TAXATION
Taxation is the process of imposing compulsory contribution on the private sector to meet
the expenses which are incurred for a common good.
Functions or Purposes of Taxation
The functions of taxation can be discussed from the activities of the government it is meant to
achieve.
These are:
a. Raise revenue
The revenue is required to pay for the goods and services which the government provides.
These goods are of two types – public and merit goods. Public goods, such as defence and
police are consumed collectively and no one can be prevented from enjoying them if he
wishes to do so. These goods have to be provided by governments. Merit goods, such as
education and medical care, could be, and often are, provided privately but not necessarily
in the amounts considered socially desirable and hence governments may subsidize the
production of certain goods. This may be done for a variety of reasons but mainly because
the market may not reflect the real costs and benefits of the production of a good. Thus, the
public may be subsidized because the market does not take account of all the costs and
benefits of the public transport system.
b. Economic stability
These are imposed to maintain economic stability in the country. During inflation, the
government imposes more taxes in order to discourage the unnecessary expenditure of the
individuals. During deflation, taxes are reduced in order to enable the individuals to
spend more money. In this way, the increase or decrease helps to check the big fluctuations
in the prices and maintain economic stability.
c. Fair redistribution of income
A major function of taxation is to bring about some redistribution of income. First, tax
revenue provides the lower income groups with benefits in cash and kind. Second, the
higher income groups, through a system of progressive taxation, pay a higher proportion of
their income in tax than the less well-off members of the society
d. Pay interest on National debt
Taxes are also levied by the government to pay interest on national debt.
e. Optimum allocation of resources
Taxes are also imposed to allocate resources of the country for optimum use of these
resources. The amounts collected by the Government from taxes are spent on more
productive projects. It means the resources are allocated to achieve the maximum possible
output in the given circumstances.
f. Protection policy
Taxes are also imposed to give protection to those commodities which are produced in the
country. The government thus imposes heavy taxes on the import of such commodities from
the other countries. In the view of these taxes, the individuals are induced to buy local
products.
, g. Social welfare
The government imposes taxes on the production of those commodities which are harmful to
human health e.g. excise duty on wines, cigarettes, etc.
h. Encourage exportation and hence the generation of foreign currency e.g. Exports are zero
rated for VAT purposes, i.e. VAT paid on purchases used for processing exports is refundable.
TYPES OF TAXES
Income tax-This is the tax imposed on income derived by individuals, (i.e. Pay as You
Earn) and businesses (i.e. Corporation Tax).
Value Added Tax (VAT)-This is the tax imposed on goods and services supplied in
Kenya and goods and services imported into Kenya.
Excise duty- This is tax imposed on locally manufactured goods such as textiles, shoes
wines and spirits.
Custom duty-This is tax imposed on imported goods such as machinery, cars,
Electronics e.t.c.
Rates-These are charged by local authorities on property owners e.g. land and buildings
within the local authority.
Cess- This is the levy imposed by the rural local authorities on certain products such as
sand, stones etc. The amounts collected are used to develop roads, hospitals, schools
and provision of water within the local authorities.
Presumptive tax
This is tax that is levied on farm produce at the rate of 2%. Such produce include wheat,
tea, coffee, maize e.t.c
Withholding tax-This is tax deducted at source i.e. income is paid net of withholding
tax e.g. incase of dividends withholding tax is 5% of income received.
Advance tax- It is charged in advance on commercial vehicles before granting road
licenses. Commercial vehicles include Lorries, vans, matatus, pickups
Turnover Tax- Turnover tax was introduced with effect from 1 January 2007 for
businesses with a turnover of less than Sh. 5 Million p.a., but exceeding sh. 500,000 p.a.
The applicable rate is 3% of the gross receipts of the business.
Turnover Tax shall not apply to:
Rental income and management or professional or training fees;
The income of incorporated companies; and
Any income which is subjected to a final withholding tax
Canons/Principles of Taxation
One of the easiest and most convenient way of making up for the ever increasing public
expenditures in Kenya and elsewhere is through taxation. Therefore, government of every
country should ensure an equitable, efficient and effective tax system. However, the
following principles guide a good tax system.
Universality: In line with the principle of universality, the tax laws should ensure that
there are no exemptions except in certain classes of income.
Certainty: The amount to pay in tax must be determined with certainty as well as
the time of payment. There should be no ambiguity. The time, how much to pay and
where to pay should be made clear to the tax payer.
Taxation is the process of imposing compulsory contribution on the private sector to meet
the expenses which are incurred for a common good.
Functions or Purposes of Taxation
The functions of taxation can be discussed from the activities of the government it is meant to
achieve.
These are:
a. Raise revenue
The revenue is required to pay for the goods and services which the government provides.
These goods are of two types – public and merit goods. Public goods, such as defence and
police are consumed collectively and no one can be prevented from enjoying them if he
wishes to do so. These goods have to be provided by governments. Merit goods, such as
education and medical care, could be, and often are, provided privately but not necessarily
in the amounts considered socially desirable and hence governments may subsidize the
production of certain goods. This may be done for a variety of reasons but mainly because
the market may not reflect the real costs and benefits of the production of a good. Thus, the
public may be subsidized because the market does not take account of all the costs and
benefits of the public transport system.
b. Economic stability
These are imposed to maintain economic stability in the country. During inflation, the
government imposes more taxes in order to discourage the unnecessary expenditure of the
individuals. During deflation, taxes are reduced in order to enable the individuals to
spend more money. In this way, the increase or decrease helps to check the big fluctuations
in the prices and maintain economic stability.
c. Fair redistribution of income
A major function of taxation is to bring about some redistribution of income. First, tax
revenue provides the lower income groups with benefits in cash and kind. Second, the
higher income groups, through a system of progressive taxation, pay a higher proportion of
their income in tax than the less well-off members of the society
d. Pay interest on National debt
Taxes are also levied by the government to pay interest on national debt.
e. Optimum allocation of resources
Taxes are also imposed to allocate resources of the country for optimum use of these
resources. The amounts collected by the Government from taxes are spent on more
productive projects. It means the resources are allocated to achieve the maximum possible
output in the given circumstances.
f. Protection policy
Taxes are also imposed to give protection to those commodities which are produced in the
country. The government thus imposes heavy taxes on the import of such commodities from
the other countries. In the view of these taxes, the individuals are induced to buy local
products.
, g. Social welfare
The government imposes taxes on the production of those commodities which are harmful to
human health e.g. excise duty on wines, cigarettes, etc.
h. Encourage exportation and hence the generation of foreign currency e.g. Exports are zero
rated for VAT purposes, i.e. VAT paid on purchases used for processing exports is refundable.
TYPES OF TAXES
Income tax-This is the tax imposed on income derived by individuals, (i.e. Pay as You
Earn) and businesses (i.e. Corporation Tax).
Value Added Tax (VAT)-This is the tax imposed on goods and services supplied in
Kenya and goods and services imported into Kenya.
Excise duty- This is tax imposed on locally manufactured goods such as textiles, shoes
wines and spirits.
Custom duty-This is tax imposed on imported goods such as machinery, cars,
Electronics e.t.c.
Rates-These are charged by local authorities on property owners e.g. land and buildings
within the local authority.
Cess- This is the levy imposed by the rural local authorities on certain products such as
sand, stones etc. The amounts collected are used to develop roads, hospitals, schools
and provision of water within the local authorities.
Presumptive tax
This is tax that is levied on farm produce at the rate of 2%. Such produce include wheat,
tea, coffee, maize e.t.c
Withholding tax-This is tax deducted at source i.e. income is paid net of withholding
tax e.g. incase of dividends withholding tax is 5% of income received.
Advance tax- It is charged in advance on commercial vehicles before granting road
licenses. Commercial vehicles include Lorries, vans, matatus, pickups
Turnover Tax- Turnover tax was introduced with effect from 1 January 2007 for
businesses with a turnover of less than Sh. 5 Million p.a., but exceeding sh. 500,000 p.a.
The applicable rate is 3% of the gross receipts of the business.
Turnover Tax shall not apply to:
Rental income and management or professional or training fees;
The income of incorporated companies; and
Any income which is subjected to a final withholding tax
Canons/Principles of Taxation
One of the easiest and most convenient way of making up for the ever increasing public
expenditures in Kenya and elsewhere is through taxation. Therefore, government of every
country should ensure an equitable, efficient and effective tax system. However, the
following principles guide a good tax system.
Universality: In line with the principle of universality, the tax laws should ensure that
there are no exemptions except in certain classes of income.
Certainty: The amount to pay in tax must be determined with certainty as well as
the time of payment. There should be no ambiguity. The time, how much to pay and
where to pay should be made clear to the tax payer.
