TAXATION

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 INTRODUCTION TO TAXATION
What is tax?
It is a compulsory payment by a tax payer to the state through the revenue authority without
involving a direct repayment of goods and services in return i.e. there is no direct reward.
TAXATION
It is the part of public finance that deals with the means by which the government raises
revenue from the public by imposing taxes which revenue is used by the government to provide
goods and services to the citizens. Taxation may be referred to as the revenue raising activity of
the government.
Public finance is the department of economic theory that deals with public expenditure and
revenue.
 INTRODUCTION TO TAXATION

 TAXING AUTHORITY
 This is the authority with the power to impose tax e.g. the national government or the county
government.
 The taxes are received as public revenue. The taxing authority has power to enforce payment of
tax. The national government imposes tax through the KRA.
 TAX PAYER
 The person or the entity that pays tax e.g. individuals or companies
 OTHER SOURCES OF GOVERNMENT FUNDS
1. Fines imposed on offenders by courts
2. Fees charged by government institutions for service rendered
3. profits from government companies/parastatals
4. Dividends from government shareholdings in private companies
5. Renting and selling government properties
6. Borrowing internally and externally
 TYPES OF TAXES

1. Income tax
Income tax is charged for each year of income, upon all the income of a person whether resident or
non resident, which is accrued in or was derived from Kenya.
Income tax is imposed on
Business income form any trade or profession
Employment income
Rent income
Dividend and interest
Pension income
Income from a digital marketplace
Natural resource income among others
 TYPES OF TAXES
2. Rental income tax
 This is tax charged on rental income received from renting out property. Its is levied at 7.5% of gross rent
received.
3. Customs duty
 Tax levied on goods imported into the country e.g. Motor vehicles, spare parts, textile, machinery etc.
4. Excise duty
 Tax levied on locally manufactured goods. E.g. beer, leather goods, cigarettes e.t.c.
5. Corporation tax.
 Tax levied on profits made by a body corporates e.g. Companies, banks, insurance companies, co-
operative societies etc. Resident companies - 30% (25% from May 2020) and Non Resident companies
– 37.5%.
6. Value added tax (VAT)
 Tax levied on the value added to the price of goods and services supplied locally or imported in Kenya.
 VAT is applicable to businesses whose annual turnover exceeds Sh.5 million. The rate of VAT is 16%
but for fuel and oils it is 8%.
 METHODS OF COLLECTING INCOME TAX
 There are different methods of collecting income tax from companies and patnrships,based
on their sources of income. They include:
 Corporation tax-
 This is a form of income tax that is levied on corporate bodies such as limited companies,
trusts and co-operatives, on their annual income.
 Companies that are based outside Kenya but operate in Kenya or have a branch in Kenya pay
corporation tax on income accrued within Kenya only.
METHODS OF COLLECTING INCOME
TAX
 Pay as you earn(PAYE)
 This is a method of collecting tax at source from individuals in gainful employment.
The tax is calculated on graduated rates of tax and personal relief is granted to arrive
at the net tax payable.
 For purposes of computing PAYE, an employer is required to apply the Individual
Income Tax Rates (Bands) that range from 10% to 35% as per Finance Act 2023 as
tabulated below (effective 1st July 2023);
METHODS OF COLLECTING
INCOME TAX(PAYE)
 Taxable Employment Income
 Taxable employment income includes, all cash payments however described and the
value of non-cash benefits (exceeding Ksh 3,000 per month).
 Cash pay includes; wages, salary, sick pay, leave pay, fees, commissions, bonuses,
service gratuity, allowances, director’s fees, overtime, pension, entertainment and
any other payments received in respect of employment
 Any excess mileage reimbursement to employee based on the rates that are higher
than AA Kenya rates will be taxable on the employee. Effective 1st July 2023.
 Club entrance and subscription fees shall be treated as taxable income to the extent
that the expense has been allowed against the employer’s income.
 Charged on both Residents and Non-Residents
 1Tax Accounted for by Employers Only
METHODS OF COLLECTING INCOME
TAX(PAYE)
METHODS OF COLLECTING INCOME
TAX(PAYE-ILLUSTRATION)
 Job is a high school teacher. His gross salary is as follows
 Basic salary=sh 86,000 per month
 Transport allowance =sh 16000 per month
 Overtime allowance =sh 13870
 Required:
 Calculate jobs income tax per month
METHODS OF COLLECTING INCOME
TAX(PAYE)
Solution
Monthly income Tax rate Amount
0-24,000 10% 10%*2400= 2400
24,000-32333 25% (32333-24000)*25%=2058.25

32334-115870 30% (115870-32334)*30%=25060.8

Total tax liability (2400+2058+2506.8)=29519.05

less personal relief (2400)
Net tax liability (29519.05-2400)=27119.05
METHODS OF COLLECTING INCOME
TAX
 Withholding tax(WHT)-this is a tax that is deductible from certain
classes of income at the point of making a payment, to non -
employees
 WHT is deducted at source from the following sources of income:
 Interest
 Dividends
 Royalties
 Management or professional fee
 Commissions
 Pensions
 TAX CREDITS
 Tax credits in Kenya are deductions allowed by the Kenya Revenue Authority (KRA) to reduce an individual’s or
a company’s tax liability. They are typically provided to incentivize specific activities or to avoid double
taxation. Below are the common types of tax credits available in Kenya:
 1. Foreign Tax Credit
• Applies to Kenyan residents who have income from foreign sources.
• Ensures that taxpayers do not pay taxes on the same income in both Kenya and the foreign country.
• The credit is limited to the lesser of the foreign tax paid or the Kenyan tax payable on the same income.
 2. Investment Tax Credit
• Incentives are offered for specific investments, particularly in sectors targeted for growth.
• Examples include manufacturing, renewable energy, and other capital-intensive industries.
• May come in the form of allowances rather than direct credits (e.g., investment deductions or wear and tear
allowances).
 3. Withholding Tax Credits
• Taxes withheld at the source of income (e.g., dividends, interest, royalties) can be offset against the final tax
payable.
• The withholding tax serves as an advance tax payment, reducing the final tax obligation.
 TAX CREDITS

 4. Donations and Charitable Contributions

 Tax deductions or credits may be available for donations to qualifying charitable organizations,
provided they are registered under the Kenyan law and meet KRA requirements.
 5. Personal Relief (for Individuals)
 While not a direct credit, personal relief is an amount granted to individuals to reduce their income tax
liability.
 The standard personal relief as of 2023 was Ksh 2,400 per month or Ksh 28,800 annually.
 6. Corporate Incentives
 Companies in Export Processing Zones (EPZs) and Special Economic Zones (SEZs) may enjoy tax
credits and other benefits, such as reduced corporate tax rates, to stimulate exports and investments.
 Claiming Tax Credits
 Taxpayers must file claims during their annual or monthly tax returns, depending on the type of credit.
 Proper documentation is crucial to substantiate claims, such as receipts for withheld taxes, certificates
of donation, or proof of foreign taxes paid.
 CANONS OR PRINCIPLES OF TAXATION
An optimum tax system is the one which will satisfy most of the canons of taxation Mr Adams Smith was the first
economist to state what an optimum tax system should fulfil. According to him an optimum tax system should fulfil four
principles of taxation. i.e.
1. Canon of equity
 Every person should pay tax according to his ability and not the same amounts. Tax should be paid in proportion
to ones income. The rich should be made to pay more taxes than the poor .
2. Canon of economy
 Collection of tax by the state should be economical i.e. the cost of collecting tax should not exceed revenue
generated. The tax should also be economical to taxpayers. I.e. they should have sufficient money left with them.
 A very heavy tax will discourage investments and savings and hence will adversely affect productivity of
economy.
3. Canon of certainty
 The tax which every individual is bound to pay ought to be certain and not arbitrary. Certainty also means that the
government should be certain about the amount of revenue expected and the time when the revenue is expected to
flow into government account
 The time of payment , mode of payment and quantity to be paid ought to be clear and plain to the taxpayer and
any other person.
 CANONS OR PRINCIPLES OF TAXATION

4. Canon of convenience
 Tax ought to be levied at the time or in the manner in which its
most likely to be convenient for the taxpayer to pay. E.g.
Payment of VAT and customs duty by the consumer is
convenient because one pays when he has the means to buy the
goods and the tax is included in the price of goods.
 CANONS OR PRINCIPLES OF
TAXATION
 Other economists have expounded on the main cannons and have included the
following:
1. Canon of simplicity.
 A good tax system should be so simple to an ordinary person. The forms to be used, mode of payment and computation should be simple so that a taxpayer
can not need the assistance of tax experts in handling tax matters.
2. Canon of flexibility
 There should be no rigidity in taxation. Tax provisions, rules and regulations should be easily amended, adjusted or discarded to meet the revenue
requirement of the state and taxpayers.

3. Canon of elasticity or buoyancy.

 The government should be able to reduce or raise the tax rates whenever the need arises.

4. Canon of productivity.
 A good tax system should raise substantial amount of revenue to the government. A tax system whose yield is not substantial should be discarded to reduce
unnecessary number of taxes.

5. Canon of Diversity
 A single or a few taxes cannot meet the revenue requirement of state nor satisfy the canon of equity. There should be a variety of taxes so that all citizens can
contribute to the states revenue according to their ability to pay. There should be a variety of taxes, direct and indirect taxes but a large multiplicity of taxes
 Purposes of taxation/why the government levy taxes .

1. To raise revenue i.e. tax is the major source of revenue to the government.
2. To protect local industries – heavy taxes are imposed on goods which are
imported and they are found in plenty in Kenya, they are substandard or luxurious
goods.
3. To protect the health of citizens – heavy taxes are imposed on goods
which are considered to be harmful to the citizens’ health e.g. beer, cigarettes, wines
and spirits, cosmetics etc.
4. As a fair means of distributing wealth – tax is said to rob the rich to pay
the poor i.e. persons with higher incomes pay more taxes than those with lower
incomes.
5. To stabilize the economy – During inflation the rates of tax are raised in order to
discourage spending and therefore reduce the amount of money in circulation during
deflation tax rates are lowered to encourage to spending and therefore increase the
amount of money in circulation.
 Purposes of taxation/why the government levy taxes .

6. .To encourage exportation hence generation of foreign currency. This occurs through EPZ
regions. i.e.
 They are exempted from corporation tax for the 1st 10 years. From the 11th year to the 20th year
they pay corporation tax at a lower rate of 25%.
 Their imports of raw materials and machinery are fully exempted from custom duty.
 Their sales are zero rated hence they can claim total input tax paid on purchases.
7. To encourage development of industries.
This is through claiming of capital allowances. Capital allowances are deducted in arriving at taxable
income and therefore they reduce the tax payable by the business.
8. To encourage investment. This occurs through
 .For qualifying dividends withholding tax at the rate of 5% is final. These are dividends received
from Ltd. Co’s, quoted companies and saccos.
 .For qualifying interest withholding tax at the rate of 5% is final tax. This interest received by
individuals from financial institutions, treasury bills and bonds and saccos.
 TAX AVOIDANCE

TAX AVOIDANCE

This is a legal/professional way of reducing ones tax burden. A tax payer uses the tax regime provided by the
government and using lawful means capitalizes on the loop holes provided in the tax provisions to reduce his tax liability.
There are no penalties for tax avoidance.

 Ways of tax avoidance

1. By investing in areas where income received is fully exempted from tax e.g. interest from post office saving bank,
interest & dividends arising from outside Kenya.
2. By investing in areas where income received is taxed at withholding tax which is final e.g. qualifying dividends and
interests.
3. By investing in marketable securities where profit made from their sale is not taxable. i.e. capital gains
4. By claiming reliefs and allowances e.g. mortgage relief, pension relief, capital allowances etc.
 TAX EVASION

TAX EVASION


It is an illegal means of reducing ones tax burden. It occurs through.
a. Claim of expenses one is not entitled to. E.g. Private expenses under business
income.
b. Under declaration of taxable income
c. Non-declaration of taxable income
 Reasons for tax evasion are:
1. High tax rates
2. Corruption
3. Complex tax systems
4. Lack of publicity of tax matters

 COSTS OF TAXATION

 These are incidental costs of taxation

 Include
1. Discourage saving when part of income is paid to government
2. Discourage investments when investors are taxed
3. Shifting investment to other countries where taxes are less
4. Discourage people from working hard if part of income is taken
5. Cost of compliance
6. Can cause inflation
 Filling tax returns

 Filing tax returns in Kenya is a legal requirement for individuals and businesses. It is
overseen by the Kenya Revenue Authority (KRA) and is done primarily through the iTax
platform. The steps to follow in filling the returns include
1. Determine the Type of Return to File
 There are several types of tax returns, depending on the taxpayer category:
• Individual Returns: For individuals earning employment income, business income, or
any other taxable income.
• Corporate Returns: For registered companies and partnerships.
• Nil Returns: For individuals or entities with no taxable income during the financial
year.
• Value Added Tax (VAT) Returns: For businesses registered for VAT.
• Pay As You Earn (PAYE) Returns: For employers deducting and remitting employee
taxes.
 Filling tax returns
2. Register on iTax
 Create an account on the KRA iTax platform if you don’t already have one.
 Ensure your account details are up-to-date, including your email and phone number.
3. Gather Required Documents
 Depending on the type of return, you may need:
 P9 Form: For employed individuals, provided by the employer.
 Business Records: For business income, such as financial statements.
 Withholding Tax Certificates: If taxes have been withheld on income.
 VAT Invoices: For VAT returns.
 Any other relevant documentation showing income and allowable expenses.
 Filling tax returns
4. Log in to iTax
 Visit the iTax portal ([Link]
 Enter your PIN and password to access your account.
5. File the Return
 Choose the relevant tax return form on iTax:
 For individuals: "Income Tax – Resident Individual Form."
 For companies: "Income Tax – Company Return."
 For nil returns: "Nil Return Form."
 Fill out the form with accurate details.
 Declare all sources of income and claim allowable deductions or reliefs.
 Attach supporting documents if required.
 Validate and submit the return.
 Filling tax returns

6. Pay Taxes (If Any)

 If the return indicates tax payable, generate a Payment Slip on iTax.
 Pay using one of the approved methods:
 Mobile money platforms (e.g., M-Pesa).
 Bank transfer or deposit.

7. Obtain a Confirmation Receipt

 After filing, iTax generates an Acknowledgement Receipt as proof of
submission. Keep this for your records.
 Filling tax returns
1. Key Deadlines
 Individual Tax Returns: Due annually by 30th June.
 Monthly Returns (e.g., PAYE, VAT): Due by the 20th of the following month.
2. Penalties for Non-Compliance
 Failing to file or filing late can attract penalties:
 Individual returns: Ksh 2,000 or 5% of the tax due, whichever is higher.
 Corporate returns: Ksh 20,000 or 5% of the tax due, whichever is highe
 END

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