TAX LAW NOTES II

TAX LAW

Tax is defined as a coercive contribution made by a person to the government to enable it carry out its programmes for providing services or goods to the nation. Tax is coercive meaning that it is forced payment i.e. not paid voluntarily. Tax is an exaction (something paid forcefully) and yet it is at the same time a contribution so every person should participate to enable the government provide for services and /or goods.

Even if tax is coercive, tax payers are not criminal when they default in payment.

Where does the coercion come from? The statutory powers contained in an Act of parliament.

This definition applies to tax regimes i.e. countries that apply taxes to raise revenue for government programmes. There are some countries that do not do this known as tax havens or non-tax regimes. These countries have substantial resources of their own to exploit, for example United Arab Emirates, the Sultanate of Brunei, among others. They give economic handouts.

Definitions of Terms and Concepts in Taxation

1.       Tax Base is the item or thing on which the tax is imposed. In income taxation, the tax base is the income; property taxes the base is property; customs duties the base is imported goods and services; capital gains tax, the base is capital; land rates tax, the base is the property based in a municipality, among others.

2.       Tax Incidence this is the tax burden and has two limbs:

a) Legal Incidence- this is the burden carried by the person whom the law has identified as the tax payer of the tax in question.

b) Economic Incidence- it is possible sometimes that the person who bears the legal burden passes the burden to someone else. The passing on is carried out through economic or business activity. The passed burden becomes an economic incidence.

For instance, the law identifies a shoemaker, baker, lawyer to pay income tax, but through pricing of goods and services passes the burden to the customer.

 

3.       Tax Equity

This means doing some amount of justice or applying some amount of justice in the application of taxes to taxpayers. It falls into three categories:

a) Horizontal Equity

This requires that a fair tax system must treat equally all people falling within the same economic horizontal circumstances. For instance, all people whose annual income is KSH 1200 should pay equal amount of taxes.

b) Vertical Equity

People in different scales or strata of economic means must be made to pay taxes each according to their economic strength.

c) Benefits Equity

This recognizes that different people derive/enjoy different benefits from the services and goods the government provides. So those who derive more benefits should pay more taxes accordingly. For instance, use of a public road, a driver derives most, the cyclist more, and a pedestrian the least. So the driver pays higher taxes but the cyclist and pedestrian since they derive less from the public road, pay nothing.

Of the three branches of equity, the benefits have not found as much expression in our tax laws as have the other two. For it is difficult to measure the benefits people derive from the goods and services the government has provided. The enjoyment is dependent on the choice of individuals and even on their taste. Also it is difficult to measure the benefits as sometimes the benefits differ from region to region within the same country due to special circumstances of each region.

Thirdly the derivation of benefits depends on progressive capacities of the taxpayer. So the benefits change from time to time.

The equity concept has been recognized in our tax system from the day of independence in 1963. Our founding fathers, in a document known as the Africa Socialism and its Application to Planning in Kenya (pages 33-35) Sessional Papers no 10. 1965 declared therein that equity was a pillar principle in our tax system from independence time onwards. In so doing, they embraced the horizontal and vertical equities. For example, income Tax Act, Chapters 470 of the laws of Kenya, the equity principle is contained in the provisions dealing with the rates at which the individual taxpayers are taxed. In the Third Schedule, those rates are arranged in such a way that people with different levels of income are taxed differently by making the tax rates progressive, i.e. those with more, pay more and those with super income are charged with surtax (the highest rate).

On the other hand, people with similar levels of income pay similar taxes, underscoring both the horizontal and vertical equities.  This element of justice in taxation equity is the only amount of justice of equity to be found in taxation. Tax systems of laws do not concern themselves with social justice. So for example a blind person, an aged person, a child etc if they have something taxable, they will still be taxed.

4. Tax Haven, Tax Holiday and Tax Loophole

A tax haven is a jurisdiction of a country that does not apply taxes to raise revenues for the government as the country has substantial resources to exploit.

A tax holiday is a period during which taxes have been suspended so that people do not pay the taxes. The suspension can relate to the entire tax system within a period of time or some taxes only. There are various reasons for this. They can be political, for example Bangladesh rewarded people for struggling successfully to establish the country. A tax holiday for three years.

Economically, to encourage people to undertake certain activities which they would not have ordinarily undertaken without this incentive. For example, in export processing zones, the applicable law provides for a tax holiday of 10 years on certain investments in those zones. This is to encourage investors to come into those zones and undertake activities geared towards exports from Kenya.

A tax loophole is an omission in the Tax law to cover a particular tax situation, thereby giving taxpayers an opportunity to escape tax liability in that situation, for example, if the tax law says that all the income of an individual and lists all incomes and forgets to list a certain income, thus exclusion is the omission.

 The loophole is always in the law. The loophole can be inadvertent or intentional by the government where it is inadvertent; an amendment is done to the law to bring into bracket the income unintentionally omitted. Where the loophole is intended, the government intends to encourage people to take advantage and engage in certain economic activities beneficial to the country. So it becomes a government policy. The intended loophole is in the statute.

5. Tax Evasion, Tax Avoidance and Tax Planning

                  Tax evasion is a criminal plan to avoid paying taxes which are due and payable from a taxpayer.

                  Tax avoidance is the act of taking advantage of a loophole in the law not to pay taxes as they have not been covered by the law. So evasion is criminal while avoidance is not.

                  Tax planning is a professional organization of person’s tax affairs to reduce the tax liability by taking advantage of all available tax loopholes. This is done openly as it is not criminal.

6. Fiscal Policy is a policy to do with raising revenue through tax measures.

7. PAYE (pay as you earn)

This is associated with income taxation and it is a system used to collect payroll taxes. Although employees earn other incomes these are not subject to P.A.Y.E. thus other incomes are called fringe benefits, terminal benefits (i.e. pensions, amenities, etc). Through PAYE, income tax is collected at the same time salary is paid.

8. Withholding Tax

Also another method of tax collection, meaning that any person paying to another person a monetary benefit which is subject to withholding tax, he must withhold from that payment the amount of withholding tax the law has specified, and then remit to the other person the balance of the payment.

It is a system of tax collection because it enables the commissioner of income Tax, especially through the agent of the Payer, to collect the tax before payment is remitted to the owners thereby assuring the collection of taxes without waiting for the payee to earn, declare and pay the tax. It is the collection of taxes in advance just likes P.AY.E

Under the income Tax Act, chapters 470, the following benefits or payments are subject to withholding tax.

Category A payment   1.       Management fee 2.       Royalties 3.       Payment for leasing equipment 4.       Dividends 5.       Interest from financial  institutions and government bonds interest from bearers bond 6.       Interest from bearers certificates 7.       Interest earned on housing bonds 8.       Ordinary rent 9.       pension and taxable withdrawals from pension of provident fund 10.     insurance commissions 11.     contractual fees

Category B resident payee     5% N/A   *5%       *15%   25%   *10%   N/A 10/35%       *10% *10%

Category C non-resident payee   *20% *20% 15%   *10%       *15%   25%   *15%   *30% *5%       *10% *20%

 

 *the amount marked by star denotes a final tax on those amounts. The recipients of those amounts do not need to declare it to their income.

Those not marked with a star must be added to the rest of the income and taxed less the amount initially withheld. It also enables the commissioner to known the income which the taxpayer earned on which a withholding tax is subject just in case he does not declare it at the years-end.

This form of taxation is connected to a concept known as credit imputation system of taxation.

9. Tax Regime

A country whose government applies taxes as opposed to a non-tax regime whose government does not apply taxes to raise revenue to finance government programmes.

Citizens of non-tax regimes enjoy total freedom from taxation, but non-citizens in certain cases pay taxes.

10. Tax Rebate, Tax Credit, Tax Relief and Tax Remission.

Tax rebate is an actual of physical return as refund of some of the monies paid as taxes. This can arise where there was over taxation, can also be out of government policy to encourage certain economic activities by the tax payers, for example in exports so as to produce goods for export, the government can run a compensation of a tax refund scheme. The government refunds some of the taxes paid on inputs.

A compensation scheme, the refund will include the tax plus other payments either for costs of inputs, transportation, etc. sometimes a tax rebate has been considered as a discount because the taxpayer is forgiven from paying full tax which was due from him by the law.

A discount may also be given to encourage tax compliance by the taxpayers for paying taxes on or before time. Rebate is also given for cooperation of taxpayer with tax authorities in the large taxpayer’s portfolios.

Tax credit A tax credit, a deduction and a tax relief are inter-related terms. A tax deduction according to cap 470 is a deduction from the total income of a person computed in accordance with the said Act and those deductions which a taxpayer can make from his total income have been specialized in section 15 of cap 470 ( for example deduction for depreciation, purchase of new equipment, business loss for the relevant year).

A tax credit, on the other hand, is not a deduction from total income, but it is a deduction from the tax which has been calculated as being due on the total income declared by the taxpayer.

If it is a deduction by a business taxpayer, it is called a credit, but if it is by an individual who is not a business taxpayer, then it is a relief.

Tax remission This is that rare occasion when the commissioner under the permission of the statute forgives a taxpayer from paying the total tax payable within that particular year of taxation, for instance section 123 of the Income Tax Act, cap 470. This occasion is because by the permission of statute, remission can only be exercised due to exceptionally hard circumstances the taxpayer has been in, thereby justifying remission which is another principle of equity in taxation connoting the philosophy that tax laws must be written in and applied in blood. They should also take into account genuine conditions of life which can make a taxpayer who is well-intentioned unable to pay taxes as and when they fall due. Section 123 of cap 470 gives an example of tax remission.

However, it must be stressed that the commissioner exercises remission very sparingly, and whatever he does so, it must be only for reasons stated in the relevant tax statute, which must be fulfilled in total, otherwise quite often the commissioner postpones assessment of tax from a taxpayer due to difficulties suffered by a taxpayer which do not fall within section 123 of cap 470.

11. Taxonomy

This concept has nothing to do with taxation. It is a scientific classification of animals and plants for purpose of orderly study.

12. Sourcing rules

Rules of provisions of the taxing statute which identify sources from which taxable income covers, for example, employment, property, business, etc. this is an American terminology. The sources are identified by the taking statute.

13. Double taxation.

A situation where the income of a taxpayer is subjected to income tax in different countries of different regimes.

Double taxation is primarily a reference to income where certain incomes are taxed twice by two different countries. For instance, an American working in Kenya earning a salary, he pays tax in Kenya because that salary has been identified as taxable. When he goes to the U.S   with the balance, he is taxed as income earned overseas and brought to the U.S.

Such incomes as rent, salaries, royalties and pensions fall under double taxation. In situations of double taxation, countries enter into double taxation agreements so that the taxpayer is taxed only in one regime, and not in the other, for example section 41 of cap 470.

To countries where there is double taxation agreement will specify where the income would be taxed. The agreement between Kenya and U.S allows Kenya to tax. If there is no agreement, the incomes will be subject to double taxation, for example, there is no double taxation agreement with Australia.

14. Single Tax Regimes

When a country is described as a single tax regime, the country applies only one type of tax, for example, if its income tax, that is all as opposed to a multi tax regime which applies many taxes.

When taxation was started in Kenya in 1900, it was a single tax regime for one year (hut tax), but in 1901 customs and excise taxes were introduced, among other taxes.

15. Tax Certificate

A clearance certificate of tax demanded of taxpayers leaving Kenya.

16. Presumptive Tax

This is a tax levied and paid on incomes on the presumption that they have been earned when indeed they have not been realized, for instance section 17A of the Kenya Income Tax Act farmers are taxed before harvesting certain taxable crops they grow.

Presumptive tax is different from advance tax. Whereas presumptive tax is covered under S.17A of cap 470, advance tax is covered under S.12A of the same Act. Advance tax is a tax that has actually been earned, but the time for payment is expedited outside specified in the Act for reasons stated therein. For instance, a taxpayer about to leave Kenya would go to the commissioner of income tax to determine his tax liability ahead of the time the tax is to be determined. He would do this and then ask the taxpayer to pay the tax to obtain a tax clearance certificate. So tax has been collected ahead of the time of collection.

Under the income Tax Act (cap470) year of income commences from 1^st January and ends on 31^st December of that calendar year. So the income tax become payable from 31^st December of the calendar year, but taxpayers are given 3 more months within which to pay taxes. Advance tax would come before 31^st December.

Not all taxpayers operate within this tax year. There are others whose year of income runs differently from the year of the calendar. Advance tax would still apply. Those with a business year have also been given 3months within which to pay.

17. Indirect Tax, Direct Tax, Property Tax, Consumption, Inheritance Tax

All these relate to classification of taxes.

Direct taxes are taxes whose incidence falls o the taxpayers identified by the tax statute. So the taxpayer bears both the legal and economic incidence of the tax, i.e. incapable of being passed to another person.

Indirect taxes

Legal incidences falls on taxpayer identified by the law, but who is able to pass the economic incidence to another person who ends up paying the tax without realizing he is paying tax on behalf of somebody else through the mechanism of privacy of goods and services.

It is indirect because the person paying the tax does not realize he is paying a tax as what he confronts is a price fixation. As a policy of government at independence time, it adopted application of direct taxes as their bases were easier to identify and easier to administer, for example income for income tax, customs and excise duty for imported  and exported goods as services, licenses fees as charges on services rendered by the government, land rates for real property ownership.

The policy continued up to 1979 when the government felt that the economy was growing sufficiently to expand the tax base by going in for indirect tax. Hence, the introduction of sales tax which has mutated to Value Added Tax (VAT). Today, the emphasis in terms of reform is to go in for indirect taxes through certain techniques like calling some taxes levies and appropriations-in-aid and other charges.

Property tax is a tax on property. There are two types of property

a)       Real property (land rates)

b)      Intellectual property

Rates are levied on real property. There are two statutes governing land:

                             i.         Valuation for rating Act, cap 266

                            ii.         Rating Act, cap 267. 

According to these Acts, the property in question is the land wherever situated. There is cadastral available in urban areas. The information would provide the owner of the land, size of land, location and use to which the land has been put and value of land at any given time.

The Act can also be applied to land outside municipalities and county councils. Intellectual property on which incomes tax is levied. It is imposed on the royalties.

Capital gains tax is a tax imposed on gains made from the realization of capital as defined in a schedule to the income Tax Act, for instance the sale of shares at a profit. This tax has been suspended for along time, though it is contained in cap 470. The rationale is for the government to let Kenyans accumulate more capital.

                  Consumption tax is a tax devised and applied by the government on luxurious consumption of goods and services to discourage this luxurious consumption by adding the taxes to the prices of those goods and services to make them unaffordable so that people can divert their spending power away from such consumption into acquisition of basic needs, capital accumulation and saving. There is the excise duty which is part of chapters 477 of the laws of Kenya. The excise duty is levied on goods considered luxurious so as to discourage consumption of those goods and services, for instance bear, cigarettes, wines, spirits, false human products like hair (not teeth), etc, as per the customs and excise Act.

 This is akin to a tax called ant-social tax. The items on which an excise duty is imposed many not necessarily be contrary to public policy as morality. Anti-social taxes are imposed on goods or services the consumption of which is contrary to public policy as morality and therefore short of withholding of banning consumption of those goods, this tax is used to discourage their consumption

In Kenya, an example of any anti-social tax is the levy on `miraa’. 

18. Zero-Rating and Tax Exemption

These terms are associated with value Added Tax (V.A.T). zero-rating, under the VAT Act, cap 476 of the laws of Kenya, means goods or services which are taxed at a zero rate; whereas a tax exemption means goods and services which are not taxed at all.

Goods and services which are zero-rated are taxable, and the minister has power to apply a rate above zero.

19. Credit Imputation System

In taxation, credit imputation system means a system of taxation which gives credit to items which were earlier taxed even if at the end of tax year, those items must be added to the rest of the income of the taxpayer. For instance, if a divided is paid in June of a given year, it is taxed in that month. At the end of the year, this income must be added to the rest of the income of the taxpayer. For instance if a dividend is paid in June of a given year, it is taxed in that year, this income must be added to the rest of the income, it is taxed in that month. At the end of  the year this income must be added to the rest of the income of the taxpayer. This also goes for the interest earned in a bank account.

Where this system applies, even if the amount is added to the rest of the income at the end of the year, it will not be taxed. The taxpayer will enjoy credit on that account. Take pension, it is normally set aside from employment income during working tenure of the taxpayer. Salary out of which pension is set aside is taxed. Is the pension taxable on retirement or a credit is imputed?

In Kenya generally, the tax system does not apply a general tax imputation system, save on limited item of income pension is not one of them. In other jurisdiction, such as the UK and US credit imputation system is allowed generally. 

20. Transfer Pricing

This is a situation where, on a given contract between parties in different countries, one party who is in a stronger bargaining position, negotiates in such a way that he ends up paying less taxes on that contract than the other party. For instance, country A government places an order for 3 jumbo jets with a company in country B. the manufacturers arrange with the country to collect the plane in a low tax regime, for instance Australia, entering the contract place to be Australia. A clause is inserted in a contract that the purchaser would be responsible for all outgoings, incidentals, and all government levies. In these two arrangements, one where a deal is entered into in a country other than the country of manufacture, and a clause imposing levies means that the burden of paying government levies has been transferred to the purchaser and even if the vendor were to pay some levies, his incidence would be low for conducting the deal in a low tax regime.

 

 

Income Taxation in Kenya

The taxation of income properly began in 1937 in which the scientific concept of income and its taxation was introduced based on the South African and Indian experiences in income taxation.

However, prior to 1937, these was a sedimentary concept of taxation of income whish was put in place. The first taxes were introduced in Kenya in the year 1900. The prominent taxes introduced were some form of customs and exercise duties and a tax known as the hut tax.

Hut Tax

This was introduced in 1900 as a form of rudimentary income taxation applied on Africans only because among others, they did not have recognizable Income upon which a scientific notion of taxation would be imposed. Notwithstanding, they nonetheless earned something which had to be taxed to make Africans help run their country and establishment of civilization and establishment of responsible government.

The task force the British had sent to study the possibility of introducing taxation came up with a recommendation that the ownership of a hut was a symbol of wealth in Africa because in those huts a man kept his several wives and large families the management of which was evidence he had an income capacity. So the hut served as a base. When hut tax was introduced. The taxpayer paid tax on every hut he had in his homestead. This hut tax was paid in the Indian rupee because of the presence of Indian coolies here. The rate of the tax was flat, 3rupees per every hut.

The taxpayers were men. The tax was administered by the Governor office directly and by headmen at the village level reporting directly to the District Commissioner through the Chief. As soon as the tax was introduced, there was the problem of identifying the taxpayer. The British tried to issue receipts every time on African paid tax, but the African quickly lose the receipt and also one receipt could pass to all others. So in 1909, an identification card was introduced called Kipande and the ID read as, for example, Karanja s/o Kamau, then location.

In 1910, a task force was appointed to review application of this tax and one of its references, PIMIS Report, was to inquire into the financial resources of the tax, introduce women to the tax stream, making the rate progressive rather than flat. If women were introduced, should it be widows or just any general women?

Recommendation: the three forms of reference should be applied and women brought in whether widow or not. The tax rate should be progressive, i.e. the more huts a taxpayer had, the more tax he paid and vice versa.

To make the tax more financially productive, instead of reviewing the hut tax itself to make it productive, another simpler form of income tax be introduced, called poll tax. The colonial government accepted those changes, and in 1910 introduced poll tax.

POLL TAX

Tax base was an African person himself who was an adult regardless of gender. This was because he is the one who consumes government services benefiting from civilization and reform establishment of a responsible government. The currency was the Indian rupee. The rate of the hut tax was made progressive, but poll tax started as flat.

The administrator was the same as already mentioned, headman playing a large role of identifying taxpayers in his region.

It was necessary to establish a system of identifying adults in an African setting. So the first ordinance on the Age of Majority Ordinance under which the administrator were empowered to look at the apparent age to identify those who were to pay the taxes and also to look at the events which had taken place in a person’s life to determine his age qualification into some initiation system, for instance becoming a Moran and use any other native devices to determine the age of an African.

The Kipande system was still used to strengthen Receipting system and Africans were encouraged to keep these documents in a safe way, for instance putting in a string and hanging in the roof of a house. The one visible consequence of introducing these two taxes was the hardship to which the taxes subjected the Africans, for the Africans had to leave their homes to be employed to earn rupees to pay the taxes, leading to dislocation of the Africans from his nature setting to white farms. Secondly, the dehumanization of the African aroused the Africans political instinct and made them to begin to see certain injustices they were being subjected to.

Because of the cruel nature of the tax system, for instance default punished by caning or doing free community labour or confiscation of wealth (for example, cattle), the Africans formed Taxpayers Association through which they intended to seek redress of their grievances. Their spillover was the formation of some political groupings, for instance Kenya African Union (KAU) that led to the formation of Kenya’s early political parties (KAU later became KANU). Examples are Mwamboo Taxpayers Association, Kavilondo Taxpayers Association, Nyanza, and Nakuru. These associations went underground as the government sought to silence them

From 1910-1952, these taxes applied in that format, but with modification in rates and with a major change in the currency. In 1921, the Indian rupees dropped because the tree Governors of east Africa who were all British established a currency known as the East Africa shilling. The currency board that managed this was the East Africa currency board, the first central Bank in east Africa. It lasted until 1966 when the 3 countries split up from various common services to form separate central banks. The shilling then became territorial.

Between 1952 and 1963, at the advent of the 1960s, it became clear that the Africans were going to be politically independent and each governor started to prepare each country for the day of independence. With a lot of reluctance in Kenya, sir Evelyn Barring by an order in council 1961 introduced a tax called GPT with a view to it replacing the two taxes (Graduated Personal Tax)so that Africans would be peaceful. GPT was not applied till 1963 by the African government, but as a municipal authority tax till about 1970 and phased it out in 1973 but the African government in 1963 decided that the two taxes should become taxes for the local authorities, not for the central government to regulate and kill them in that way. The local authorities had no capacity to enforce these taxes and the central government never assisted the local authorities in enforcement. The headman’s role was reduced through the redefinition of a new system of provincial administration which did not recognize the headmen.

The first African government through various government measures discouraged the application of these two taxes but did not abolish on the statute book and they still remain as the taxes applied by local authorities especially county councils but the councils have no capacity to enforce them and so they too have abandoned these taxes. Siaya county council is one of the councils which actively tries to raise these taxes especially poll tax.

The scientific notion of income

Taxation; historical development

After about 3 failed attempts to introduce income taxation in Kenya, the final successful attempt was in 1937, a limited form of income taxation based on South African and Indian experiences.

The 1^st leg of was Income Tax Regulations,1937 which later after the 2 world war became the Income Tax Ordinance,1947 which applied upto 1948. In that year, the British governor decided;

a) Since the 3 territories of EA were now under the British

b) Since it would be simpler to apply a uniform taxation throughout

The regulations in the 3 countries were consolidated into the EA Income Tax (management) Act, 1948. Under this Act, the EA Income Tax management office was established and stationed in Nairobi. Similarly, a commissioner of income tax EA was mandated to apply, administer and collect income taxes from the 3 territories and put the same into one central fund.

However, given different economic capacities prevailing in the territories, each territory was allowed to determine the rate to apply reliefs and credit to give to taxpayers, deductions allowed and the question of settlement of disputes relating to income taxation.

This Act remained in force upto 1972 having undergone major changes in 1952 and 1955. By 1963, when Kenya was attaining independence, there was a lot of uneasiness on the part of Kenya government on administering taxes on an EA basis. Tanzania, having been a German colony, had not been brought up in the British tradition of record keeping and so a lot of discrepancies and these led to delays in processing of taxes and refunds due to the taxpayers. 72% of taxpayers were from Kenya and were inconvenienced in the collection of income taxes.

The period between 1963 and 1978 was the heaviest litigation in the history of income tax in Kenya prompting the need to have special law reports EA tax cases.2ndl, since the revenues collected were distributed on an indigent basis so as to bring up the EA territories to be equal to the one in front, Kenya in particular felt this was inequitable as it contributed more than 75%.

In 1973, a decision was taken to break up the EA Income Tax Management System (in 1972) so that each country could go it alone. They worked the modalities of disengagement throughout 1973 and on 1^st Jan, 1974, Kenya launched its own Income Tax Department as a department of its own treasury under its own commissioner and so launched its own Income Tax Act came into force on 1^st Jan, 1974 codified as Act 470.

Income taxation; general profile in Kenya

Applicable law is Cap 470, primary source of law on income taxation; case law learned opinion and other considered opinion from economists, philosophers, sociologists, etc.

According to this Act, this is the general scheme tax;

Part 2. Imposition of income tax. There are several subject matters ss. 3 and 12 A;

1)      The Act defines the income which is the subject of income taxation s.3, the charging section.

2)      The part tells us, broadly speaking we only charge income that has been earned in Kenya and not outside Kenya to attract the flow of capital into the country.

S.3(1) subject to and in accordance with this Act…which accrued in or was derived, whether by a resident or non-resident so income not earned as accrued in Kenya is not taxable. However S.3 Malaysia; subject and in accordance with this Act…so taxes are imposed on income wherever derived from.

In the U.S., S61 (a) Internal Revenue Code, changing section, except as otherwise provided, gross income means income of person from whatever source derived.

Malaysia and U.S. have a similar approach in identifying sources of income .i.e. the global definition of income tax.

The Kenyan approach is scheduler

 

3)after S.3 has given a general list of what tax,  the rest of the sections take over to give details of each one of the items from employment, we shall also tax income from employment and services rendered. S. 5 give details of section 3 (2) (a) (2) income from employment means…

Part 3 Exempt Income

After part 2 has listed taxable income part 3 lists income exempt from taxation ss.13 and 14 and first schedule to the A ct.

Does the government tax itself? The government of Kenya is not listed as a taxpayer, except to the extent it might surrender any one of its departments or operations to taxation. It does so through certain parastatals or certain operating units.

Should church or mosque incomes .i.e. religious income be exempted? Nigeria has introduced tax on religious income.

Part 4 ascertainment of total income

For purposes of taxation , section. 15-33 deals with this aspect.

Formulas

Total Income S.2, in relation to a person, the aggregate amount of his income, other than income exempt from tax under part 3, chargeable to tax under part 2 as ascertained under part 4

A=ALL INCOME EARNED BY THE TAXPAYER

B=EXEMPT INCOME

C=xxx -

Deductions

D=income subject to tax.

Then apply the appropriate rates to these amounts to obtain tax due, then subtract any reliefs and credits, what remains is the payable tax.

Relief is on the tax, not on the income and deductions are from income and deductions are from income.

Under part IV, there is the formula for calculating taxable income. When ascertaining income, do it in good faith, i.e. be honest 55 23 and 24 would apply in case of bad faith.

PART V. RELIEFS

Relate to individuals, not corporations which enjoy credits only one relief family relief.

PART VI: RATES, DEDCTIONS, SET –OFFS AND DOUBLE TAXATION RELIEFS 55 34 43

Rates are found in the third schedule to the Act.

Set – offs are generally forbidden in taxation, but S.39A a set – off

Double taxation relief is given under a double taxation agreement to save a taxpayer from being taxed on the same income twice because he works in one country and goes to another county. It is not fair and discourages international l dealings.

The agreement must specify what it is a relief on the entire income or it is on a specified portion thereof. For instance, it may say a divide or a royalty or rent or interest earned by a taxpayer in Kenya, shall be subject to relief and specify which county would tax the income and which to give double taxation relief.

S. 43 Person’s assessable income deals with who pays the tax. SS. 44-51 legal incidence of Tax.

Generally, the owners of income pay tax on it, but sometimes a person not an owner can be asked to pay tax on behalf of an income owner

S.45 the income of a wife, the payer is the husband, unless she opts to be assessed separately.

RETURNS, NOTICES AND ASSESSMENTS SS. 52-78

The concept of a return is a report prepared by the taxpayer himself, declaring total income as calculating the tax he thinks he should pay. The commissioner has the tools for verifying the correctness of the returns personal identification number (P.I.N) is one of the tools. Pin is a mirror system which is supposed to reflect and reveal to the commission transaction in which the taxpayer has entered into in the course of the income years, with a view to enabling him to see whether stated in the returns.

S.132 and 13^th schedule to the ACT specify transactions for which PIN is required, for instance building a new house, registering a company etc.

S.43 time limitation in taxation, more than 7 years from date of assessment of tax not payable V.A.T and income TAX specified, and in the absence of clear legislation, a file can opened at any time.

RULES OF CONSTRUCTING TAX STATUTES

The Acts of parliament which provides for taxing are a very special type of status in addition to the general rules of statute in addition to the general rules of statutory interpretation; they are subjected to additional and unique rules of interpretation.

1.       All taxes are contrary to natural justice these is therefore no room while construction to import rules of equity in order to do natural justice to the sate or tax pays (Tax case law report 1894 at 318). Which do we exclude rules of natural justice

Because taxation is an exaction (a force I taking) of something from a citizen or the peoples representatives have decided in parliament via a statute that there should be a tax that tax will be applied without regards to rules of natural justice. Thus, if children are caught by the stature, they must pay the tax. That is why in the stature there is no minimum age which a person must attain to pay tax. Even an insane person will pay it within the statute so will disabled and poor people. There are, however, exceptions regarding this apparent harshness.

A.      If the stature itself has conferred or the taxing authority the power to show remorse and to embrace the rules of natural justice, that will be done.  For instance, under most of Kenya’s tax statutes particularly income tax act and VAT Act, the relevant commissioners are allowed under certain circumstance to waive the assessment of taxes on taxpayers under those circumstances which the law states, for example.

                                  I.         If the taxpayer had genuine difficulties which made it impossible for him to pay taxes, the commissioner can waive and he has discretion to totally waive as call for it in subsequent year.

                                 II.         A nation may face a national catastrophe as strife or difficult condition which makes the government to conclude that it is not possible to raise revenue from the people for example following the war between Pakistan and India which dismembered Eastern Pakistan from Pakistan, the government concluded that it was impossible to collect revenue. Also, floods and earthquakes can lead to waives regionally or nationally.

                                III.         Sometimes the government may abstain from collecting taxes which are due as a way of economic incentives of that particular   period. This is common in the agriculture sector where farmers are given incentives.

                                IV.         Social justice requires that even tax statutes must take cognizance of social difficulties in society, for instance poverty and government as a policy always applied tax law with sensitivity to the poor which will be implemented by the tax threshold to exclude the poor as by impossible fair rate on the poor segments of the society is on this kind of policy of being mindful of the poor that the equity principles applied.

B.      There is no common laid applicable to taxation because taxation is a creature of statutory law (tax cases series 1897 Vol. 3 at 505)

C.      Whether a person is taxable or not is not a question of logic. It must always be a question of statute. The taxability of a person depends on the statutory provision.

 

2.       In order for a person to be taxed, there must be clear provisions in the statute saying so there is therefore no taxable no taxable by logic, implication, no taxation by inference. This rule was laid down in Ormond Investment Company Ltd V Betts ( H.MI) (1927-28) 13 T.C 400 (H/L. Lord Buckmaster “ the cardinal principle relating to Acts that impose taxation on the subject, a principle well known in law and ought not to be weakened namely, that impositions of a tax  must be in plain terms. No tax can be imposed on a subject without words in an Act of parliament clearly stating an intension to lay the burden on him. It is in that respect kindred to the creation of a penalty or establishment of a crime without statutory provision. The subject ought not to be involved in tax liabilities by an elaborate process of hair splitting arguments.

Also in the National provident institute V Graham (1918-2 4) 8 T.C 62 (H.C), Samoyet, l. J at 97 “ it’s a most wholesome rule that in taxing the subject, the crown must show that clear powers to tax were given by the legislature”.

Lord Atkhson in Brooks V commissioner of inland Revenue (1913-21 )7 T.C (A.C)  at 254 “ but this is a taxing statutes and taxes cannot be imposed upon the subject under it unless  in strict accordance with its provisions.

3.       It is not just enough that there are provisions in the stature taxing a person. Those words must be clearly and plain and should not be the subject of unnecessary arguments. The meaning of the relevant provision must be understood by minimum efforts. It should not be understood through an elaborate process of hair – splitting arguments just because the tax payer must be brought within the brackets not withstanding this point, tax statutes are one of the most difficult to understood. They tend to be cast so widely and focused so meticulously in order to cover all possible 100phdes so that the tax net can catch all conceivable taxpayers in order for revenue to be raised. The width of the focus of tax statutes is the source of litigation, for instance under the income tax Act, Cap 470 of the Laws of Kenya, by S.2 business is defined as follows: “business includes any trade, vocation. Manufacturing as an adventure as concern in the nature of trade”? The Act is trying to be broad and focused to catch as many forms of business as possible.

4.       Estoppel

Once the statute has provided for a given tax, the government cannot be presented from enforcing that tax unless the statute has been withdrawn by parliament, therefore, there is no principle of Estoppel against the government if matters of taxation, for example, a tax payer might have paid his taxes properly in 1992, but in 1995 the commissioners discovers some omission of a receipt he ought to have declared in 1992 is the commissioner precluded from reopening the matters? In the case of liberty & Co Ltd V C.J.R 12 T.C 630 (C.A), the cost announced firmly that Estoppel does not apply against the crown in matters of taxation and even if it appears that the state had acquiesced in the matters out which the matters have arisen, it cannot be Estopped from reopening the matters and determining a fresh Rowlatt, J at 639 said.

“No servant of the crown has authority in a case of service to create freehold of his by a promise on behalf of the crown when there is not one by law and no servant of the crown is entitled to lay down principles of law for the this future which will bind the parties”.

In William (inspector of taxes) V the trustees of WW Grundy (1931 – 34) 18 TC 271 at 278, Finlay, J “That there is no estoppels in these matters of taxation. Therefore accounts can be reopened to being in overlooked matters.

There is one exception, however sometimes the statute may put a time limitation on the reopening of taxpayer’s affairs, and in that event estopped. Under the income tax Act, it is 7 years courts have been reopening unwilling. They have said that the state must employ qualities officers in matters of taxation in order to spare the taxpayers the agony of reopening; they have also said that reopening must be sparingly done because it makes it difficult for business to operate.

In Bernhard V the C.I.R (1927 – 28)13 TC 723 (CA) Owlet, J at page 735 said, “I am bound to say that I feel a little uneasy about reopening of agreed income tax statements for a given years and bringing in things subsequent I call it reopening because the interest tax does not necessarily fellow the system of account or accounting keeping of the taxpayer approach. I am uneasy because it is to be hoped that reopening is not to be applied everyday because it would be very difficult to administer income tax as companies to administer their affairs.

Tax statures must therefore be interpreted strictly. The meaning of words in the statute must be plain.

 

 

PURPOSE OF TAXATION

REASONS ARE UNIVERSAL

1.       Raise revenue

This underlies most taxes. They are developed and applied by any government to raise money in Kenya for example; the finance minister budget proposals will always make reference to the amount of money he expects from each tax, i.e. income tax, VAT local authorities also raise funds via taxes through cherubs, property taxes, special taxes such as cess. In this respect, the ranking of tax in year of income is

Income tax

Customers and excise tax

V.A.T

It is hoped that in the course of time that if administration of tax improves then V.A.T will take the lead, followed by income tax and then customs and excise tax local authority  in pastoralist areas raise more from livestock sales while. Those in agricultural areas raise from licenses more than sale in overpopulation areas such as Kakamenga and Kisii, License, are cruel in revenue

This is the most important reasons

2.       The optimum allocation of resources

Taxes are levied for an equitable redistribution of income in a county even in market driven economies there are market driven economies, there are market failure, thus a situation where forces of supply and demand are unable to distribute equitably the wealth of a given country among people of regions. Taxes are a measure of intervention to revise taxes which are to be imposed the rich as better areas and to transfer these taxes to poor areas or sectors of the population.

The transfer of revenue is carefully carried out through a well designed system. For example income tax by imposing higher rates of income tax on the rich, money is realized from that exercise as collected revenue.

Then the government will spent the money on goods and services used by the poor. The government subsidizes these goods and services the government may also fully pay for goods and services accessed by the poor

When the government collects from the rich and then spending for the benefit of those without, that is called the option allocation.

3.       To clear market’ imperfections

Market forces can fail. Mechanisms of demand and supply may fail. There ought to be stability in the market. The government can intervene by imposing tax to reverse the tread for cheaper imports. This will affect demand and supplies, for instance, the imposition of customs and excise tax.

The government can intervene to combat inflation. Item price are high. If the prices of sugar are high because of the VAT, sometimes the government can reduce or remove the VAT.

The government can also use taxation to fight deflation. Tax may be used to control the consumption of certain goods for example, beer, cigarette etc. The government may impose tax on such a product.

4.       Combating or removing anti-social activity

These are a number of activities that are anti-social, for example; miraa; there is need to intervene because there is stigma. This also goes for cigarette and alcohol. Excise duty is levied on cigarette, beer etc.

5.       Taxes are used to implement government policies.

Every government comes up to office with an action plan, for example, the party in power may intend to reduce poverty or double agricultural production to enhance regional co-operation. The government thus turns to tax. Revenue raised will be used to implement its policies.

Classification of Taxes

There are many types of taxes for example; Income tax, VAT, Custom duty, Stamp duty, Licences, Fees, telecommunications tax etc.

Throughout the history of taxation, taxes have been classified as follows:

1.       Direct or Indirect taxes

This classification is based on the manner in which they are administered. Direct taxes are administered directly by the taxing authority on the taxpayer, for instance Income tax where the commissioner deals with commissioner directly. Fees and charges are also direct taxes.

Taxes are directly because of the manner in which the revenue is collected from the taxpayer. The commissioner identifies and then collects the revenue where the tax is direct, the legal incidence of the tax is also direct. Legal incidence means the burden of paying of the tax.

In indirect tax, the legal incidence is always direct, though the economic incidence may not be direct. The economic incidence is the actual monetary burden. If the taxes are indirect, the tax payer can pass the economic incidence to a third person. It is thus the buyer who is meeting both the legal and economic incidences.

2.       Progressive or Proportional/ Regressive and Degressive

This is based on the rates at which the taxes are imposed on the tax payer.

If the tax is progressive, for example Income tax, when the income is rising, the rates also rise. The proportion of progression need not be equal. Income can go up by 20% and the tax by 5%. This is still progressive.

Proportional means the income increases and the tax goes up by the same proportion, for example; income rises by 10% and so does tax goes down and vice versa.

Regressive means income increases and tax goes down and vice versa.

Degressive means the rates remain constant, notwithstanding the changes.

Requirements for Good Tax Structure: An Optimum Tax Structure

There are certain qualities:

1.       Revenue generation:

A good system must generate or be capable of generating revenues. Revenues as estimated must accordingly be generated. This revenue has its own measurements:

A)      The planned target must be reached if not surpassed in order for the tax system to be said to yield revenue optimally.

B)      The costs of collection must be minimum, for instance, salaries of staff, transportation and other incidentals, they ought not be enormous. The total cost must not exceed 1% of the collected tax. If it is more than 1% it is very costly.

2.       Equitable:

A good tax system should reflect social justice laws.

a)       Those with more abilities to pay should pay more than those with less and if possible, the very poor should be exempted. Each country has its own measurements of rich and poor. Ability is fixed by the tax threshold. Using its parameters a country will determine its tax threshold.

The burden of paying should be borne more by those with the money. Those with the par in income should be treated equally and this is called horizontal equity. Those at different levels should be treated differently .i.e. vertical equity.

b)      Concepts of benefit equity: this principle demands that those who gain more from government services than others should pay more than those who benefit less.

3.       Tax incidence

This is the monetary burden. Experts have said that a good system must have its incidence falling on the people the law identifies as taxpayers and not able to shift it. A tax which has the potential of shifting it to an identified person then that is not a good tax system.

4.       Taxes should promote economic development instead of shifting economic growth.

Property in the early 1980s was charged on sale or transfer. It was argued that there was no property to be taxed and taxing of property was discouraging the accumulation of property, and it was abolished in 1989. Sales Tax (Chapter 476 Laws of Kenya), the predecessor of VAT was said to be cumbersome hence it was abolished. Death Duty Act is a tax on inheritance. It was argued was argued that in the country there are very few people who inherit property. The annual budgetary system iron out the difficulties.

5.       Compliance Costs:

Experts have argued that a good tax system should not present to the taxpayer high compliance costs. If it is too, costly, the taxpayers will engage in evasion. Points of paying tax should be close. Kenya has been divided into various revenue offices. In Nairobi, we have Industrial Area, City Centre and others. Some taxes are collected in situ [natural setting], for instance, miraa’s availability, i.e. it is not in Kakamega hence one cannot seek to collect it there.

6.       Convenience

The taxpayer must have sufficient notice of the tax. This ought not to be arbitrariness.

The amount of tax he is going to pay should be known beforehand. This should be in notice. Income tax is based on self-assessment. The taxpayer first makes a declaration of his income and after the declaration his bracket of tax will be determined. Secondly, the state has to develop the mechanisms of discovery to ascertain the declaration. Thus, P.I.N was introduced as a tax collection and verification system. P.I.N assists the commissioner know if the taxpayer is declaring the collect amounts.

Kenya’s Tax Inventory

1.       Air passenger service charge is provided for the Air Passenger Services Charge Act (CAP 475, Laws of Kenya).

This is a tax paid by anybody using the air services by boarding a plane deporting form any airport in Kenya prior to the 1998 Finance Act, the passenger paid the tax at the point of departure. Kenyans were allowed to pay in local currencies while non-citizens were allowed to pay in dollars. The Finance Act 1998 changed the mode of payment through air ticket. The person who accounts to the government is the air ticket sales agent.

2.        Customs and excise duty:

This is a custom imposed on all imported goods and services except those exempt. These goods have been categorized in generic groups known as tariffs and each tariff has been given a number. Each particular good or service has a tariff number against which it is indicated the exact charge to be levied on the product or service, for instance dairy products 004.010.00so0 each product for instance cheese, etc. has a subtariff number.

Customs and Excise Duty Act (CAP 472 Laws of Kenya) make this applicable excise duty on the other hand, is a tax imposed on certain schedule as listed or identified from Kenya, for instance tea, coffee etc. customs deals with imports while excise deals with exports. These tariffs are very particular and caves a vast number of products. The World Trade Organisation prepared a list that has been inserted in the Act.

3.       Estate Duty Tax (Death Duty):

This is a tax on inheritance. It is based on the egalitarian principle that all people of a given generation should start life on equal footing. It is applied under the Estate Duty Tax (CAP 483 Laws of Kenya) which now has been suspended. It was for social justice. In this country however there is no property to be inherited. On the other hand, if one inherits substantial wealth, it will be taxed.

4.       Hotel Accommodation Tax:

It is governed by the Hotel Accommodation Tax Act. (CAP 478, Laws of Kenya.)

It is a tax paid for accommodation in hotel s. They are categorized hotels. This tax is levied in order to assist in the training of caterers at Utalii college.

5.       Income tax

This is a tax paid on incomes people earn. Income is defined by the Act for the purpose of taxation. This applied in virtue of Income Tax Act cap 470 laws of Kenya.

Income tax was introduced In Kenya in 1937 after 4 failed attempts. The model was South African mode of income taxation. It was introduction arguing that these was no income in the colony between 1937-1973 the tax was administered on an east African basis by a department known as the E.A Income Tax Management. The income Tax management Act 1955 is the one that managed the tax. The department was based in Nairobi. The income was redistributed on indigent basis to the East African countries. When the department broke up in 1973, Kenyan created its own department and law in 1973 which come into operation on 1^st January 1974, Income Tax Act, Cap 470 laws of Kenya. According to this Act income upon which tax is imposed has been defined.

Income tax as at 1937 was imposed on whites and Asians and Africans had no income to be subject to taxation. Thus the hut and poll tax was imposed on them. The hut tax was first tax to be introduced in 1900 and poll tax in 1910. Hut tax had as its base the hut. The Africans had no identifiable income. There was invariably a wife in every hut, a measure of wealth in the African context and Africans paid in rupees. It is the man who paid tax. In1910 the colonial government after research and survey argued that Africans had become richer and introduced the poll tax. The base was the person himself men above 18 years of age were the ones to pay in the Indian rupee. In 1923 there were major changes in the hut and poll tax by introducing women in the bracket. The local administration (chief and village headmen) administered this tax and accounted for the collected monies to the local authorities. Headmen were appointed from the village who knew the number of huts and persons within their village. Also before 1923 the rates applicable were that but in 1923 the rates were graduated so that a person paid more tax according to the number of huts or wealth.

These taxes applied up to the time of independence when the independence government abolished  hut tax  but improved the poll tax. In 1969 the poll tax was abolished for major urban councils like Nairobi Mombasa Eldoret  and Kisumu, the government replacing it it with grants by 1975 the African who was paying income tax under the Income Tax Act cap 470.

Under the act, income is defined in Sec 3( i.e the charging section) by indicating wat the income is. It defines income in two ways

       (a)Either it lists sources from which income taxable income comes from for employment or business or trade

        (b)Lists receipts which if they come into the hands a person then they will be taxable for instance royalties rent dividends etc

This section has been amplified in sec 4-14 anything not listed in that section is not taxable. Thus Kenya’s system of identifying what is taxable is called scheduler under s.3. The Kenyan income tax identifies income by making a list. In some countries the scheduler is not used and the global system is used instead, where the law says that anything that comes into the hands of a particular person which enhances that person’s economic standing shall be treated as income. Under Kenya’s system gifts, gain from gambling, tips, sweep stakes are they taxable? Look at sec 3.

(assessment)

This are merely methods of determining a taxpayer’s income he has earned in the year under investigation , and tax due its main features are:

·        Time:

Assessment comes after the end of the year of income. The year of income commences from 1^st January and ends 31^st December . Businesses are allowed to have their financial years different from others two to three months after the end of the year taxpayers must assess themselves and failure attracts interest on the tax due.

·        Method:

Assessment is done in writing through documents known as returns and a taxpayer can have one or more returns depending on his ability it is therefore possible to see a taxpayer with a provisional return on which he prepares and makes a provisional return of his income .He will still be expecting more income awaiting the return proper. Sometimes after submitting his returns the commission may look at the information and send their an additional returns for completion sec 73-81

·        Collection:

He will collect the income. The essence of the return is to declare to the commissioner that in the year in question his total income was that much less deductions entitled to by the law schedule 2 has those deductions listed.

If a person earns his income he will deduct family allowance insurance which subtractions may amount to 5 million from 20 million. The resulting 15million is the taxable income on which rates are applicable. The tax may amount to 1.8 million. Deductions are on the tax thus relief will be on deductions from 1.8m to say 1.5m

Who does the assessment?

Income tax is a tax where the assessment is done by the taxpayer and then declares his income to the commissioner. These is a lot of checking when a person assesses himself. Because of substantial lying the law has put in place verification mechanisms which the commissioner can employ to know who is lying. In the commissioner office there is the department of investigation which randomly investigates the tax payer’s assessment. Through that department the commissioner ascertains. There is the liaison department that liaises with various law enforcement agent s for instance court ministry of land and registry of companies

Personal identification number (PIN) which every taxpayer is required to have reveals to the commissioner the transactions a taxpayer has engaged in in the course of the year. These transactions are listed in schedule 13, for example any transaction involving registration of land or registration in the registry of lands. Such registration cannot occur unless the PIN is revealed. On receiving the PIN, the registry passes the information to the commissioners any legislation at the company registry ,Pin must also be revealed. If a person is registering a newly-formed business, he must reveal the PIN which the company registry or registrar of business names will pass such information to the commissioner. Any transaction with local Authorities, for example registration of a new water meters, PIN should be availed, payment of rates to for example Nairobi city council PIN should be revealed .The purpose of this is to show the commissioners the extent to which the taxpayers was involved in transactions in the course of the year to enable the commissioners to assess accurately the returns filed by the taxpayer. Mortgages and charges also require the PIN.PIN is the mirror process because it reflects the income of the taxpayer.

Collection and recovery of Taxes.

Collection is done from the taxpayer himself or sometimes agent. There is a time during which the collection is to be done and failure to collect on time leads to interest being charged, as under section 92.Through there is time within which tax is to be paid, there are situations where the commissioner can collect easily. Section 100 guarantees ship owners and captains, deceased Section 97 and persons leaving country Section 98.Collection is by direct demand from the taxpayer. If one fails, then a suit will be brought under section 101 and if it failure by distrait Section 102 or security from property section 103.There is no imprisonment or corporal punishment as a method of collection.

PAYE (Pay as you Earn)

This is a method of collection in respect of those in salaried employment. The person paying is required to retain the tax due.

Withholding

This is a method used by the commissioners in respect of certain  payments which are not salaries ,and the Act has indicated for example royalties ,dividend payment ,payment in the form of a return on capital ,for example for investment and any payment made to persons outside Kenya .Withholding means retain so much for tax.

6.       Fees, Licenses and charges

Various kinds of fees for instance court fees ,registration fees(for companies ,business names and transfer .These fees, charges and licenses are applicable in Kenya by virtue of public fees Act cap 424, and the charging section 152.The fees and licenses have been the primary source of tax income for local authorities .During the 1998/99 financial year, the government gave an indication that it was going to revert to funding of local Authority through grants and sharing of tax revenue collected by the central government. The government is rationalizing licenses, charges and fees so that any of them ultimately can be levied by the central government (public fees Act)Prior to 1993,there was a road tell ,it was imposed on Kenyans by virtue of public roads Toll Act, cap 407 laws of Kenya. This tax was imposed on those owning motor vehicles as defined under the Act and using designated public roads. It was collected at earmarked road points where road tell booths were built. This tax was abandoned in 1993 because it had a very substantial evasionary effect. It had wide chances of evasion. Avoidance is taking advantage of a tax loophole. Evasion is trying to defeat the payment of a legally imposed tax .People used to:-

A) Take the tours via other lanes

b) The staff in the booths printed their own receipts which they gave to genuine payers. If they did not give receipts they gave tips. Some complained that there were very many tolls  on some routes as opposed to others.

Traders in the rural areas use bicycles. In 1993, the toll was replaced by the road maintenance levy which came into existence via the road maintenance levy fund (amendment) Act No 9 of 1993 which was substantially amended in 1944 through the road maintenance Act No 3 ,1994.Gittes under the 1993 0r 1994 Act  the tax consists of a levy on petroleum fuel which the companies and any individual running petroleum business pays to the government and recoups from the customers . Anybody importing this fuel pays the levy. When fixing pump prices, he recovers whatever he paid. In the amending Act section 2 thereof, the petroleum fuel has been defined. Section 3 of the amending Act states that the minister shall impose via a Gazette Notice the tax. The minister in charge of transport will consult finance minister and then impose the tax. There are difficulties: erratic princes of the pump fuel because the minister keeps on charging the rates or the companies take advantage of the; levy by charging high princes per litre for their fuel.

8. Rates /property Rates

This is a tax paid for ownership of a certain properties in this country. The property in question is real property in urban areas such as land development or underdeveloped .Property rates are also imposed on agricultural land the rates can be imposed for ownership as value of land. Property rates whether in urban or rural areas strictly speaking is a tax for local authorities. In urban areas the municipal, town and urban councils are the ones that impose the rates. In rural areas it is the county councils that impose property rates on agricultural land. Due to technical difficulties of imposing rates on agricultural lands, most county councils don’t tax agricultural land. Its only a few with Wareng county leading the pack. They have a very developed collection system. To tax land one needs a cadastral information on centre, meaning that land has to be registered. Secondly, up to date registers have to be there to determine who the owner is cadastral information is to determine the size of the land, thus pascelization. Thirdly, there will be need to do a cadastral value of the soil so that a person pays tax according to the value of the soil he owns. Fourthly, there is the problem of the technical staff to undertake these studies. Thus, rural land isn’t taxable. Due to heavy concentration of population, its not possible to levy this tax.

These taxes are applicable in Kenya by virtue of the Rating Act, Cap 266. The Rating Act is the charging act. The valuation for Rating Act is the one that indicates the calculation of the tax applicable on the identified property.

9.       Second hand motor vehicle purchase tax:

This tax is payable on the purchase of a second hand motor vehicle. The registrar of motor vehicles is the administrator and collector, and so sale of second hand motor vehicles will be registered, unless this tax is paid and imposed by Cap 484(Second Hand Motor vehicles Purchase Tax Act)

10.     Telecommunications Tax: telecommunication services provided by the government as its agencies by virtue of Telecommunications Tax Act, Cap 473.

11.     Video tax: levied on video service provision.

12.     Refinery Throughput tax: charged by the refinery when it processes oil for others.

13.     Stamp Duty: imposed by Stamp Duty Act. It’s a duty imposed on various transactions scheduled in that Act, for instance registration of a company, a business entity, e.t.c.

14.     Prior to 1990, there was a Sale Tax which was replaced by Value Added Tax(VAT)

15.     Provisional Collection Of Taxes And Duties Tax, Cap 415. This Act doesn’t impose a tax its only an administrative act. During budget speech, the finance minister makes certain tax measures to become applicable immediately because parliament debates the budget. How can he constitutionally satisfy this measures? This act justifies and what it approves is only provisional since parliament must approve.

16.     Local manufacturers (Export Compensation) Act, Cap 482: this statute is administrative only and doesn’t introduce tax. There are certain products when exported attract excise duty under the Custom Excise Act. The government has developed a scheme of compensating exporters for the taxes they pay prior to exporting.

17.     Under Export Processing Zone Act, manufacturers do so on condition that they export these goods and services. To encourage investors the government extends too them tax holidays and incentives. A tax holiday is an exemption from paying tax for a given period in time. Under EPZ, a tax holiday may be for a period of ten.

VALUE ADDED TAX.

Though the state of Michigan in the US (1953) was the first to come up with something akin to VAT, the tax imaged in Europe in the 1960s. the modern form appeared in France in 1960,61, to introduce this tax to national level. They were followed by Denmark 1967, Germany 1968, Sweden 1969, Norway 1970, Britain 1972-73. Because o the E.U, they have been required to standardize their VAT rates as from 1986 (see International Bureau of Physical Documentation 1985 at 315-16.)

The tax now spread all over the world save for Japan. Asian tigers have adopted it. Japan tried to introduce it in its districts, but failed. Its there in Austrian New Zealand, Portugal. In Africa the tax is notable in South Africa, Tunisia, Nigeria and in the east African region. In east Africa Kenya was the first to introduce VAT in 1990. The actual statute was enacted in 1989 VAT Act, but came into effect on 1^st January 1990(Cap 476, laws Of Kenya). Tanzania introduced it in 1994, then Uganda 1995. The Uganda approach is the best in East Africa because they took time to study it: they took three years before introducing the tax. They wanted their own home grown statute. They set up a department in 1993 trained staff and traders on how to manage VAT requirements in Kenya to replace a tax called Sales Tax, which had operated from 1984 upto 1989 and had operated under Sales Tax Act, Cap 476whose codification was inherited by the VAT Act.

WHY THE CHANGE FROM SALES TAX TO VAT

Both sales and VAT and commercial transaction levy are related taxes. They are similar in many respects because

a)       They are taxes on commercial sales or transfers.

b)      They are taxes on consumptions as determined.

THE SALIENT DIFFERENCE

Commercial Transaction Levy (CTL) the simplest form of VAT which a country can apply when it doesn’t have a sophisticated tax administration system and a substantial commercial base. Prior to1995, Uganda was applying CTL, Rwanda and Burundi apply it. Sales Tax is the secondary stage like the CTL, the tax base for Sales Tax is the manufacturing of goods. Its easy to pick on the manufacturer because he can be physically located for imposition and collection; he can also be located through registration. Under the CTL, the manufacturers are few; under Sales Tax, there are more manufacturers.

VAT, on the other hand is the principle of this form of tax. It obtains in countries that have enhanced and sophisticated tax systems. Under VAT we talk of goods and services, unlike the other two where we talk of goods only. Whereas CTL and Sales Tax touch on goods locally manufactured, VAT applies on goods and services both locally manufactured and imported goods.

 

REASONS FOR VAT INTRODUCTION

1)      Administrative – the main reason why VAT was introduced was one of administration. It was very difficult to administer Sale Tax. The tax was imposed on the manufacturers and whenever he sold his goods, he was the one to impose the tax on the purchaser on behalf of the government, and at the end of the month he would remit to the government. He had to compile notes together with the money to the commissioner. The manufacturers complained that it was too involving and risky keeping the money. The invoice and all other returns were too involving. A good tax system should not have an undue burden on the taxpayer.

Secondly, where sales were done by credit, the manufacturers had to chase the purchaser to ensure that payment is within the month, lest he sends returns without the money. Many manufacturers found themselves in arrears collected, thus suffering penalties for non-remittance.

Thirdly, traders found that they will incur certain overhead costs in administering tax for the commissioner because they had to employ accountants to keep the books and purchase relevant stationery for keeping the records as required. They had to provide security for the money plus a police detachment. The commissioner allowed them to compute their own expenses for purposes of deducing from the revenue but were not allowed to withhold the fund they only allowed a refund. The commissioner was not good in keeping his promise for the refund, and the situation became worse when the government found itself in a financial mess some manufacturers closed down. It dawned on the government that this tax was not promotional but a burden.

2)       Sales Act has by nature a very narrow tax base. Under the law it was a tax imposed on the sale of manufactured goods. In most cases, there aren’t many manufacturers in this country. Those few manufacturers result into a small tax for the base.

Secondly, at any rate how could we determine the total number of manufacturers when their number is known by declaration? Some didn’t declare. Sale Tax didn’t apply on services i.e. only applied on goods.

Thirdly, there was a very wide latitude of tax evasion and also avoidance. The sale of a manufactured good is evidenced by an invoice and/or a purchase/sales receipt. In most cases the manufacturers agreed with the sellers not to issue receipts, thus there was sale without imposition of tax, thus evasion. A good number of manufacturers preferred to sale imported goods since the tax touched on local goods only, thus tax avoidance. The Kenya government found that ultimately because of narrowness, avoidance, evasion, and the government saw that the revenue generated did not meet the targets. There was a substantial shortfall between collected and estimated revenue and the government found that the tax was too costly to administer when it came to making records. They opted for VAT, in 1989 they enacted the law.

ADVANTAGES OF VAT OVER SALE OR CTL

The Kenya government preferred VAT because it is superior because of a wider tax base. It can be made to apply both goods and services, thereby expanding the tax base beyond the goods.

Secondly, the goods and services need not only be local, the tax can be levied on the imported goods and services.

A broader tax base means more revenue generation from VAT than Sales Tax. Sales Tax was imposed only on the manufacturers and manufactured goods. VAT is imposed not on the manufacturers, but the supplier of goods and services. The tax can be collected from the numerous supply points in the normal commercial transaction. The manufacturer selling to the wholesaler who in turn sells to the retailer thus increasing the number of supply points? Section 2 of the VAT Act defines supply as to include:

Ø  Sale, supply or delivery of taxable goods to another person

Ø  The sale or provision of taxable services to another person

Ø  The appropriation by a registered person of taxable goods or services as for his own use outside his business

Ø  The making of a gift on any taxable goods or services

Ø  The letting of taxable goods on hire, leasing or other transfers

Ø  The provision of taxable services by a contractor to himself in constructing a building and related civil engineering works for his own use or renting.

Ø  Any other provision of services or disposal of taxable goods.

There are many transactions which businesses conduct © above relates to notional sale, a sale where the seller and the purchaser are one and the same. There are certain things if done will be considered. For example; appropriation of taxable service for personal use, for example an advocate drafting his own instrument of transfer, a doctor treating his own children, an accountant preparing his own annual accounts.

B.) the word provision means that the services are free in: a) supply or delivery this relates to the credit system where goods may be delivered for free. (D) one will pay tax not considering the gift stated. (G) is meant to cast a wider tax net. The constitution requires explicitly, while this is not explicit (g) is to be read ejusdem jeneris in terms of a-f.

WHAT IS TAXABLE UNDER V.A.T?

Section 5 indicates what is vat able “a tax to be known as V.A.T shall be charged on a value of goods and services…”. V.A.T thus applies to goods and services supplied in this country, and also to goods imported in Kenya. It may also apply to anything that the minister may decide to be vat able. V.A.T in broad language thus falls on any supply on goods and services locally.

However, in order for the goods and services to be taxed, the following must be considered and taken into account according to section 5:

Ø  The service or goods must obtain/ occur in Kenya. It must not be a good or service obtained from another country. Action of supply must take place locally in Kenya.

Ø  It must be a supply as defined by section 2

Ø  To guide taxpayers so as to know what actually vat able is, the act has taken a number of guiding steps. According to section 6, supply6 in addition to section 2must be a supply undertaken by a taxable person. It must be a supply undertaken in the course of the furtherance of any business carried by that person. According to section 2 this business out of which is vatable includes any trade or manufacture.

The act gives an indication that the goods or services should be those that have been specified in the first schedule of the act as those which have been specified in a Ministerial Gazette Notice. The services will be those that are not included in the first schedule.

 

THE FIRST SCHEDULE

The schedule indicates the rate of V.A.T to be imposed on the goods which are listed in that schedule. These rates have been in the first instance specified by section  6 (2) and the schedule states that the rate shall be 15% [ now 16%], but in part 2, it states that the rate is 10%. This schedule has listed goods and imposed rates on taxable value. The schedule is detailed. This schedule was prepared by WTO in Geneva. Section 6 gives the minister power to increase list if anything is left out in the schedule. Even if section 6 states that tax shall be charged on any supply of goods or services, it is only those goods listed in the schedule and ministerial list that are taxed. Since it is important that the rate of taxable goods be known, it follows that the goods must be known.

 In Kenya Revenue Authority V K.C.C, K.C.C have a product called MALA, when the act was made operational, the government refrained from imposing tax on MALA because it had been introduced for poor construction workers thus it would be too costly for them. In 1997, the government purported that K.C.C had not been declaring V.A.T; it ought to pay from 1990 [when V.A.T act came into force]. In the schedule, the milk is either exempted as zero rated (obtain court order)

In the preparation of this list in the first schedule, the goods must always be identified by the Universal Tasitt Numbers prepared by the W.T.O. These numbers are three bits, i.e. Carrots 760.101.00; the reason why there are zeroes at the end is that in case of discovery of another (carrot), then it can be expanded. It is very comprehensive and includes any conceivable goods.

a.)      It covers on goods that are edible

b.)      All goods that are not food.

It includes a category of medicine; it also includes a portion of photographic materials, oil, computer hardware; oils include petroleum, clothing, beauty and medical products, glasses, artificial limbs, artificial body parts, all manner of drinks and beverages. The tax however does not apply on exempted goods. Section 2 defines exempt supplies as supply of goods specified in the second schedule as services not specified in the second schedule.

SECOND SCHEDULE

A number of foods have been exempt, prominently in the foods various forms of milk and fish and vegetables have been specifically mentioned and so are fruits, beverages, sugar, alcohols and spirits have been exempt for certain purposes; a number of machinery exempt for certain helicopters not exceeding 2000 kg, certain motor vehicles.

FOURTH SCHEDULE

The act excludes another set of goods from taxation, which are in 4^th schedule provided for under S.2 (1) for designated goods. S.2 states that there are certain goods classified as either designated or undesignated. Goods which are designated are taxable while those undesignated are non- taxable. The schedule says that the goods listed in chapter 1-21 of the first schedule to Customs and Excise Act   are undesignated. Taxable goods do not include goods which are exempt or undesignated.

SERVICES

Section 5 states that V.A.T is applicable on supply of goods and services. Section 6 (1) states that tax will be charged on goods or services. The act further indicates that services are taxable. Third schedule indicates taxable services. Services not taxable are not included. It has accounting services including auditing, provision of reports et al in management, public relations, actuarial services (evaluation of risk). Any legal service and any service connected therewith services by architects, services by consultant engineers, any agency service, services by secretarial specialists; mail and parcel services; services in the form of advertisement, et al.

SCHEDULE EXCEMPTING GOODS AND SERVICES (8^TH).

There are certain goods or services which shall be exempt by being zero rated when provided by certain persons or institutions. Zero rating means that the thing is taxable, but the rate is zero because at any time the minister can increase the rate without going to parliament for approval. Public bodies and institutions exempt are:

ü  All goods for use by the president

ü  All goods for official use by the defence forces

ü  All imported goods for common wealth

ü  Goods for official use by specialized agencies, diplomatic service, etc

On first arrival in Kenya, what diplomats bring along is zero rated. Aid agencies like World Vision Action Aid; household or personal items including motor vehicles brought by employees of those agencies.

ü  All goods used by British council

ü  Goods for charities

ü  goods for physically handicapped

ü  educational material for the blind

ü  president’s award scheme

ü  Armed Forces Canteen Organization (AFCO) is zero rated

ü  Supplies to the agricultural society of Kenya, AMREF, Museum, vehicles for mps save for buses

ü  Returning diplomats from abroad who went to represent Kenya

ü  Agha Khan Development Network

ü  Deceased’s personal effects

Zero rating is a form of exemption but is different from normal exemption in that the minister can freely increase the rate unlike the other exemptions for which the minister require parliamentary approval.