxes
6.8 Tax Decisions, Objections, Appeals, Relief of mistakes and Rulings
6.9 Voluntary Tax Disclosure Program
6.10 Administrative penalties and offences
6.11 Digital service tax
6.12 Electronic Tax Register (ETR)- Specifications
6.13 Electronic Tax invoice – (Regulation 2020)
6.14 Application of ICT in taxation: Practical use of iTax to file the returns
Suggested Methods of Delivery
• Presentations and practical demonstrations by trainer;
• Guided learner activities and research to develop underpinning knowledge;
• Supervised activities – filing of returns;
The delivery may also be supplemented and enhanced by the following, if the opportunity allows:
• Visiting KRA
• Visiting Tax consultancy firms for enquiries and training/trainer from the KRA sector;
Recommended Resources Tools
Computers Calculators
Materials and supplies
• Digital instructional materials
Sample Reading and Reference materials
1. NCLR (2009). Laws of Kenya: East African Community Customs Management Act, 2004.
2. NCLR (2017). Laws of Kenya: Excise Duty Act No. 23 Of 2015
3. NCLR (2018). Laws of Kenya: Income Tax Act
4. NCLR (2012). Laws of Kenya: The Public Finance Management Act
5. NCLR (2018). Laws of Kenya: Tax Procedures Act of 2015
6. NCLR (2018). Laws of Kenya: Value Added Tax Act of 2013
7. Revenue Authorities Circulars/Notices
8. Kasneb e-learning resources (link on website) and approved study packs.
9. Select books in taxation by local authors