TAXATION AND PUBLIC
FINANCE
CPA ERICK MOMANYI 0729224223
, TAXATION
Tax- is a compulsory contribution made by persons to the state for the purpose of meeting its
expenses for a common course.
Characteristics of tax.
1. It’s compulsory.
2. The is imposition of fines and penalties for non-payment of tax.
3. There is no direct reward in payment of tax. (quid pro quo) i.e. something for something.
4. It robs the rich and rewards the poor.
5. Tax is imposed where there is an income.
PURPOSE OF TAXATION
1. Raising public revenue to meet public expenditure for a common cause.
2. Protection of the health of citizens. Heavy taxes are imposed on goods that are considered to be
harmful to the health of citizens if consumed in large quantities such as beer and cigarettes.
3. Protection of local industries. Heavy taxes are imposed on imported goods which are substandard or
goods that are available locally in plenty.
4. 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.
Export processing zones (EPZ). These are designated areas where the industries located are granted
attractive tax incentives in exchange of exporting manufactured goods e.g.
- Corporation tax is not payable during the first ten years of operation.
- Corporation tax is payable at a rate of 25% from the 11th to 20th year of operation.
5. To encourage savings for retirement.
6. Encouragement of citizens to acquire residential property The interest paid on a loan acquired to
purchase a residential house which is owner occupied is allowable deduction from income up to a
maximum of sh. 300,000 per annum.
7. Taxes are used to stabilize the economy. During inflation i.e. when price levels increase due to
increased demand, taxes are levied heavily in order to reduce the money in circulation. During deflation
when activities in the economy are low, taxes may also be reduced to improve demand, increase
economic activity and employment in the economy.
8. Redistribution of income Persons with more income i.e. for both individuals and companies are taxed
more than those with lower incomes and the revenue collected is used to develop all the under-
developed areas.
9. To encourage the development of industries. Capital expenditure incurred on purchase of machinery
and factory buildings is allowed as a deduction referred to as investment deduction.
CPA ERICK MOMANYI 0729224223 pg. 1
, TYPES OF TAXES
a). Major taxes
Income tax- This is the tax imposed on income derived by individuals.
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 etc.
corporation tax -Is the tax levied on incomes earned by body corporates. It is charged at the rate of 30%
for resident corporates and 37.5% for non-resident corporates.
b). Pseudo/sub taxes
1. Petroleum levy- This is the tax that is imposed on the prices of petroleum products. The revenue
collected is used to maintain roads in the country.
2. Airport tax- This is the tax imposed on air tickets through various airlines. The amounts collected are
used to improve or maintain airport facilities such as the run-ways.
3. Stamp duty- It is imposed by the government on the transfer of properties and on certain instruments
or legal documents. The purpose of stamp duty is to ensure that the transactions are legalized.
The following items are chargeable to stamp duty.
Agreement e.g., partnership deed.
Hire purchase agreement.
Bills of exchange and promissory note.
MOA
AOA
Conveyance
Marketable securities.
Insurance policies.
Lease agreement.
Instrument exempted from stamp duty.
Acknowledgement of debt (trust deed)
Adoption deed.
Affidavit and statutory declaration.
Award certificate.
Delivery note.
Instrument of divorce.
Birth certificate
Marriage certificate
CPA ERICK MOMANYI 0729224223 pg. 2
, Death certificate
Letter of allotment of shares.
4. Catering levy- This is a tax imposed by the government on services and food supplied in certain
hotels. The amounts collected from catering levy are used to improve tourism industry e.g. maintaining
of institutions offering courses in hospitality such as Utalii College.
5. 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
Any income which is subjected to a final withholding tax
c). LOCAL AUTHORITY LEVIES(LAL)
1. Rates- These are charged by local authorities on property owners e.g. land and buildings within the
local authority.
2. Cess- This is the levy imposed by the rural local authorities on certain products such as sand, stones
etc. found in a specific place. The amounts collected are used to develop roads, hospitals, schools and
provision of water within the local authorities.
d). STATUTORY DEDUCTIONS
These are mandatory deductions made from employees’ salaries and wages by the employers who remit
the amounts deducted. Statutory deductions include:
P.A.Y.E- It is a statutory duty of all employers to deduct income tax from the wages or salaries paid to the
employees.
NATIONAL SOCIAL SECURITY FUND (NSSF)- The contributions are at 12% of the monthly employee's
pensionable pay, with 6% deducted from the employee and 6% contributed by the employer.
NATIONAL HOSPITAL INSURANCE FUND (NHIF)- This is a statutory deduction made under the National
Hospital Insurance Act. The Act requires every employee to contribute some amount per month towards
this fund.
PRINCIPLES OF AN OPTIMAL TAX SYSTEM
These refer to the rules or standards established by economic scholars for an optimal tax system. The
principles guide the formulation of tax systems by the government. Adam smith was the first economic
scholar to state four principles of taxation. Other economic scholars proposed 5 additional principles.
CPA ERICK MOMANYI 0729224223 pg. 3
FINANCE
CPA ERICK MOMANYI 0729224223
, TAXATION
Tax- is a compulsory contribution made by persons to the state for the purpose of meeting its
expenses for a common course.
Characteristics of tax.
1. It’s compulsory.
2. The is imposition of fines and penalties for non-payment of tax.
3. There is no direct reward in payment of tax. (quid pro quo) i.e. something for something.
4. It robs the rich and rewards the poor.
5. Tax is imposed where there is an income.
PURPOSE OF TAXATION
1. Raising public revenue to meet public expenditure for a common cause.
2. Protection of the health of citizens. Heavy taxes are imposed on goods that are considered to be
harmful to the health of citizens if consumed in large quantities such as beer and cigarettes.
3. Protection of local industries. Heavy taxes are imposed on imported goods which are substandard or
goods that are available locally in plenty.
4. 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.
Export processing zones (EPZ). These are designated areas where the industries located are granted
attractive tax incentives in exchange of exporting manufactured goods e.g.
- Corporation tax is not payable during the first ten years of operation.
- Corporation tax is payable at a rate of 25% from the 11th to 20th year of operation.
5. To encourage savings for retirement.
6. Encouragement of citizens to acquire residential property The interest paid on a loan acquired to
purchase a residential house which is owner occupied is allowable deduction from income up to a
maximum of sh. 300,000 per annum.
7. Taxes are used to stabilize the economy. During inflation i.e. when price levels increase due to
increased demand, taxes are levied heavily in order to reduce the money in circulation. During deflation
when activities in the economy are low, taxes may also be reduced to improve demand, increase
economic activity and employment in the economy.
8. Redistribution of income Persons with more income i.e. for both individuals and companies are taxed
more than those with lower incomes and the revenue collected is used to develop all the under-
developed areas.
9. To encourage the development of industries. Capital expenditure incurred on purchase of machinery
and factory buildings is allowed as a deduction referred to as investment deduction.
CPA ERICK MOMANYI 0729224223 pg. 1
, TYPES OF TAXES
a). Major taxes
Income tax- This is the tax imposed on income derived by individuals.
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 etc.
corporation tax -Is the tax levied on incomes earned by body corporates. It is charged at the rate of 30%
for resident corporates and 37.5% for non-resident corporates.
b). Pseudo/sub taxes
1. Petroleum levy- This is the tax that is imposed on the prices of petroleum products. The revenue
collected is used to maintain roads in the country.
2. Airport tax- This is the tax imposed on air tickets through various airlines. The amounts collected are
used to improve or maintain airport facilities such as the run-ways.
3. Stamp duty- It is imposed by the government on the transfer of properties and on certain instruments
or legal documents. The purpose of stamp duty is to ensure that the transactions are legalized.
The following items are chargeable to stamp duty.
Agreement e.g., partnership deed.
Hire purchase agreement.
Bills of exchange and promissory note.
MOA
AOA
Conveyance
Marketable securities.
Insurance policies.
Lease agreement.
Instrument exempted from stamp duty.
Acknowledgement of debt (trust deed)
Adoption deed.
Affidavit and statutory declaration.
Award certificate.
Delivery note.
Instrument of divorce.
Birth certificate
Marriage certificate
CPA ERICK MOMANYI 0729224223 pg. 2
, Death certificate
Letter of allotment of shares.
4. Catering levy- This is a tax imposed by the government on services and food supplied in certain
hotels. The amounts collected from catering levy are used to improve tourism industry e.g. maintaining
of institutions offering courses in hospitality such as Utalii College.
5. 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
Any income which is subjected to a final withholding tax
c). LOCAL AUTHORITY LEVIES(LAL)
1. Rates- These are charged by local authorities on property owners e.g. land and buildings within the
local authority.
2. Cess- This is the levy imposed by the rural local authorities on certain products such as sand, stones
etc. found in a specific place. The amounts collected are used to develop roads, hospitals, schools and
provision of water within the local authorities.
d). STATUTORY DEDUCTIONS
These are mandatory deductions made from employees’ salaries and wages by the employers who remit
the amounts deducted. Statutory deductions include:
P.A.Y.E- It is a statutory duty of all employers to deduct income tax from the wages or salaries paid to the
employees.
NATIONAL SOCIAL SECURITY FUND (NSSF)- The contributions are at 12% of the monthly employee's
pensionable pay, with 6% deducted from the employee and 6% contributed by the employer.
NATIONAL HOSPITAL INSURANCE FUND (NHIF)- This is a statutory deduction made under the National
Hospital Insurance Act. The Act requires every employee to contribute some amount per month towards
this fund.
PRINCIPLES OF AN OPTIMAL TAX SYSTEM
These refer to the rules or standards established by economic scholars for an optimal tax system. The
principles guide the formulation of tax systems by the government. Adam smith was the first economic
scholar to state four principles of taxation. Other economic scholars proposed 5 additional principles.
CPA ERICK MOMANYI 0729224223 pg. 3
