PUBLIC FINANCE AND TAXATION

STUDY TEXT

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CONTENT

1. Introductions to public financial management

- Nature and Scope of Public Finance
- General overview of public financial management as envisaged by the constitution
- Responsibility of National and County Treasuries
- Overview of the public financial management Act
- Financial regulations
- Treasury circulars; meaning and application
- Process of developing county government finance bills
- Role of budget officers in budget preparation and execution
- Responsibilities of the national and county treasuries in relation to budget preparation
- Budget process for both national, county and public entities

2. Establishment of public funds in the public sector

- Provision of establishing public funds
- Rationale of creation of public funds
- The consolidated fund
- The establishment and administration of contingency funds
- The establishment and administration of equalization funds
- County revenue sources

4. Supply chain management in public entities

- Definition and terminologies
- General overview of Public Procurement and Disposal (PPD) Act
- Procurement guidelines as envisaged by PPD Act
- Committees responsible for procurement
- Procurement process by National, County and other Public entities
- Tendering process and selection of suppliers in public sector
- Concept of E-procurement

5. Oversight function in public finance management

- The role of National Assembly
- The role of senate
- The role of county assembly
- The role of auditor general
- The role of Internal Audit
- Role of controller of budget in relation to disbursement of public funds as envisaged

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 by the constitution and PFM Act, 2012

6. Introduction to taxation
- History of taxation
- Principles of an optimal tax system
- Single versus multiple tax systems
- Classification of taxes and tax rates
- Impact incidence and tax shifting, Lax shifting theories
- Taxable capacity
- Budgetary and fiscal policy tools.: General definition of budgets terms ,Budget surplus
and deficits
- Role of budget officers in budget preparation and execution
- Responsibilities of the national and county treasury in relation to budget preparation
- Budget process for both national, county and Public entities
- Revenue Authority — History, structure and mandate

7. Taxation of income of persons Taxable and non taxable persons

- Sources of taxable incomes
- Employment income;
 Taxable and non taxable benefits
 Allowable and non allowable deductions
 Tax credits (Withholding tax, personal and insurance relief etc)
 Pension Income
- Business income:
 Sole proprietorship
 Partnerships (excluding conversions)
 incorporated entities (excluding specialised institutions)
 Turnover tax
- Income from use of property- rent and royalties
- Farming income
- Investment income
- Capital gains tax

8. Capital deductions
- Rationale for capital deductions
- Investment deductions: ordinary manufacturers

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 - Industrial building deductions
- Wear and tear allowances
- Farm works deductions
- Mining allowance
- Shipping investment deduction
- Other deductions
9. Administration of income tax
- Overview of the income tax act
- Identification of new tax payers
- Assessments and returns
- Operations of PAYE systems: Preparation of PAYE returns, categories of employees
- Notices, objections, appeals and relief of mistake A
- Appellant bodies
- Collection, recovery and refund of taxes
- Offences, fines, penalties and interest
- Application of ICT in taxation: iTaxi Simba system

10. Administration of value added tax

- Introduction and development of VAT
- Registration and deregistration of businesses for VAT
- Taxable and non taxable supplies Privileged persons and institutions
- VAT rates
- VAT records
- Value for VAT, tax point
- Accounting for VAT
- VAT returns
- Remission, rebate and refund of VAT
- Rights and obligations of VAT registered person
- Offences fines, penalties and interest
- Enforcement
- Objection and appeals: Requirements and procedure
- Challenges in administration of VAT

11. Customs taxes and excise taxes

- Customs procedure
- import and export duties
- Prohibitions and restriction measures

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 - Transit goods and bond securities
- Excisable goods and services
- Purposes of customs and excise duties
- Goods subject to customs control
- Import declaration form, pre-shipment inspection, clean report of findings
- Other revenue sources
6.12 Emerging issues and trends

TOPIC PAGE

Topic 1: Introduction to public financial management ……………….………............6

Topic 2: Establishment of public funds in the public sector……………………….….…..30
Topic 3: Supply chain management in public entities………………………….….……...46
Topic 4: Oversight function in public finance management…………………..….……….65
Topic 5: Introduction to taxation….……………………………………………..…….….71
Topic 6: Taxation of income of persons………………..……………………………..….109
Topic 7: Capital deductions………………………….…….………………….…..…..….168
Topic 8: Administration of income tax………………..………………………..…..…….195
Topic 9: Administration of value added………………….……………………….……...221
Topic 10: Customs taxes and excise taxes…………………………….……….………….255

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Table of Contents

Chapter One

1. INTRODUCTION TO PUBLIC FINANCIAL MANAGEMENT ..........................2

1.1. Nature and Scope of Public Finance ........................................................................ 2

1.2. General Overview of Public Financial Management as Envisaged by the

Constitution ............................................................................................................................. 5

1.3. Role of the National and County Treasuries ........................................................ 15

1.4. Overview of the Public Financial Management Act ........................................... 18

1.5. Financial Regulations ............................................................................................... 25

1.6. Treasury Circulars; Meaning and Application .................................................... 26

1.7. Process of Developing National and County Government Finance Bills ........ 28

1.8. Role of Budget Officers in Budget Preparation and Execution ......................... 28

1.9. Responsibilities of the National and County Treasuries in Relation to Budget

Preparation ............................................................................................................................ 30

1.10. Budget Process for Both National, County and Public Entities......................... 32

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1. INTRODUCTION TO PUBLIC FINANCIAL

MANAGEMENT

1.1. Nature and Scope of Public Finance

What is Public Finance?
The word public refers to general people and the word finance means resources. So

public finance means resources of the masses, how they are collected and utilized.

Different economists have defined public finance differently. Some of the definitions

are given below.

1. According to prof. Dalton public finance is one of those subjects that lie on the

border lie between economics and politics. He says, “Public finance is

concerned with the income and expenditure of public authorities, and with the

adjustment of the one to the other.“

2. According to Adam Smith “public finance is an investigation into the nature

and principles of the state revenue and expenditure”

3. According to Findlay Shirras “Public finance is the study of principles

underlying the spending and raising of funds by public authorities”.

4. According to H.L Lutz “Public finance deals with the provision, custody and

disbursement of resources needed for conduct of public or government

function.”

Thus, Public Finance is seen as a branch of economics which studies

income and expenditure of government.

The discipline of public finance describes and analyses government services, subsidies

and welfare payments, and the methods by which the expenditures to these ends are

covered through taxation, borrowing, foreign aid and the creation of money.

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Nature of Public Finance

Public finance is a science as well as an art. Science is the systematic study of any

subject which studies relationship between facts while, In the words of J.N. Keynes,

”Art is the application of knowledge for achieving definite objectives.”

It is a science because we study in it the various principles, problems and policies

underlying the spending and raising of funds by the public authorities. It teaches how

to collect taxes in the best way and how to maintain them economically and how to

spend them properly.

Carl Copping Plehn (January 20, 1867 – July 21, 1945) an American economist and a

professor of public finance at the University of California, Berkeley, from 1893 to 1937

advanced the following arguments in favour of public finance being science:

One. Public finance is not a complete knowledge about human rather it is

concerned with definite and limited field of human knowledge.

Two. Public finance is a systematic study of the facts and principles relating

to government revenue and expenditure.

Three. Scientific methods are used to study public finance.

Four. Principles of public finance are empirical.

As an art, public finance enables the concerned personnel to adopt the principles and

policies in solving the financial problems of the Government in the best possible way

to the maximum benefit of the society. The way to be adopted should be logical,

suitable and proper according to the time. Application of various principles and

policies depends much on the ability of the personnel in the Government how best he

can extract from it in the public interest.

Public finance is therefore, both a science and an art. This can either be;

1) Positive science, as well as

2) Normative science.

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It is a positive science as by the study of public finance factual information about the

problems of government’s revenue and expenditure can be known. It also offers

suggestions in this respect.

It is also normative science as study of public finance presents norms or standards of

the government’s financial operations . It reveals what should be the quantum of

taxes, kind of taxes and on what items less of public expenditure can be incurred.

Scope of Public Finance

Public finance as a subject, which studies the income and expenditure of the

government, it’s scope may be summarised in five (5) broad ways as follows:

1. Public Revenue

2. Public Expenditure

3. Public Debt

4. Financial Administration

5. Economic Stabilization

1. Public Revenue: Public revenue concentrates on the methods of raising public

revenue, the principles of taxation and its problems. It further studies the classification

of various resources of public revenue into taxes, fees and assessment etc.

2. Public Expenditure: This part studies the fundamental principles that govern the

flow of Government funds into various streams.

3. Public Debt: This section is concerned with, the problem of raising loans. The loan

raised by the government in a particular year is the part of public revenue.

4. Financial Administration: This refers to the organisation and administration of the

financial mechanism of the Government by relevant Government machinery.

5. Economic Stabilization: This part describes the various economic policies and

other measures of the government to bring about economic stability in the country.

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The subject-matter of public finance is not static, but dynamic. As the economic and

social responsibilities of the state are increasing day by day, the methods and

techniques of raising public income, public expenditure and public borrowings are

also changing.

1.2. General Overview of Public Financial Management

as Envisaged by the Constitution

Public Finance is covered under chapter twelve of the constitution of Kenya, 2010

which came into effect on the 27th of August 2010 after almost two decades of constant

pushes for a new constitutional dispensation and one failed referendum held in 2005.

Chapter twelve sets out the general principles that apply to all public money with

emphasis on accountability and public participation in decision making on how such

money is used. It is divided into seven (7) distinct functional parts as follows: -

Part I — Principles & Framework of Public Finance

Part 2 — Other Public Funds

Part 3 — Revenue-Raising Powers and the Public Debt

Part 4 — Revenue Allocation

Part 5 — Budgets and Spending

Part 6 — Control of Public Money

Part 7 — Financial Officers and Institutions

Part I — Principles & Framework of Public Finance

A. Principles of public finance

Article 201 outlines the principles that guides aspects of public finance as : —

1) Openness & accountability, including public participation in financial matters

2) Equitable Public finance system

a. Sharing of burden of taxation fairly;

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b. Sharing of revenue raised equitably among national & county

governments; and

c. Equitable development of the country.

3) Equitable sharing between present & future generations the burdens & benefits

of use of resources & public borrowing;

4) Prudent & responsible Use of public money; and

5) Responsible financial management & clear fiscal reporting.

B. Equitable sharing of national revenue

Article 203 details the conditions taken into account in determining equitable share of

national Revenue from national to county government

i) National interest

ii) Public debt

iii) Needs of the national government

iv) Need to ensure county governments can perform tasks required of them

v) Fiscal capacity of county governments

vi) Developmental needs of the counties

vii) Economic disparities in the counties

viii)Affirmative action in respect of disadvantaged areas and people

ix) Stability and predictability in allocation of revenue

x) Flexibility in responding to emergencies

Every fiscal year the minimum revenue allocated to county governments will be 15%

of revenues collected by national government.

C. Equalization Fund.

Article 204 establishes this Fund and 0.5% of all revenues collected in each fiscal year

by the National government is paid into the fund.

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• This fund is used to provide basic services namely water, roads, health and

electricity to marginalized areas raising these services to levels enjoyed by the

rest of the country.

• The national government may only use this fund as approved by an

appropriation bill in parliament and through grants to counties in which

marginalized communities exist.

• Money not used in any fiscal year is carried forward for use in subsequent

years.

• NO funds can be withdrawn from the Fund without the Controller of Budget’s

approval.

Article 204 clause 6 envisages, that this fund will be required for 20 years after which

the provisions made lapse. However, parliament may extend the longevity of the

article if necessary.

Part 2 — Other Public Funds

Other than the equalization fund under Article 205, the other three (3) funds

established by Chapter twelve of the constitution are : —

1. Consolidated fund

2. Revenue fund

3. Contingency fund

1. Consolidated Fund

All monies and revenue raised by the national government other than that which is

excluded by an act of parliament is paid into the Consolidated fund. Money from this

fund can only be withdrawn

• In accordance with an appropriation act by parliament

• As a charge authorised by the Constitution or act of parliament

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Money cannot be withdrawn unless the controller of budget has approved the

withdrawal.

2. Revenue Fund

There is a revenue fund for each county government into which all county revenues

are paid.

Money may only be withdrawn from the revenue fund as provided for by an act of

parliament or county assembly legislation.

Money cannot be withdrawn unless the controller of budget has approved the

withdrawal.

3. Contingency Fund

The use of this fund is for unforeseen and urgent expenditure and its operation is in

accordance with act of parliament.

Part 3 — Revenue-Raising Powers and the Public Debt

A. Power to impose taxes and charges

According to article 209 of the constitution, Only the national government has powers

to impose : —

o Income tax;
o Value-added tax (VAT);
o Customs duties and other duties on import and export goods; and
o Excise tax.

An Act of Parliament may authorise the national government to impose any other tax

or duty, except those specified above

Article 209 of the constitution further gives County governments authority to impose

the following : —

o Property rates;
o Entertainment taxes; and
o any other tax that it is authorized to impose by an Act of Parliament.

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National & County governments have powers to impose charges for the services they

provide in a manner that doesn’t prejudice national economic policies, economic

activities across county boundaries or the national mobility of goods, services, capital

or labour.

B. Imposition of Tax

No tax or licensing fee can be imposed, waived or varied without legislation and

waived taxes must be have a public record together with reason for waiver and the

auditor general must be notified of the waiver.

No law excludes or authorizes the exclusion of a State officer from payment of tax by

reason of—

– Office held; or
– Nature of the work.

C. Borrowing by national government

Parliament prescribes terms on which national government borrows and imposes

reporting requirements.

The cabinet secretary responsible for finance must report to either house of parliament

within 7 days of request with full details of any loan or guarantee.

D. Borrowing by county government

County governments can only borrow if the loan is guaranteed by national

government and approved by county assembly.

E. Loan guarantees by national government

Parliament determines the terms under which national government may guarantee

loans and at the end of each financial year national government must report on the

guarantees provided in that financial year.

F. Public debt

Public debt is any charge on the consolidated fund.

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Part 4 — Revenue Allocation

i) Commission on revenue allocation

Article 215 of the Constitution establishes the CRA & its composition. The commission

on revenue allocation is appointed by the president and consists of:

• A chairperson approved by parliament

• Two members nominated by political parties represented in the national

assembly according to their proportion of members.

• Five members nominated by political parties represented in the senate

according to their proportion of members.

• Principal Secretary in the ministry of finance

Functions of the Commission on revenue allocation

1. Article 216 specifies the principal function of the CRA as to recommend the basis

of equitable sharing of revenue between the national and county governments and

among the county governments. In formulating those recommendations, the

commission MUST seek to promote the conditions under article 203 – see above.

2. CRA also determines, publishes and regularly reviews policies in which it sets out

the criteria by which to identify the marginalized areas for purposes of Article 204

(2).

3. Recommendations are submitted to senate, national assembly, national executive,

county assembly and county executives.

ii) Division of revenue

The Senate by resolution determines the basis for allocating national revenue amongst

the counties and must be endorsed by the national assembly before approval.

Revenue raised nationally will be shared between National and County governments

and among county governments as follows;

Total revenue raised = 100%

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(a) National Government < 84.5 %

(b) 47 County Governments >15 %

(c) Equalization fund = 0.5 %

The >15% revenue sharable among the 47 county governments will be shared using

the formula approved by parliament. see below:

iii) Annual Division and Allocation of Revenue Bills

At least 2 months before the end of each financial year :

(a) A division of revenue bill will be introduced in parliament to divide national

revenue between national and county governments

(b) A County Allocation Of revenue bill will be introduced to allocate amongst

county governments the monies allocated to county government.

A county’s share of revenue will be transferred without undue delay or deduction.

Part 5 — Budgets and Spending

(a) Form, content and timing of budgets

Budgets of national and county governments must contain :

• Estimates of revenue and expenditure – differentiating between recurrent and

development expenditure

• Proposals for deficit financing

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• Proposals for borrowing and increase in public debt

National legislation must prescribe :

• Structure of development plans

• Timing of budgets

• Form of consultation between governments in the process of preparing the

budgets

(b) Budget Estimates and annual Appropriation bill

At least 2 months before the end of each financial year Cabinet Secretary responsible

for finance submits to parliament estimates for revenue and expenditure of the

national government for the next financial year.

After consideration these estimates are included in an Appropriation bill to authorise

the expenditure from the Consolidated Fund.

(c) Expenditure before annual budget is passed

If the appropriation bill is delayed, national assembly may nevertheless authorise

withdrawal of money from the consolidated fund if the money is to carry on the

services of national government until the delay is resolved and does not exceed 50%

of the expenditure estimate for the year.

(d) Supplementary Appropriation

The national government may spend money that has not been appropriated if the

money appropriated is insufficient or a need for expenditure for which no money has

been appropriated has arisen

Approval for supplementary appropriation will be sought from parliament within

two months after the first withdrawal. An appropriation bill will be tabled to approve

the supplementary withdrawal.

The maximum that may be withdrawn under this article 223 is 10% of the sum

appropriated by parliament for that financial year.

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Part 6 — Control of Public Money

1. Financial Control

Article 225 establishes the National Treasury, laying down its functions &

responsibilities with regard to control of public money.

Expenditure control and transparency (not the same as judicious) use of public money

is implemented by legislation. Under such legislation the Cabinet secretary may stop

transfer of funds to state organs for material breaches of measures provided for in the

legislation. Such stoppage has to be approved by parliament.

County funds cannot be stopped in excess of 50%

2. Accounts and Audit of Public Entities

An act of parliament provides for keeping of financial records and the auditing of

accounts of government and other public entities and provides for the designation of

an accounting officer in every public entity at the national and county level of

government.

The auditor-general is responsible for auditing the government and public entity

accounts. The auditor-generals own accounts are independently audited by an accountant

appointed by national assembly.

3. Procurement of Public Goods and Services

Public entity contracts for goods and services must be fair, equitable, transparent,

competitive and cost-efficient.

Act of parliament defines the framework within which policies for procurement and

disposal of assets are implemented.

Part 7 — Financial Officers and Institutions

1) Controller of Budget

Article 228 (1) creates The Controller of Budget who is nominated by the President

and, with the approval of the National Assembly, appointed by the President.

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The office holder must have a minimum of 10 years knowledge of auditing public

finance management and holds office for a maximum of 8 years.

Oversees the implementation of national and county government budgets.

2) Auditor-General

Article 229 (1) creates The Auditor-General who is nominated by the President and,

with the approval of the National Assembly, appointed by the President.

This office holder must have a minimum of 10 years knowledge of auditing public

finance management and holds office for a maximum of 8 years.

They audit accounts of: The national and county governments, Courts, all commissions

established by the constitution, National parliament, senate and county assemblies, Political

parties funded from public funds, & Public debt.

3) Salaries and Remuneration Commission

Article 230 (1) creates The Salaries and Remuneration Commission and consists of a

chairperson appointed by the President :

A person each nominated by : Parliamentary service commission, Public service

commission, Judicial service commission, Teachers service commission, National police service

commission, Defence council, The senate on behalf of counties, Umbrella group of trade unions,

Umbrella group of employers, Joint forum of professional bodies, A person nominated by

Cabinet secretary for finance – No vote, A person nominated by the attorney general – No vote,

& A person nominated by Cabinets secretary responsible for public service – no Vote

This commission:

(a) sets and reviews the remuneration and benefits of state officers, and

(b) advices governments on the remuneration and benefits of public officers.

The commission must ensure the public compensation bill is sustainable, helps to

attract and retain people with appropriate skills and recognises productivity and

performance.

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4) Central Bank of Kenya

Article 231 (1) creates The Central Bank of Kenya to formulate monetary policy,

promote price stability and issue currency.

Notes and coins issued by the CBK must not bear the portrait of any individual.

1.3. Role of the National and County Treasuries

Role of the National Treasury

The National Treasury derives its mandate from Article 225 of the Constitution 2010,

Section 11 of the Public Management Act 2012 and the Executive order No. 2/2013. It

executes its mandate in consistency with any other legislation as may be developed or

reviewed by Parliament from time to time.

The core functions of the National Treasury as derived from the above legal provisions

include;

1) Formulate, implement and monitor macro-economic policies involving

expenditure and revenue;

2) Manage the level and composition of national public debt, national guarantees and

other financial obligations of national government;

3) Formulate, evaluate and promote economic and financial policies that facilitate

social and economic development in conjunction with other national government

entities;

4) Mobilize domestic and external resources for financing national and county

government budgetary requirements;

5) Design and prescribe an efficient financial management system for the national

and county governments to ensure transparent financial management and

standard financial reporting;

6) In consultation with the Accounting Standards Board, ensure that uniform

accounting standards are applied by the national government and its entities;

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7) Develop policy for the establishment, management, operation and winding up of

public funds;

8) Prepare the annual Division of Revenue Bill and the County Allocation of Revenue

Bill;

9) Strengthen financial and fiscal relations between the national government and

county governments and encourage support for county governments and assist

county governments to develop their capacity for efficient, effective and

transparent financial management; and

10) Prepare the National Budget, execute/implement and control approved budgetary

resources to MDAs and other Government agencies/entities.

Role of the County Treasuries

The County Treasuries are established pasuant to Section 103 of the Public

Management Act 2012 for each county government. The County Treasury comprise

of:

i) The County Executive Committee member for finance; (Head of the County

Treasury)

ii) The Chief Officer; and

iii) The department or departments of the County Treasury responsible for

financial and fiscal matters.

The core function of a County Treasury is to monitor, evaluate and oversee the

management of public finances and economic affairs of the county government

including:

1) developing and implementing financial and economic policies in the county;

2) preparing the annual budget for the county and co- ordinating the preparation of

estimates of revenue and expenditure of the county government;

3) co-ordinating the implementation of the budget of the county government;

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4) mobilising resources for funding the budgetary requirements of the county

government and putting in place mechanisms to raise revenue and resources;

5) managing the county government's public debt and other obligations and

developing a framework of debt control for the county;

6) consolidating the annual appropriation accounts and other financial statements of

the county in a format determined by the Accounting Standards Board;

7) acting as custodian of the inventory of the county government's assets except

where provided otherwise by other legislation or the Constitution;

8) ensuring compliance with accounting standards prescribed and published by the

Accounting Standards Board from time to time;

9) ensuring proper management and control of, and accounting for the finances of

the county government and its entities in order to promote efficient and effective

use of the county's budgetary resources;

10) maintaining proper accounts and other records in respect of the County Revenue

Fund, the County Emergencies Fund and other public funds administered by the

county government;

11) monitoring the county government's entities to ensure compliance with this Act

and effective management of their funds, efficiency and transparency and, in

particular, proper accountability for the expenditure of those funds;

12) assisting county government entities in developing their capacity for efficient,

effective and transparent financial management, upon request;

13) providing the National Treasury with information which it may require to carry

out its responsibilities under the Constitution and this Act;

14) issuing circulars with respect to financial matters relating to county government

entities;

15) advising the county government entities, the County Executive Committee and the

county assembly on financial matters;

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16) strengthening financial and fiscal relations between the national government and

county governments in performing their functions;

17) reporting regularly to the county assembly on the implementation of the annual

county budget; and

18) taking any other action to further the implementation of this Act in relation to the

county.

1.4. Overview of the Public Financial Management Act

Subject to Article 201 of the Constitution and the 5th schedule, the Public Finance

Management Act, 2012 was enacted by the Parliament of Kenya to provide for : -

- Effective management of public finances by the national and county

governments;

- Oversight responsibility of Parliament and county assemblies;

- Different responsibilities of government entities and other bodies, and for

connected purposes

The Act was Assented to by the president on 24th July 2012 and all provisions relating

to county governments come into operation upon the final announcement of the

results of the first elections under the Constitution (9th March 2013 at 1440Hrs), while,

all other Provisions came into force on 27th August 2012

Objectives of Public Finance Management Act, 2012

The core object of this Act is to ensure that:

(a) Public finances are managed at both the national and the county levels of

government in accordance with the principles set out in the Constitution.

(Promote good financial management at the National and County Government

level); and

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(b) Public officers who are given responsibility for managing the finances are

accountable to the public for the management of those finances through

Parliament and County Assemblies. (Facilitate effective and efficient use of

limited resources)

Others include:

• Have one overarching legislation applied to both levels of governments

instead of several PFM laws as was the case before.

• Article 189 of the constitution requires national and county governments to

have autonomy in the management of their finances and setting priories.

Hence the mirror treatment of the roles and responsibilities of key institutions

involved in public financial management at the two levels of governments.

• Comply with constitutional requirement to enact legislations on public

finance listed in the 5th schedule and also mentioned in Chapter 12.

Areas Covered by the Public Finance Management Act, 2012

Macro-Fiscal
Policymaking

Accounting, Institutions:
Reporting and Powers and Budgeting
Audit Functions

Treasury
Management
and Budget
Execution

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A. Institutions: Powers and Functions

National PFM Institutions County PFM Institutions

• Parliament: National • County Assemblies

Assembly/Senate/PBO

• Cabinet • County Executive Committee

• National Treasury • County Treasuries

• Cabinet Secretary for finance • County Executive Member for

Finance

• Accounting Officers for National • Accounting Officers for County

Government Governments

• Receivers and Collectors of • Receivers and Collectors of

Revenue for NG Revenue for CG

• Public Debt Management Office • County Budget and Economic

(PDMO) Forum

• Accounting Standards Board

(ASB)

• Controller of Budget and Auditor-

General;

• Commission on Revenue

Allocation

Intergovernmental Fiscal Coordination Institutions

• The Intergovernmental Budget and Economic Council which comprises of

the: -

– Deputy President,

– Cabinet Secretary (finance),

– Cabinet Secretary (intergovernmental relations),

– Chair of Council of County Governors,

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– each County Executive Committee members (finance)

– representatives of Parliamentary Service Commission, Judicial Service

Commission & Commission on Revenue Allocation.

• Joint Intergovernmental Technical Committee which reviews any

discretionary national intervention (by the Cabinet Secretary) in the financial

management of county governments. It Comprises of:

– The Cabinet Secretary responsible for finance,

– Cabinet Secretary responsible for intergovernmental relations;

– Representative of the CG or CG entity concerned;

– Representative of the Commission on Revenue Allocation; and

– Representative of the Intergovernmental Budget and Economic Council

B. Macro-Fiscal Policymaking framework

National Government County Government

• Prepares a Medium -Term fiscal • Prepares a Medium -Term

strategy: Budget Policy Statement. fiscal strategy: County Fiscal

• Prepares progress reports on fiscal Strategy Paper (CSFP).

strategy by way of the Budget • Prepares progress reports on

Review & Outlook Paper (BROP). CFSP by way of the County

• Prepares a pre-election & post- Budget Review & Outlook

election report. Paper (CBROP).

• Required to observe the fiscal • Required to observe the fiscal

responsibility principles covering responsibility principles

– debt, spending, wage bill, covering – debt, spending,

borrowing, fiscal risks and tax wage bill, borrowing, fiscal

rates/bases risks and tax rates/bases.

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C. Budgeting
National Government Budget County Government Budget

Process Process

• Issuance of the Budget circular • Issuance of the Budget Circular

• Budget Review and Outlook Paper • County Budget Review and

(BROP) and the Budget Policy Outlook Paper (CBROP) and

Statement. the CFSP

• Division of Revenue Bill and • County Government

County Allocation of Revenue Bill development plan.

• Budget estimates • Budget estimates

• Appropriation Bill • Appropriation Bill

• Submission of the National Debt • Submission of the county Debt

Management Strategy Management Strategy

• Public pronouncement of budget • Public pronouncement of

policy highlights and revenue revenue raising measures

raising measures by the Cabinet

Secretary

• Approval of Finance Bill • Approval of Finance Bill

D. Treasury Management and Budget Execution

National Government County Government

• Provides for the operationalization • Provides for the

of Consolidated Fund, operationalization of the

Equalization Fund and County Revenue Fund.

Contingencies Fund. • Authorises each county

government to open a County

Emergency Fund.

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National Government County Government

• Provides for the establishment of • Provides for the establishment

other national public funds of other county public funds.

• Establishes a Single Treasury • Each County Treasury shall

Account for the National establish a Treasury Single

Government Account for each CG.

• Each national government entity is • Each county government entity

required to prepare an annual is required to prepare an

cash flow plan and forecast annual cash flow plan and

forecast

• Every county government

prepare a consolidated annual

cash flow projection by 15th

June which shall be the basis

for the preparation of the NT

schedule of disbursement to

CGs.

• Provides for process of budget • Provides for process of budget

reallocations and supplementary reallocations and

estimates supplementary estimates

E. Accounting, reporting and audit

National Government County Government

Provides for the preparation of: Provides for the preparation of:

• Consolidated annual financial • Consolidated annual financial

statement of NG statement of CG.

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National Government County Government

• Annual financial statement of NG • Annual financial statement of

entity CG entity

• Quarterly report of NG entity. • Quarterly report of CG entity.

• Annual report of revenue • Annual report of revenue

received and collected received and collected

• Report of waivers and variations • Report of waivers and

in taxes, fees and charges. variations in taxes, fees and

charges.

• Annual financial statement of a • Annual financial statement of

national public fund a county public fund

• Quarterly report of a national • Quarterly report of a county

public fund public fund

• Separate reports by State • Separate reports by County

Corporations (sections 88 & 89) Corporations (sections 184 &

185)

• Pre and Post-election reports

Enforcement
National Government County Government

• Any offence under the PFM Act, • Any offence under the PFM

2012 attracts a term of Act, 2012 attracts a term of

imprisonment of up to 5 years or imprisonment of up to 5 years

a fine of up to Kshs. 10 Million, or a fine of up to Kshs. 10

or both Million, or both

• Principal Secretary responsible for • County Chief Officer

National Treasury to report responsible for finance to

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National Government County Government

suspected offences to relevant law report suspected offences to

enforcement authorities. relevant law enforcement

• Public Officers are personally authorities.

liable for losses incurred by NG as • Public Officers are personally

a result of their fraudulent, corrupt liable for losses incurred by CG

or negligent acts. as a result of their fraudulent,

corrupt or negligent acts.

Public Participation
• Various sections in the PFM Act 2012 provide for public participation in public

financial management and in particular:

– the formulation of the Budget Policy Statement, County Fiscal Strategy

Paper and the Budget Estimates.

– the preparation of division of revenue Bill and County Allocation of

Revenue Bill.

– County Budget and Economic Forum provides a platform for public

participation in county planning and budgeting.

• Requirement for publication and publicizing of budget documents and reports

enhances public participation.

• Section 207 of the PFM Act, 2012 requires development of regulations to

prescribe further guidelines for public participation in public financial

management.

1.5. Financial Regulations

PFM legal instruments in force:

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– Public Finance Management Act, 2012;

– The Commission on Revenue Allocation Act, 2011;

– The Independent Offices (Appointment) Act, 2011; and

– The Salaries and Remuneration Commission Act, 2011;

– The Procurement of Public Goods and Services, 2015

– The Public Audit Act, 2015; and

– The Controller of Budget Act, 2016.

In order to consolidate the PFM legal framework, the following Acts were repealed:

(a) the Fiscal Management Act (No. 5 of 2009);

(b) the Government Financial Management Act (No. 5 of 2004);

(c) the Internal Loans Act (Cap. 420);

(d) the Contingencies Fund and County Emergency Funds Act, 2011 (No. 17 of 2011);

(e) the National Government Loans Guarantee Act, 2011 (No. 18 of 2011); and

(f) the External Loans and Credits Act (Cap. 422).

1.6. Treasury Circulars; Meaning and Application

Meaning
Treasury circulars provide guidance and instructional information principally to

government departments and state-owned enterprises and request financial

information from those agencies. They are usually addressed to :

– Chief executives (CEs);

– Chief Financial Officers (CFOs);

Application
- The main purpose of Treasury circulars is to provide guidance & instructional

information and to request for financial information.

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- Treasury circulars may also cover matter which are outside the scope of treasury

instructions such a budget timetable.

- Treasury circulars may also cover matters that are to take effect immediately (but

these may be incorporated within treasury instructions as part of an annual update)

Chapter 12 & Sec. 104 of the PFM Act allows both the National and County Treasuries

to issue Treasury Circulars (See sample below)

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1.7. Process of Developing National and County

Government Finance Bills
Refer to: Chapter 1.10 (Duplication)

1.8. Role of Budget Officers in Budget Preparation and

Execution

The Parliamentary Budget Office (PBO) was established in the year 2007 as a unit

under the Directorate of Information and Research services following a resolution of

Parliament. The office further got a legal backing with the enactment of the Fiscal

Management Act 2009 (FMA), which established the PBO as an office in the

Parliamentary Service Commission. The office was subsequently elevated to a

directorate in 2010.

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The Finance Management Act was repealed in 2012 with the enactment of the Public

Finance Management Act 2012 (PFM), which re-established the PBO as an office of the

Parliamentary Service and enhanced its roles.

The Budget Office consists of persons (Officers) appointed on merit based on their

experience in finance, economics and public policy matters. The functions of the PBO

are outlined in section 10 of the PFM Act, 2012 are as follows: -

1) Provide professional services in respect of budget, finance, and economic

information to the committees of Parliament;

2) Prepare reports on budgetary projections and economic forecasts and make

proposals to Committees of Parliament responsible for budgetary matters;

3) Prepare analyses of specific issues, including financial risks posed by Government

policies and activities to guide Parliament;

4) Consider budget proposals and economic trends and make recommendations to

the relevant committee of Parliament with respect to those proposals and trends;

5) Establish and foster relationships with the National Treasury, county treasuries

and other national and international organisations, with an interest in budgetary

and socio-economic matters as it considers appropriate for the efficient and

effective performance of its functions;

6) Ensure that all reports and other documents produced by the Parliamentary

Budget Office are prepared, published and publicised not later than fourteen days

after production; and

7) Report to the relevant committees of Parliament on any Bill that is submitted to

Parliament that has an economic and financial impact, making reference to the

fiscal responsibility principles and to the financial objectives set out in the relevant

Budget Policy Statement; and

8) Propose, where necessary, alternative fiscal framework in respect of any financial

year.

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The Parliamentary Budget Office MUST observe the principle of public participation
in budgetary matters.

1.9. Responsibilities of the National and County

Treasuries in Relation to Budget Preparation

The National Treasury

The general responsibilities of the National Treasury with respect to the budget

Process provided under Part III of the Public Finance Management Act 2012 (PFM),

include: -

a) Preparation of the annual Budget Policy Statement.

b) Preparation of the Budget Review and Outlook Paper.

c) Publication of pre- and post-election economic and fiscal reports by National

Treasury.

Additionally, a Budget Supply Department of Treasury headed by a Director of

Budget with technical officers of Finance cadre, Economists Accountants and

Administrators mandated with the preparation of annual estimates of revenues and

expenditures that are laid before Parliament every year for approval. It does also

prepare supplementary estimates as the need arises.

Objectives of The Budgetary Department

a) Strengthen the budget and reporting system to put in place a more efficient and

effective Public Financial Management System.

b) Implementation of budget process to conform to the essential principles for sound

budget management

c) To introduce a performance perspective to the budget process by aligning

expenditure to policy priorities

d) To link to planning, policy objectives to budget allocation.

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e) Restructure the budget to fund programs that can be identified in line with the ERS

targets

Responsibilities of The Budgetary Department

1) Coordination of the preparation and presentation to Parliament of MTEF and

Annual Estimates of expenditure

2) Development of broad priorities for allocation of public expenditure and

implementing Ministerial Ceiling System

3) Enforcing proper management control, monitoring and evaluation for efficient

utilization of budgetary resource to realize value for money

4) Setting up systems for the budget process e.g. GFS classification MTEF Budget.

5) Ensuring that allocation of resources is consistent with Government policy

priorities.

The County Treasuries

The general responsibilities of the County Treasuries with respect to the County

Budget Process provided under Part IV of the Public Finance Management Act 2012

(PFM), include: -

a) Preparation of the County Fiscal Strategy Paper.

b) Preparation of the County Budget Review and Outlook Paper.

Additionally, the County Treasuries: -

a) Prepare the annual budget for the county and coordinating the preparation of

estimates of revenue and expenditure of the county government;

b) Co-ordinate the implementation of the budget of the county government;

c) Mobilize resources for funding the budgetary requirements of the county

government and putting in place mechanisms to raise revenue and resources;

d) Report regularly to the county assembly on the implementation of the annual

county budget; and

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e) Considers any recommendations made by the county assembly when

finalizing the budget proposal for the financial year concerned.

f) Publish and publicize the County Fiscal Strategy Paper within seven days after

it has been submitted to the county assembly.

1.10. Budget Process for Both National, County and

Public Entities

National Government Budget Process

The National Budget Process is outlined under Part III of the Public Finance

Management Act 2012 (PFM), and it provides in Section 35 (1) of the Act that, the

budget process for the national government in any financial year comprises of the

following stages: -

1) Integrated development planning process which includes both long term and

medium-term planning;

2) Planning and determining financial and economic policies and priorities at the

national level over the medium term;

3) Preparing overall estimates in the form of the Budget Policy Statement of

national government revenues and expenditures;

4) Adoption of Budget Policy Statement by Parliament as a basis for future

deliberations;

5) Preparing budget estimates for the national government;

6) Submitting those estimates to the National Assembly for approval;

7) Enacting the appropriation Bill and any other Bills required to implement the

National government's budgetary proposals;

8) Implementing the approved budget;

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9) Evaluating and accounting for, the national government's budgeted revenues

and expenditures; and

10) Reviewing and reporting on those budgeted revenues and expenditures every

three months.

County Government Budget Process

The County Budget Process is outlined under Part IV of the Public Finance

Management Act 2012 (PFM), and it provides in Section 125 (1) of the Act that, the

budget process for the county governments in any financial year shall comprise the

following stages: -

1) Integrated development planning process which shall include both long term

and medium-term planning;

2) Planning and establishing financial and economic priorities for the county over

the medium term;

3) Making an overall estimation of the county government's revenues and

expenditures;

4) Adoption of County Fiscal Strategy Paper;

5) Preparing budget estimates for the county government and submitting

estimates to the county assembly;

6) Approving of the estimates by the county assembly;

7) Enacting an appropriation law and any other laws required to implement the

county government's budget;

8) Implementing the county government's budget; and

9) Accounting for, and evaluating, the county government's budgeted revenues

and expenditures;

The Cabinet Secretary & The County Executive Committee member for finance MUST
ensure that there is public participation in the budget process.

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Table of Contents

Chapter Two

2 ESTABLISHMENT OF PUBLIC FUNDS IN THE PUBLIC SECTOR .................2

2.1. Provision of Establishing Public Funds .................................................................. 2

2.2. Rationale of Creation of Public Funds..................................................................... 2

2.3. The Consolidated Fund ............................................................................................. 2

2.4. The Establishment and Administration of Contingency Funds .......................... 4

2.5. The Establishment and Administration of Equalization Funds .......................... 5

2.6. County Revenue Sources .......................................................................................... 7

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Chapter Two: Establishment of Public Funds in the Public Sector

2 ESTABLISHMENT OF PUBLIC FUNDS IN THE PUBLIC

SECTOR

2.1. Provision of Establishing Public Funds

These are government entities created by the Constitution for particular purposes and

are separately organised from other financial obligations of the government with

capability to hold their Assets and Liabilities separately.

They engage in financial transactions on their own account. Their sources of finance

are: -

– Provided for by law

– Transfer from budget

– User Charges

– Borrowing or Donor funds

2.2. Rationale of Creation of Public Funds

There are three major reasons behind the necessity to create public funds. These are:

- Budget failure to address specific needs that may require more attention.

- Failure by the budget to fully or adequately fund some activities.

- Protection of important programs from budget cuts.

2.3. The Consolidated Fund

Establishment: Article 206 (1) of the constitution establishes the Consolidated

Fund. The fund receives all money raised or received by or on behalf of the national

government, except : -

– Money reasonably excluded from the Fund by an Act of Parliament and payable

into another public fund established for a specific purpose; or

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– Money retained by the State organ that received it for the purpose of defraying

the expenses of the State organ.

Withdrawal from the Fund: Money can only be withdrawn from the
Consolidated Fund under the following conditions : -

– Accordance to an appropriation by an Act of Parliament (Appropriation Act);

– Accordance with Article 222 (Authorise before Appropriation Act is passed) or

223 (Supplementary Appropriation); or

– As a charge against the Fund as authorized by the Constitution or an Act of

Parliament.

Administration of the Fund: According to Sec. 17 (1) of the PFM Act, 2012, The

National Treasury is mandated to administer the Consolidated Fund and to maintain

the Consolidated Fund in the National Exchequer Account, kept at the Central Bank

of Kenya.

The National Treasury does the following in carrying out its duty as the Fund’s

administrator : -

– Facilitates payments into that account all money raised or received by or on

behalf of the national government; and

– Pays from that National Exchequer Account without undue delay all amounts

that are payable for public services.

– Ensures that the Exchequer Account is NOT overdrawn at any time.

For every withdrawal, the Treasury MUST make a requisition and submit it to the

Controller of Budget for approval. The approval, together with written instructions

from the Treasury is sufficient authority for the CBK to pay.

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2.4. The Establishment and Administration of

Contingency Funds

Establishment: Article 208 (1) of the constitution establishes Contingencies Fund.

The Fund consists of monies appropriated from the Consolidated Fund for urgent &

unforeseen need.

Administration of the Fund: The Cabinet Secretary is the administer of the Fund
and should ensure that the Permanent capital of the Fund doesn’t exceed 10B or as

may be prescribed by the Cabinet Secretary with the approval of Parliament.

The Cabinet Secretary keeps the Fund in a separate account, maintained at CBK and

can only pay : -

– into that account monies appropriated to the Contingencies Fund by an

Appropriation Act; and

– from the Contingencies Fund, without undue delay, all advances made.

Advances from the Fund: This can only be done in case of urgent &
unforeseen need. There is an urgent need for expenditure if the Cabinet Secretary,

guided by regulations and relevant laws, establishes that : -

– The payment was not budgeted for; and

– The event was unforeseen and cannot be delayed until a later financial year

without harming the general public interest. An unforeseen event is one which

:-

i) Threatens serious damage to human life or welfare;

ii) Threatens serious damage to the environment; and

iii) is meant to alleviate the damage, loss, hardship or suffering caused

directly by the event. An event is considered to threaten damage to

human life or welfare only if it involves, causes or may cause : -

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a) Loss of life, human illness or injury;

b) Homelessness or damage to property;

c) Disruption of food, water or shelter; or

d) Disruption to services, including health services

Financial statements in respect of the Fund: Within three months after the
end of each financial year, the National Treasury MUST prepare and submit to the

Auditor-General financial statements for that year which should contain the following

information : -

– Date & amount of each payment made from the Fund;

– The person to whom the payment was made;

– The purpose for which the payment was made;

– In case the money has been spent for the purpose it was intended, a statement

to that effect;

– In case the money has NOT YET been spent for the purpose it was intended, a

statement specifying the reasons for not having done so; and

– a statement indicating how the event was unforeseen and couldn’t be delayed.

2.5. The Establishment and Administration of

Equalization Funds

Establishment: Article 204 (1) of the constitution establishes the Equalization Fund
and allocated to it 0.5% of all the revenue collected by the National Government each

year. Total revenue is calculated on the basis of the most recent audited accounts of

revenue received, as approved by the National Assembly.

Purpose of the Fund: The National Government uses the Equalization Fund only
to provide basic services to marginalized areas to the extent necessary to bring the

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quality of those services in those areas to the level generally enjoyed by the rest of the

nation. These services include:

– Water;

– Roads;

– Health facilities; and

– Electricity.

Withdrawal from the Fund: The National Government may use the Equalization
Fund under the following conditions : -

– In accordance with an Appropriation Act; and

– Either directly, or indirectly through conditional grants to counties in which

marginalized communities exist.

Administration of the Fund: Sec. 18 of the PFM Act, 2012 Authorises The
National Treasury is to administer the Fund and keep the Fund in a separate account

maintained at the CBK. The National Treasury:

– Ensures that the Fund Account is not overdrawn at any time.

– Ensures that no funds are withdrawn without the approval of the Controller

of Budget.

The approval, together with written instructions from the National Treasury

requesting for the withdrawal, are sufficient authority for the CBK to pay amounts

from the Fund.

Unutilized balances in the Fund at the end of the year remains in that Fund for use in

the subsequent financial year.

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2.6. County Revenue Sources

County governments may collect/revenue from the following sources : —

– Property rates;

– Entertainment taxes; and

– any other tax that it is authorized to impose by an Act of Parliament.

In addition, they have powers to impose charges for the services they provide in a

manner that doesn’t prejudice national economic policies, economic activities across

county boundaries or the national mobility of goods, services, capital or labour.

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Chapter Three: Supply Chain Management in Public Entities

Table of Contents

Chapter Three
3 SUPPLY CHAIN MANAGEMENT IN PUBLIC ENTITIES ................................. 2

3.1. DEFINITIONS AND TERMINOLOGIES ...................................................................... 2

3.2. GENERAL OVERVIEW OF PUBLIC PROCUREMENT AND DISPOSAL (PPD) ACT ... 4

3.3. PROCUREMENT GUIDELINES AS ENVISAGED BY PPD ACT .................................. 6

3.4. COMMITTEES RESPONSIBLE FOR PROCUREMENT................................................ 11

3.5. PROCUREMENT PROCESS BY NATIONAL, COUNTY AND OTHER PUBLIC

ENTITIES ............................................................................................................................. 12

3.6. TENDERING PROCESS AND SELECTION OF SUPPLIERS IN PUBLIC SECTOR ....... 12

3.7. CONCEPT OF E-PROCUREMENT ............................................................................. 13

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3 SUPPLY CHAIN MANAGEMENT IN PUBLIC ENTITIES

3.1. Definitions and Terminologies

1. “Accounting officer” means: -

(a) Officer for a public entity other than a local authority, the person appointed

by the CS to the Treasury as the accounting officer or, if there is no such

person, the chief executive of the public entity; or

(b) Officer for a local authority, the town or county clerk of the local authority;

2. “Advisory Board” means the Public Procurement Oversight Advisory Board

established under section 21;

3. “Authority” means the Public Procurement Oversight Authority established

under section 8;

4. “Candidate” means a person who has submitted a tender to a procuring entity;

5. “Citizen contractor” means a natural person or an incorporated company wholly

owned and controlled by persons who are citizens of Kenya;

6. “Contractor” means a person who enters into a procurement contract with a

procuring entity;

7. “Corruption” has the meaning assigned to it in the Anti-Corruption and Economic

Crimes Act,

8. 2003 and includes the offering, giving, receiving or soliciting of anything of value

to influence the action of a public official in the procurement or disposal process

or in contract execution.

9. “Director-General” means the Director-General of the Authority provided for

under Sec 10;

10. “Disposal” means the divestiture of public assets, including intellectual and

proprietary rights and goodwill and other rights of a procuring entity by any

means including sale, rental, lease, franchise, auction or any combination however

classified, other than those regulated by any other written law;

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11. “Fraudulent practice” includes a misrepresentation of fact in order to influence a

procurement or disposal process or the exercise of a contract to the detriment of

the procuring entity, and includes collusive practices amongst bidders prior to or

after bid submission designed to establish bid prices at artificial non-competitive

levels and to deprive the procuring entity of the benefits of free and open

competition;

12. “Goods” includes raw materials, things in liquid or gas form, electricity and

services that are incidental to the supply of the goods;

13. “Local contractor” means a contractor who is registered in Kenya under the

Companies Act and whose operation is based in Kenya;

14. “Procurement” means the acquisition by purchase, rental, lease, hire purchase,

license, tenancy, franchise, or by any other contractual means of any type of works,

assets, services or goods including livestock or any combination;

15. “Procuring entity,” means a public entity making a procurement to which PPD

Act applies;

16. “Review Board” means the Public Procurement Administrative Review Board

established under section 25;

17. “Services” means any objects of procurement or disposal other than works and

goods and includes professional, non-professional and commercial types of

services as well as goods and works which are incidental to but not exceeding the

value of those services;

18. “Works” means the construction, repair, renovation or demolition of buildings,

roads or other structures and includes: -

a) Installation of equipment and materials;

b) Site preparation; and

c) Other incidental services.

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3.2. General Overview of Public Procurement and

Disposal (PPD) Act

The purpose of the Act is to establish procedures for procurement and the disposal of

unserviceable, obsolete or surplus stores and equipment by public entities to achieve

the following objectives: -

a) To maximize economy and efficiency;

b) To promote competition and ensure that competitors are treated fairly;

c) To promote the integrity and fairness of those procedures;

d) To increase transparency and accountability in those procedures; and

e) To increase public confidence in those procedures;

f) To facilitate the promotion of local industry and economic development.

When a State organ or any other public entity contracts for goods or services, it must

do so in accordance with a system that is fair, equitable, transparent, competitive and

cost-effective. The Act is applied with respect to: -

a) Procurement by a public entity;

b) Contract management;

c) Supply chain management, including inventory and distribution;

d) Disposal by a public entity of stores and equipment that is unserviceable,

obsolete or surplus.

e) Renting of premises;

f) Appointing, other than under the authority of an Act, of an individual to a

committee, task force or other body if the individual will be paid an amount

other than for expenses; and

g) Acquiring of real property.

For greater certainty, the following are NOT procurements with respect to the Act: -

a) The retaining of the services of an individual for a limited term if;

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b) The acquiring of stores or equipment if the stores or equipment are being

disposed of by a public entity in accordance with the procedures set.

c) The acquiring of services provided by the Government or a department of

the Government.

Conflicts with Other Acts

If there is a conflict between PPD Act and the regulations made under the Act and any

other Act or regulations, in matters relating to procurement and disposal, PPD Act or

the regulations made under the Act prevails.

Conflict with International Agreements

• Where any provision of PPD Act conflicts with any obligations of the Republic of

Kenya arising from a treaty or other agreement to which Kenya is a party, the Act

prevails except in instances of negotiated grants or loans.

• Where a treaty or agreement referred to above contains favorable provisions to

citizens and local contractors, full advantage is taken of these provisions of the Act

in the interest of promoting domestic capacity development.

• Where procurement conflict with obligations of the Republic of Kenya arising from

a treaty or other agreement to which Kenya is a party favors an external

beneficiary: -

o Procurement through contributions made by Kenya, shall be undertaken in

Kenya through contractors registered in Kenya; and

o All relevant insurances shall be placed with companies registered in Kenya

and goods shall be transported in carriages registered in Kenya.

Conflict with Conditions on Donated Funds

If there is a conflict between PPD Act, the regulations or any directions of the

Authority and a condition imposed by the donor of funds, the condition prevails with

respect to procurement that uses those funds and no others.

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However, this does not apply if the donor of funds is a public entity.

The Public Procurement Oversight Authority

This is a body established under the Act and has all the powers necessary for the

performance of its functions which includes:

1. Ensuring that the procurement procedures are complied with;

2. Monitors the public procurement system and reports its overall functioning to

the Minister;

3. Assists in the implementation and operation of the public procurement system

and in so doing to prepare and distribute manuals and standard documents;

a. To provide advice and assistance to procuring entities;

b. To develop, promote and support the training and professional

development of persons involved in procurement; and

c. To issue written directions to public entities with respect to procurement

including the conduct of procurement proceedings and the

dissemination of information on procurements; and

d. To ensure that procuring entities engage procurement professionals in

their procurement units.

4. Initiates public procurement policy and proposes amendments to the Act or to

the regulations; and

5. Performs such other functions and duties as are provided for under the Act.

3.3. Procurement Guidelines as Envisaged by PPD Act

General Procurement Rules

Rule One: Choice of procurement procedure

1) In procurement, the procuring entity should use open tendering or an

alternative procurement procedure only if that procedure is allowed.

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2) A procuring entity can also use restricted tendering or direct procurement as

an alternative procurement procedure upon: -

(a) Obtaining a written approval from tender committee; and

(b) Records in writing the reasons for using the alternative procurement

procedure.

Rule Two: Procurement not to be split or inflated

1) No procuring entity may structure procurement as two or more procurements

for the purpose of avoiding the use of a procurement procedure.

2) Standard goods, services and works with known market prices are to be

procured at the prevailing real market price.

3) Public officials involved in transactions in which are unreasonably inflated,

will be required to pay the procuring entity for the loss resulting from their

actions.

Rule Three: Qualifications to be awarded contract

One is qualified to be awarded a contract for procurement only if he satisfies the

following criteria: -

1) Meets necessary qualifications, capability, experience, resources, equipment

and facilities to provide what is being procured;

2) Has legal capacity to enter into a contract for the procurement;

3) Not insolvent, in receivership, bankrupt or in the process of being wound up

and is not the subject of legal proceedings relating to the foregoing;

4) The procuring entity is not precluded from entering into the contract with the

person under Limitation on contracts with employees,

5) Not debarred from participating in procurement proceedings under Limitation

on contracts with employees.

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Rule Four: Pre-qualification procedures

To identify qualified persons a procuring entity may use a pre-qualification procedure

or may use the results of a pre-qualification procedure used by another public entity

Rule Five: Limitation on contracts with employees

Except as expressly allowed, a procuring entity must not enter into a contract

for procurement with: -

1) An employee of the procuring entity or a member of a board or committee of

the procuring entity;

2) A CS, public servant or a member of a board or committee of the Government

or any department of the Government or a person appointed to any position

by the President or a CS; or

3) A person, including a corporation, who is related to the people above

Rule Six: Specific requirements

1) The procuring entity MUST prepare specific requirements relating to the

goods, works or services being procured that are clear, that give a correct and

complete description of what is to be procured.

2) The specific requirements MUST include all the procuring entity’s technical

requirements with respect to the goods, works or services being procured.

Rule Seven: Verification that not debarred

A tender, proposal or quotation submitted by any person must include a statement

verifying that the person is not debarred from participating in procurement

proceedings and a declaration that the person will not engage in any corrupt practice.

Rule Eight: Termination of procurement proceedings

In case a public entity terminates procurement proceedings it is not liable to any

person for termination but must:

1) Give the Authority a written report on the termination.

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2) Give prompt notice of a termination to each person who submitted a tender,

proposal or quotation.

3) On request, give reasons for terminating the proceedings within 14 days of the

request.

4) Return the tenders unopened proceedings are terminated before the tenders

are opened.

Rule Nine: Inappropriate influence on evaluations

After the deadline for the submission of tenders, proposals or quotations: -

1) No unsolicited communications to the procuring entity or any person involved

in the proceedings that might reasonably be construed as an attempt to

influence the evaluation and comparison of tenders, proposals or quotations by

anyone who submitted a tender, proposal or quotation; and

2) No person who is not officially involved in the evaluation and comparison of

tenders, proposals or quotations shall attempt, in any way, to influence that

evaluation and comparison.

Rule Ten: Participation in procurement

1) Candidates participate in procurement proceedings without discrimination

except where participation is limited in accordance with the Act and the

regulations.

2) The CS shall, in consideration of economic and social development factors,

prescribe preferences and or reservations in public procurement and disposal.

Rule Eleven: Corrupt practice

No person should be involved in any corrupt practice in any procurement proceeding

and should any person/employee or agent of a person contravene this provision, the

following shall apply: -

1) The person to be disqualified from entering into a contract; or

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2) If a contract has already been entered into, the contract must be terminated.

Rule Twelve: Fraudulent practice

Fraudulent practice in any procurement proceeding is not acceptable and any person

is involved then: -

1) The person must be disqualified from entering into a contract; or

2) If a contract has already been entered into, the contract must be terminated.

Rule Thirteen: Collusion

Any form of collusion or attempt to collude with any other person to do the following

is strictly prohibited.

Rule Fourteen: Conflicts of interest

An employee or agent of the procuring entity or a member of a board or committee of

the procuring entity who has a conflict of interest with respect to a particular

procurement process cannot take part in that procurement proceedings and in any

decision relating to that procurement or contract.

Rule Fifteen: Confidentiality

During or after procurement proceedings no procuring entity, employee, agent of

procuring entity, member of a board or committee of the procuring entity are all

bound not to disclose the following: -

1) Information relating to a procurement whose disclosure would impede law

enforcement or whose disclosure would not be in the public interest;

2) Information relating to a procurement whose disclosure would prejudice

legitimate commercial interests or inhibit fair competition;

3) Information relating to the evaluation, comparison or clarification of tenders,

proposals or quotations; or

4) The contents of tenders, proposals or quotations.

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Rule Sixteen: Procurement records

A procuring entity must maintain a proper filing system with clear links between

procurement and expenditure and is required by law to keep such records for each

and every procurement for at least six (6) years after the resulting contract was

entered into or, if no contract resulted, after the procurement proceedings were

terminated.

3.4. Committees Responsible for Procurement

For purpose of ensuring that procurement and asset disposal decisions are made in a

systematic, corporate and structured manner the following standing committees are

formed:

a) Disposal committee; and

b) Tender committees which includes: -

1) Tender opening committee;

2) Tender evaluation committee;

3) Negotiation committee; and

4) Inspection and acceptance committee.

Where a county public entity lacks capacity to form these committees then, the

accounting officer seek advice from the Authority. The Tender Committees

compromises of:

1) Chairperson;

2) Deputy Chairperson;

3) Five Members; and

4) Secretary - procurement professional heading the procurement unit.

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3.5. Procurement Process by National, County and

Other Public Entities

The accounting officer are charged with the sole responsibility of informing the

Authority on the composition of the county public entity’s tender committee and

respective alternates within 14 days from the date of appointment.

The accounting officer or head of the procuring entity appoints an alternate member

for each tender committee, and it is only the alternate who attend any meeting of the

county and designated tender committee whenever the member is unable to attend.

Compliance
A county procuring entity shall ensure that it complies with the provisions of the Act,

all the Public Procurement and Disposal Regulations, 2006, these Regulations, the

directions of the Authority and the Administrative Review Board in respect of its

procurement and disposal activities.

For Further Reading Please refer to The Public Procurement and Disposal Regulations,

2006

3.6. Tendering Process and Selection of Suppliers in

Public Sector

As Discussed under 3.3

For Further Reading Please refer to The Public Procurement and Disposal Regulations,

2006 and Regulations

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3.7. Concept of e-Procurement

E-Procurement is an automated business process, which includes procurement

planning, management of suppliers, requisitions, quotations, contracts and receipts

will be shifted to a more effective and cost-efficient online transaction.

Categories for E-procurement:

According to Baily (2008), the following are the types of E-procurement:

1. Web-based ERP (Enterprise Resource Planning) deals with creating and

approving purchasing requisitions, placing purchase orders and receiving goods

and services by using a software system based on Internet technology.

2. E-MRO (Maintenance, Repair and Operations) deals with creating and

approving purchasing requisitions, placing purchase orders and receiving non-

product related MRO supplies

3. The third type is E-sourcing involves Identifying new suppliers for a specific

category of purchasing requirements using Internet technology.

4. E-tendering involves sending requests for information and prices to suppliers and

receiving the responses of suppliers using Internet technology

5. E-reverse auctioning is another type of e-procurement. This uses Internet

technology to buy goods and services from a number of known or unknown

suppliers.

6. E-informing This involves gathering and distributing purchasing information

both from and to internal and external parties using Internet technology

7. E-market sites. Here, buying communities can access preferred suppliers'

products and services, add to shopping carts, create requisition, seek approval,

receipt purchase orders and process electronic invoices with integration to

suppliers' supply chains and buyers' financial systems.

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Benefits of E-Procurement
An organization, which uses E-procurement, has the following advantages:

1. Price reduction in tendering:

In this method, there is no paperwork, postage fee and other costs associated with

preparation and sending tender documents. It is also faster to send a document

electronically as compared to the traditional method of sending tender documents

through post office. It results to improved order tracking and tracing, for it is much

easier to trace the orders and make necessary corrections in case an error is

observed in the previous order.

2. There is reduction in time to source materials:

A lot of time is spent on paper invoicing in terms of writing, filing and postal

communication but while in e-procurement, staff have sufficient time to engage

on strategic issues of procurement The time wasted in moving from one town or

country to another to look for a potential supplier or buyer is greatly reduced since

with a click of a button, you can readily get the information in the internet.

3. Lower Administration costs

Reduction in paperwork and this leads to lower administration costs.

4. Reduction in procurement staff

Since most of the procurement process is done electronically, the number of staff

needed to facilitate the process reduces. Reduction in staff is an important way of

producing competitive advantage through reduced costs.

5. E-procurement gives an organization competitive advantage over its

competitors.

As a centralized department oversees all procurement activities worldwide and

can access documentation when required, this gives a distinct advantage over the

much slower process of having to post documentation between offices. This

extends the supply chain beyond geographical boundaries to a much wider group.

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6. E-procurement is improvement of communication

E-procurement allows sections of electronic documentation to flow through the

supply chain; it improves the speed of returns and subcontractor price visibility.

7. Enhanced inventory management

8. Increased accuracy of production capacity

9. Negotiated unit cost reduction

E-Procurement in Kenya
Integrated Financial Management Information System (IFMIS)

According to the National Treasury, IFMIS is an automated system used for public

financial management that interlinks planning, budgeting, expenditure management

and control, accounting, procurement, audit and reporting.

E-procurement is a component of IFMIS whose usage is submission and evaluation of

procurement applications. According to the Kenya ICT Authority, its benefits are: -

a) Enhances efficiency and transparency in public procurement thus eliminating

corruption,

b) Provides an equal platform for suppliers to compete for tenders and also

c) Dispensing justice through archiving of records.

From this analysis, e-procurement platform is a tool primarily aimed at reducing

wastage, graft and plunder of national resources. It brings discipline on how public

procurement is done and can help transform how public finances are managed.

Counties have been against the system. The gravity of this mischief is escalated by the

allegation that the governors are willing to embrace the accounting platform of IFMIS

but not the e-procurement platform. The governors allege that e-procurement:

a) Lacks adequate infrastructure in the counties;

b) Slow; and

c) Lacks an enabling legal framework, which renders its roll out ineffective.

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Problems Encountered in Implementing E-Procurement

Peter Smith, from Public Spend Matters Europe, in his article “Implementing

eProcurement – Kenya Runs into Problems” states that, It is not long ago that the

introduction of eProcurement in Kenya was being hailed as a big success. Like many

other countries in Africa and indeed other parts of the world, corruption has been a

major problem in public procurement, and the introduction of eProcurement was seen

as one way of countering this. The system included for instance built-in price

referencing, so bids that were above a benchmark could not be accepted.

eProcurement can help most of all because it provides a clear audit trail for bidding

and supplier selection. Everything is documented and it is easy to see which suppliers

have bid and what they have bid. Aspects such as ensuring bids are “opened” at the

same time can also be managed more easily than with manual processes. However, it

appears that all is not well now with the system in Kenya, and the leaders of 47

counties within the country suggested the system should be suspended.

The Council of Governors (CoG) wanted the National Government to suspend the e-

procurement system in counties specifically because the system was hampering

effective service delivery due to lack of proper infrastructure to support the system.

The council called for immediate suspension until the supporting infrastructure is in

place and threatened go to court. The governors have identified a number of problems

with the system:

1) It has “recentralized procurement and contributed to marginalization of locals

in tendering.”

2) People and businesses that do not have access to the Internet cannot take part

in the supplier selection and contracting process at county level.

3) Malfunctioning of the system, hence, unable to promptly pay bills to suppliers,

causing problems for those firms and creating a crisis of confidence in the

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process. There are also issues with the infrastructure that is needed to support

electronic procurement. In some cases, the system has had very limited

availability – “one county was allowed to access the system for two hours only

in two weeks.”

Some observers saw this as a push-back against the anti-corruption aspect of the

system. But the government does need to show that it is doing everything possible to

make this a success, and these do seem to be fundamental issues. But what can we

learn from this that might be relevant to contracting authorities and governments in

other parts of the world, including Europe?

The most important point is that it is not enough to just have a system. It is (as we

mathematicians say) a necessary but not sufficient condition for achieving successful

eProcurement. So, whatever happens next in Kenya, we can see that having the

technical infrastructure for eProcurement is vital. A reliable Internet service that can

be accessed reliably by the supply market is essential if this is to work well.

Then, we need a supply market that is sophisticated enough to use eProcurement. It

is not enough to have a system and Internet connections – your suppliers need to

know how to use the system and be prepared to use it. The particular risk identified

now in Kenya is that the smaller, local suppliers will lose out, because they are the

potential suppliers who do not have the equipment, knowledge or resources to access

the system. Given that virtually every government and contracting authority wants to

promote local business, and small, dynamic, innovative firms, then this is critical.

As well as the market, you must have capability and capacity amongst the staff who

are going to operate the eProcurement system and process. that appears to be another

issue in Kenya, and really is a failing of the center if that is the case. Training must be

the responsibility of the “Programme owner” as it were, the central government in

this case.

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We also wonder whether the implementation in Kenya the stakeholder buy-in that

had again is necessary for a successful implementation – indeed, necessary for any

major change Programme really. If there was resistance to the new system, even if it

was not obvious or overt, then when anything goes wrong, those who oppose it will

jump on that immediately.

Smith finally sums it all up that, it has not been possible to establish if this is a home-

grown system or something bought in. He says that their own views on this are clear

– buy rather than build. However, in this case it does not seem to be the technical

features of the system that are the problem. But even so, we would always prefer to

see governments using off the shelf systems – if nothing else, it would be much easier

to find the resource to drive implementation and do the training needed on the ground

in Kenya if it was a eProcurement system that was in widespread use elsewhere.

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Table of Contents

Chapter Four
4 OVERSIGHT FUNCTION IN PUBLIC FINANCE MANAGEMENT ................ 2

4.1. THE ROLE OF NATIONAL ASSEMBLY ...................................................................... 2

4.2. THE ROLE OF SENATE .............................................................................................. 4

4.3. THE ROLE OF COUNTY ASSEMBLY .......................................................................... 5

4.4. THE ROLE OF AUDITOR GENERAL .......................................................................... 5

4.5. THE ROLE OF INTERNAL AUDIT .............................................................................. 6

4.6. ROLE OF CONTROLLER OF BUDGET IN RELATION TO DISBURSEMENT OF PUBLIC

FUNDS AS ENVISAGED BY THE CONSTITUTION AND PFM ACT, 2012 ............................. 6

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4 OVERSIGHT FUNCTION IN PUBLIC FINANCE

MANAGEMENT

4.1. The Role of National Assembly

The Budget Committee
The National assembly has established a “budget committee” in public finance matters

meant to oversee public finance management.

The committee is established to deal with budgetary matters and has responsibility

for the following matters, in addition to the functions set out in the Standing Orders:

a) Discuss and review the Budget Policy Statement and budget estimates and

make recommendations to the National Assembly;

b) Provide general direction on budgetary matters;

c) Monitor all budgetary matters falling within the competence of the National

Assembly under this Act and report on those matters to the National Assembly;

d) Monitor adherence by Parliament, the Judiciary and the national government

and its entities to the principles of public finance and others set out in the

Constitution, and to the fiscal responsibility principles of this Act;

e) Review the Division of Revenue Bill presented to Parliament and ensures that

it reflects the principles of the Constitution;

f) Examine financial statements and other documents submitted to the National

Assembly and make recommendations to the National Assembly for

improving the management of Kenya's public finances;

g) Make recommendations to the National Assembly on "money Bills", after

taking into account the views of the Cabinet Secretary; and

h) Table in the National Assembly a report containing the views of the Cabinet

Secretary

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i) Introduce the Appropriations Bill in the National Assembly. accordance with a

system that is fair, equitable, transparent, competitive and cost-effective.

Parliamentary Budget Office

The office known as the “Parliamentary Budget Office” exists as an office of the

Parliamentary Service. In addition to any other criteria established by the

Parliamentary Service Commission, the

Budget Office consists of people appointed on merit by virtue of their experience in

finance, economics and public policy matters.

Responsibilities of the Parliamentary Budget Office

The Parliamentary Budget Office does the following: -

a) Provide professional services in respect of budget, finance, and economic

information to the committees of Parliament;

b) Prepare reports on budgetary projections and economic forecasts and make

proposals to Committees of Parliament responsible for budgetary matters;

c) Prepare analyses of specific issues, including financial risks posed by

Government policies and activities to guide Parliament;

d) Consider budget proposals and economic trends and make recommendations

to the relevant committee of Parliament with respect to those proposals and

trends;

e) Establish and foster relationships with the National Treasury, county treasuries

and other national and international organizations, with an interest in

budgetary and socioeconomic matters as it considers appropriate for the

efficient and effective performance of its functions;

f) Subject to Article 35 of the Constitution, ensure that all reports and other

documents produced by the Parliamentary Budget Office are prepared,

published and publicized not later than fourteen days after production; and

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g) Report to the relevant committees of Parliament on any Bill that is submitted

to Parliament that has an economic and financial impact, making reference to

the fiscal responsibility principles and to the financial objectives set out in the

relevant Budget Policy Statement; and

h) Propose, where necessary, alternative fiscal framework in respect of any

financial year.

i) In carrying out its functions the Parliamentary Budget Office shall observe the

principle of public participation in budgetary matters.

4.2. The Role of Senate

The Committee
There is a Committee of the Senate set to deal with budgetary and financial matters,

it has responsibilities for the following matters, in addition to the functions set out in

the Standing Orders: -

a) Present to the Senate, subject to the exceptions in the Constitution, the proposal

for the basis of allocating revenue among the Counties and consider any bill

dealing with county financial matters;

b) Review the County Allocation of Revenue Bill and the Division of Revenue Bill

in accordance with the Constitution at least two months before the end of the

financial year;

c) Examine financial statements and other documents submitted to the, and make

recommendations to the Senate for improving the management of

government's public finances; and

d) Monitor adherence by the Senate to the principles of public finance set out in

the Constitution, and to the fiscal responsibility principles of this Act.

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e) In carrying out its functions under the Committee shall consider

recommendations from the Commission on Revenue Allocation, County

Executive Committee member responsible for finance, the Intergovernmental

Budget and Economic Council, the public and any other interested persons or

groups.

4.3. The Role of County Assembly

Read: PART IV—COUNTY GOVERNMENT RESPONSIBILITIES WITH RESPECT TO

MANAGEMENT AND CONTROL OF PUBLIC FINANCE – SECTION 102

4.4. The Role of Auditor General

The Auditor-General audits and reports, in respect of that financial year, on the

following: -

a) The accounts of the national and county governments;

b) The accounts of all funds and authorities of the national and county

governments;

c) The accounts of all courts;

d) The accounts of every commission and independent office established by the

Constitution;

e) The accounts of the National Assembly, the Senate and the county assemblies;

f) The accounts of political parties funded from public funds; the public debt; and

g) The accounts of any other entity that legislation requires the Auditor-General

to audit.

The Auditor-General may audit and report on the accounts of any entity that is funded

from public funds. An audit report confirms whether or not public money has been

applied lawfully and in an effective way.

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Audit reports shall be submitted to Parliament or the relevant county assembly and

Parliament or the county assembly within three (3) months after receiving an audit

report should debate and consider the report and take appropriate action.

4.5. The Role of Internal Audit

There is an Internal - Auditor Generals Department at the National Treasury, which

ensures that its arrangements for conducting internal auditing include: -

(a) Reviewing the governance mechanisms of the entity and mechanisms for

transparency and accountability with regard to the finances and assets of the

entity;

(b) Conducting risk-based, value-for-money and systems audits aimed at

strengthening internal control mechanisms that could have an impact on

achievement of the strategic objectives of the entity;

(c) Verifying the existence of assets administered by the entity and ensuring that

there are proper safeguards for their protection;

(d) Providing assurance that appropriate institutional policies and procedures and

good business practices are followed by the entity; and

(e) Evaluating the adequacy and reliability of information available to

management for making decisions with regard to the entity and its operations.

4.6. Role of Controller of Budget in Relation to

Disbursement of Public Funds as Envisaged by the
Constitution and PFM Act, 2012

Controller of Budget is nominated by the President and, with the approval of the

National Assembly and to qualify to be the Controller, one needs to have extensive

knowledge of public finance or at least ten (10) years’ experience in auditing public

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finance management. The Controller, hold office for a term of eight (8) years and is

not eligible for re-appointment.

The Role of The Controller

1) To oversees the implementation of the budgets of the national and county

governments by authorizing withdrawals from public funds

2) Not approve any withdrawal from a public fund unless satisfied that the

withdrawal is authorized by law

3) Submits to each House of Parliament every four (4) months, a report on the

implementation of the budgets of the national and county governments.

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Table of Contents

Chapter Five
5 INTRODUCTION TO TAXATION .......................................................................... 2

5.1. HISTORY OF TAXATION ........................................................................................... 2

5.2. TYPES OF TAXATION................................................................................................. 8

5.3. PRINCIPLES OF AN OPTIMAL TAX SYSTEM .............................................................. 9

5.4. SINGLE VERSUS MULTIPLE TAX SYSTEMS ............................................................. 13

5.5. CLASSIFICATION OF TAX SYSTEMS........................................................................ 18

5.6. TAX SHIFTING......................................................................................................... 25

5.7. FACTORS THAT DETERMINE TAX SHIFTING .......................................................... 28

5.8. TAX EVASION AND TAX AVOIDANCE .................................................................... 29

5.9. TAXABLE CAPACITY................................................................................................ 32

5.10. FISCAL POLICIES ..................................................................................................... 35

5.11. THE REVENUE AUTHORITY; HISTORY, STRUCTURE AND MANDATE .................. 36

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5 INTRODUCTION TO TAXATION

5.1. History of taxation

World History
Benjamin Franklin (January 17, 1706 to April 17, 1790), a polymath, inventor, scientist,

printer, politician, freemason and diplomat best known as one of the Founding

Fathers who drafted the Declaration of Independence and the Constitution of the

United States once said, "In this world, nothing can be said to be certain, except death

and taxes." Emphasizing on the inevitability of both

Contrary to this popular believe in recent times, taxes haven’t been around forever.

Sure, there were taxes in ancient Greek, ancient Egypt, and ancient Roman

governments in times of war levied taxes on their citizens to pay for military expenses

and other public services. Taxation evolved significantly as empires expanded and

civilizations become more structured. But the idea of sales taxes, income taxes, payroll

taxes, and other types of taxes is mostly a modern invention.

“The earliest known tax records, dating from approximately six thousand years B.C.,

are in the form of clay tablets found in the ancient city-state of Lagash in modern day

Iraq,” according to a publication on the Association of Municipal Assessors of New

Jersey (AMANJ) website. This early form of taxation was kept to a minimum, except

during periods of conflict or hardship.

What does the Bible say about paying taxes?

In Matthew 22:17–21, the Pharisees asked Jesus a question: "'Tell us then, what is your

opinion? Is it right to pay taxes to Caesar or not?' But Jesus, knowing their evil intent,

said, 'You hypocrites, why are you trying to trap me? Show me the coin used for

paying the tax.' They brought Him a denarius, and He asked them, 'Whose portrait is

this? And whose inscription?' 'Caesar's,' they replied. Then He said to them, 'Give to

Caesar what is Caesar's, and to God what is God's.'" In full agreement, the apostle Paul

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taught, "This is also why you pay taxes, for the authorities are God's servants, who

give their full time to governing. Give everyone what you owe him: If you owe taxes,

pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor"

(Romans 13:6–7).

Taxation History in Kenya

I. Initial Stage: Portuguese

This can be traced back to the Portuguese who arrived at the Kenyan coast and took

over from the Arabs and signed the first recorded treaty that involved a form of

taxation in in 1502. The then Sultan Ibrahim of Malindi was held against his wishes

and forced to accept defeat. While being held hostage during negotiations on Vasco

da Gamma’s boat, a treaty of surrender was signed with Portugal for an annual

tribute of 1,500 meticals of gold.

By the end of the rule of the Arabs and Portuguese along the East coast of Africa the

existing balance of taxation that was inherited by the British included a capitation tax

payable per head of slave exported and customs revenue shared equally between the

Arabs and Portuguese. The tax base was, however, limited to traders only.

II. Second Stage: British

The British who ruled what is presently Kenya and Uganda together to form British

East Africa Protectorate colonial tax policy supported its own economy. This was done

initially through the Chartered company concept. However, later in order to

encourage rule from within the territory to make it viable after the accidental

discovery of arable land in Kenya. They introduced the following taxes:

1) Hut and Poll Tax in 1901, (fee payable by all locals per hut through labor,

money, and grain or stock.),

2) Land tax 1908,

3) Income tax 1921,
4) Graduated personal tax 1933

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III. Third Stage: Post independence

Soon after independence Kenya had income tax, corporation tax, trade taxes and

excise taxes. Value-added taxes were introduced later. During the first decade and a

half of independence, the government mainly dealt with taxation as there was a

desperate need.

IV. Fourth Stage: Currently

The new Constitution which was approved by 67% of Kenyan voters was presented

to the Attorney General of Kenya on 7th April 2010, officially published on 6th May

2010, and was subjected to a referendum on 4th August 2010. The constitution was

promulgated on 27 August 2010.

Article 209 of the Constitution of Kenya 2010 outlines powers to impose taxes or raise

revenue for both national government and county government.

Tax and Its Characteristics

Definition:

Dr. Dalton defines tax as a compulsory contribution levied on persons of a state for a

common purpose. While Prof. Sallingman, says tax is a compulsory contribution from

a person to the government to meet the expenses incurred in the common interest of

all without reference to special benefits conferred.

Tax can therefore be comprehensively defined as:

Compulsory/involuntary payment by a tax payer without directly obtaining

goods or services (as a "quid pro quo") in return.

In other words, there are no direct goods or services given to a tax payer i.e. no direct

benefit in return for the tax paid. The tax payer can, however enjoy goods or services

provided by the government like any other citizen without any preference or

discrimination

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Characteristics of Tax

a) It is a compulsory contribution from the people to the government hence anyone who

refuses to pay tax is punished.

b) It’s a payment of the people to the government to finance its functions for the

benefit of all citizens.

c) It’s not paid for a specific service rendered by the government to the person paying the

tax. This means that the person can’t ask the government to provide a service to

him for the tax he has paid. And one cannot refuse to pay tax because he does not

require the services of the government.

Taxation is the part of public finance that deals with the means and/or a system of

raising money to finance government by way of Taxes among other sources. All

governments require payment of money - taxes - from people.

Governments use tax revenues to provide goods and services to the public (its

Citizens) i.e. pay soldiers & police, build dams & roads, operate schools & hospitals,

provided food for the poor & medical care to the elderly, and for hundreds of other

purposes. Without taxes to funds its activities, government could not exist.

Generally, Taxation is part of a boarder discussion on public finance while Public

Finance is the section of economic theory that deals with public expenditure and

revenue.

Whereas Public Revenue is the cash inflow of the government from various sources,

which include: -

i. Taxes

ii. Fees levied on services provided by the government i.e. Motor Vehicle

registration fees, Import licensing fees etc.

iii. Fines charged on law brokers

iv. State property fees i.e. Entrance fees for Game Reserves

v. Public debts i.e. Treasury Bills

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vi. Disposal of public investments i.e. Sale of government shareholding in

parastatals

vii. Donor Aid i.e. IMF, World Bank

viii. Grants

Public expenditure on the other hand is the allocation of public revenue to the various

functions of the government like recurrent expenditure which is day to day operations

of the government i.e. salaries and wages of civil servants. Capital expenditure, which

includes investment projects of the government i.e. Building Schools, Roads and

Hospitals.

Functions of The Government

Governments world over are expected to carry out certain activities as part of their

services to the public. These are divided into four major functions, namely: -

1) Administration: The government oversees the administration of the country

by for instance in the Kenyan scenario, creation of provinces; Districts;

Divisions; Locations and Sub-Location.

2) Protection: A good government must ensure the security of its people from

external aggression and internal security must be provided. This is done

through The Armed Forces and The Police.

3) Social functions: The government provides social facilities like Housing,

Education and Health care among others

4) Development functions: It is the duty of the government to develop and

maintain transport and communication network, agricultural systems and the

economic infrastructure in general.

Principally, the role of governments is to enable us to appreciate the importance of

government sector and therefore towards this end in trying to fulfill the above

functions modern governments generally undertake the following: -

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1. Security (external & internal) involving military, police & other protective

services.

2. Justice or settlement of disputes

3. The regulation & control of economy including coinage, weights and measures,

the business practices, operation of public sector undertakings

4. Social and cultural welfare through education, social relief, social insurance,

health and other activities.

5. Conservation of natural resources.

6. Promotion of the unity of the state by control of transportation and

communication.

7. Administration and financial system, government revenue expenditure and

fiscal control.

8. Education and employment.

9. Housing.

10. Public health.

11. Uplifting of weaker sections of the society.

12. Restoration of social justice in the society.

To perform the above functions effectively and adequately, the government needs

funds

Why Governments Levy Taxes

Government(s) world over levy taxes not only limited to raising of revenue: -

a) Raising Revenue: - Every government requires funding to carry out its operations.

A significant part of this funding is the revenue raised through taxation. Revenue

is used to fund both recurrent and capital expenditure.

b) Protectionist policy: - The government uses taxes to protect local industries from

competition brought by foreign industries. This involves taxation of similar goods

imported into Kenya or the exemption of local products from taxation.

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c) Economic stability: - The government uses taxes in times of inflation and

deflation. This is mainly used to control expenditure patterns in the economy i.e.

during inflation taxes rates are raised to suppress the purchasing power of money

while in times of deflation tax rates are lowered to increase the purchasing power

of people.

d) Distribution of Wealth: - A good tax system will tax the poor at lower rates than

the rich and the money raised used to improve the living standards of the poor

hence wealth balancing.

e) Allocation of resources: - Taxes are also used for optimal allocation of resources

in order of priority. Revenue raised in taxes will be allocated to projects which are

of fundamental importance to a society i.e. Beer and cigarettes are heavily taxed in

terms of excise duty and the amount so raised used to fund social projects like

Schools, health care etc.

f) Employment Policy: - The government can use money raised from taxes to put up

projects to create jobs. This can be done by funding government institutions so as

to employ people i.e. TSC. The government can also use the same to salvage

government institutions, which are in financial difficulties to avoid job losses.

5.2. Types of taxation

Income Taxes
Income tax is a tax that governments impose on financial income generated by all

entities within their jurisdiction. By law, businesses and individuals must file an

income tax return every year to determine whether they owe any taxes or are eligible

for a tax refund. Income tax is a key source of funds that the government uses to fund

its activities and serve the public.

They include among others: Corporation taxes for companies, PAYE for individuals,

Capital gains tax, Advance tax, Presumptive tax, Fringe benefit tax, Withholding tax.

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Consumption Taxes
A consumption tax, sometimes referred to as a "spendings tax,” is a tax levied

on consumption spending on goods and services. The tax base of such a tax is the

money spent on consumption. It closely resembles the income tax except that the tax

base is spending, not income. The important difference is that the tax base is

expenditure rather than income.

They include among others: Value Added Tax, excise duty, Withholding tax

Customs Duties
Customs Duty is a tax imposed on imports & exports. The rates of customs duties are

either specific or on ad valorem basis, that is, it is based on the value of goods traded.

Other Taxes, Fees & Levies

These include:

a) Entertainment tax e) Road Maintenance Levy

b) Petroleum Development Fund f) Road Transit Toll Levy

c) Import Declaration & Fund g) Aviation Revenue

(IDF) h) Revenue Stamps

d) Foreign Motor Vehicle i) Kenya Bureau of Standards

Inspection Fee (KEBS) Levy

5.3. Principles of an optimal tax system

The Government requires funds for the performance of its various functions. These

funds are raised through tax and non-tax sources of revenue. Imposing tax on income,

property and commodities etc. raises tax revenues. In fact, tax is the major source of

revenue to the Government.

No one likes taxes, but they are a necessary evil in any civilized society. Whether we

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believe in big government or small government, governments must have some

resources to perform their essential services. So how does one go about evaluating a

tax?

Taxation is an important instrument for the development of economy of the country.

A good tax system ensures maximum social advantage without any hardship on

taxpayers. While framing the tax policy, the government should consider not only its

financial needs but also taxable capacity of the community. Besides the above,

government must consider some other principles like equality, simplicity,

convenience etc. These principles are called as "Canons of Taxation". The following

are the important canons of taxation.

Canons Advocated by Adam Smith Canons Advocated by Others

A. Canon of Equality. A. Canon of Productivity.

B. Canon of Certainty. B. Canon of Elasticity.

C. Canon of Convenience. C. Canon of Diversity.

D. Canon of Economy. D. Canon of Simplicity.

E. Canon of Expediency.

F. Canon of Co-ordination.

G. Canon of Neutrality.

Canons Advocated by Adam Smith

No one has yet come up with a better set of criteria for judging a tax than the

Canons of Taxation first proposed by Adam Smith more than two hundred years

ago. Adam Smith in his book, “Wealth of Nations” has explained the four canons

of taxation that are mentioned above. All accepts them as good taxation policy.

A. Equality

This principle of Adam Smith, states that “the subjects of every state ought to

contribute toward the support of the Government, as nearly as possible, in proportion to

their abilities". That is, a good tax system should be based on the ability to pay of

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the people. That is, all people should bear the public expenditure in proportion to

their respective abilities. Tax burden should be more on the rich than on the poor.

Since the rich people can pay more for public welfare, more tax should be collected

from richer section and less tax from the poor. The ability to pay may be

determined either based on income and wealth or based on consumption i.e.

luxury or necessity. In simple terms, canon of equality implies that when ability

to pay is taken into consideration, a good tax should distribute the burden of

supporting government more or less equally among all those who benefit from

government.

B. Certainty

Adam Smith also advocated is certainty and contended that, "the tax which each

individual is bound to pay ought to be certain and not arbitrary. The time of payment, the

manner of payment, the quantity to be paid, should be clear and plain to the contributor

and every other person". It means the time; amount and method of payment should

all be clear and certain so that the taxpayer can adjust his income and expenditures

accordingly. This principle removes all uncertainties in the payment of tax and

ensures smooth functioning of the tax department.

C. Convenience

In the canon of convenience, Adam Smith states that, "every tax ought to be levied at

the time or in the way it is most likely to be convenient for the contributor to pay it". That

is, the tax should be levied and collected in such a way that is convenient to

taxpayer. For example, it may be in installments, land revenue may be collected at

the time of harvest etc. This principle reduces the tendency of tax evasion

considerably.

D. Economy

Adam Smith believed that "every tax ought to be so contrived as both to take out and

keep out of the pockets of the people as the little as possible over and above what it brings

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into the public treasury of the state". This principle states that the minimum possible

amount should be spent on tax collection and the maximum part of the collection

should be brought to the Government treasury. This canon of ‘Economy' is

naturally sub-divided into two parts viz.,

a) ‘Taxation should be inexpensive in collection', and

b) ‘Taxation should retard as little as possible the growth of wealth'.

It may also be remarked that there is a close connection between "Economy" and

"Productivity", since the former aids in securing the latter.

Canons Advocated by Others

Other researchers have added to Adam Smith’s criteria. Some have noted that a

tax should be adequate, meaning it should produce sufficient revenue to support

whatever it is that citizens want their government to do. Some have argued for a

"Benefit Principle" whereby the amount of tax each is called upon to pay bears

some relationship to the benefits each taxpayer receives from government. Others

have argued that a tax should be neutral in its effect on the way markets work. But

Smith’s Canons remains the starting point for any serious evaluation of a tax.

A. Productivity: C.F. Bastable, identified that a tax system should be productive

enough i.e. it should ensure sufficient revenue to the Government and it should

encourage productive activity by encouraging the people to work, save and

invest.

B. Elasticity or Buoyancy: The next principle advocated by Bastable is elasticity.

The taxes should be flexible. It should be levied in such a way to increase or

decrease the tax revenue depending upon the need. For example, during

certain unforeseen situations like floods, war, famine, and drought etc. the

Government needs more amount of revenue. If the tax system is elastic in

nature, then the Government can raise adequate funds without any extra cost

of collection.

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C. Diversity: As Per this principle, there should be diversity in the tax system of

the country. The burden of the tax should be distributed widely on the entire

people of the country. The burden of the tax should be decentralized so that

everyone should pay as per his ability. To achieve this, the Government should

impose both direct and indirect taxes of various types. It should not depend

upon one or two types of taxes alone.

D. Simplicity: This principle states that the tax system should be simple, easy and

understandable to the common man. If the tax system is complex and vague,

the taxpayer cannot estimate his tax liability and it will cause irregularities in

the payments and leads to corruption.

E. Expediency: A tax should be levied after considering all favorable and

unfavorable factors from different angles such as economic, political and social.

F. Co-ordination: In a federal set up like Ethiopia, Federal and State Governments

levy taxes. So, there should be a proper co-ordination between different taxes

imposed by various authorities. Otherwise, it will affect the people adversely.

G. Neutrality: This principle stresses that the tax system should not have any

adverse effect. That is, it shouldn’t create any deflationary or inflationary

effects in the economy.

5.4. Single versus multiple tax systems

Generally, there are two major types of tax systems.

1) Single or unified tax system

2) Multiple tax system.

A. Single Tax System: means only one kind of tax. A single tax denotes the only tax

exclusive tax on the one class of things. The single tax might be proportional

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progressive or regressive. It may be for a single fixed amount. According to

Seligman “A single tax denotes the only tax, on exclusive the one class of things”

Merits of Single Tax System

a) The greatest merit of single tax is it simplicity. Since there is only one tax work

of the government is simplified.

b) Levy assessment and collection of revenue would become very easy.

c) Levy and collection of tax can be good if tax concerned is carefully selected.

Demerits of A Single Tax System

j) The greatest defect of the single tax system is that from the revenue point

of view the tax yield may not be sufficient for the government.

k) Yield of any single tax does not increase rapidly as the yield from multiple taxes

system.

l) Increase in the rate of tax alone cannot increase revenue.

B. Multiple Tax System: means a tax system comprising several types of taxes. They

may include both direct taxes and indirect taxes.

Merits of Multiple Tax System

a) Multiple tax system generally results in equitable tax burden since it is

comprising of direct and indirect, proportional and progressive taxes.

b) It is difficult for individuals to evade taxes altogether.

c) It is more useful in achieving social and political objectives.

d) Tax system becomes broad based and even covers every sector in the country.

Today, with enormous range of expenditure outlays, Governments cannot depend

upon a single tax. Because it will not provide sufficient revenue to meet their

financial needs. Moreover, with the single tax, the Government cannot achieve the

principles of equality, ability to pay and equitable distribution of income and

wealth among the people. Thus, the principle of multiple-taxation is

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recommended whereby the Government may resort to various direct and indirect

taxes to attain their objectives both fiscal and social.

Different Kinds of Multiple Taxes

Multiple Taxes

Diffrent Authorities Single Authority

International Double NationalDouble Double Taxation by the

Taxation Taxation same Authority

3. Taxation on profits
Taxes levied by two
Taxes levied by 2. Taxation on both before distribution and
Goverments of thesame 1. Taxation on capital
Goverments of two debtors and creditors on dividends after
Country i.e. National & and income.
diffrent Countries for the amount of loan. distribution.
County Goverments

1. Double Taxation by Different Authorities

When two different taxing authorities either international or National levy the

same tax base, it becomes a case of double taxation.

(a) International Double taxation: This type of double taxation occurs when the

Governments of different countries levy on the same tax base. The scope of a

tax determines the incidence of its burden. It includes both direct and indirect

taxes. Generally, the income tax, wealth tax and customs duty cause such

international double taxation.

(b) National Double Taxation: This kind of double taxation occurs when the

Governments within a country levy tax on the same base. When the National

Government and County Governments of a country levy tax on any one tax

base, it is called federal/National double taxation.

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2. Double Taxation by the Same Authority

Such a double taxation occurs when a Government either National or County

levies on the same tax base twice. The tax on capital and income, debtors and

creditors on the amount of loan, on the profits before and after distribution and

the like are the notable examples in this regard.

Effects of Double Taxation

Generally, double taxation is not liked by taxpayers and is highly criticized by the

economists as It affects the economy of the country directly and indirectly. The

main effects of double taxation are discussed below: -

1) Injustice to the Taxpayers - Double taxation causes injustice to the taxpayers.

It discriminates among the different taxpayers.

2) Does not conform to the Principle of Ability to Pay - In case of double

taxation, the tax system does not conform to the principle of ability to pay.

Because when both the Central and County Governments tax the same group

on the same tax base, the principle of ability to pay is violated.

3) Does not ensure the Principle of Equity - When the National and County

Governments levy taxes on the same commodities especially on the necessities,

it will broaden the gap between the rich and the poor. Thus, the double taxation

violates the principle of equity also.

4) Discourages the Ability to Work, Save and Invest - Double taxation increases

the price of the commodities and leaves the people with lower disposable

income. This in turn affects the standard of living of the people and thereby

reduces their ability to work, save and invest.

5) Discourages the Small-scale Industries - When the taxes are uniformly levied

without any exemption to small-scale sector, the competitive efficiency of them

will be affected. Because of a rise in their prices, they cannot compete with the

large-scale industries in the market.

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6) Discourages Exports - When the same commodities are taxed both by National

and County Governments, their price will automatically be increased which in

turn affects the export market.

7) Affects the Overall Economic Development of the Country - Since double

taxation affects the individual economic activities, the whole economic

development will be affected. In such a situation, the Government cannot use

the taxation as a weapon, boost the sick industries and to curb the effects of

trade cycles in the economy.

Remedies for Double Taxation

To remove the effects of double taxation, the following remedial measures can be

adopted. They can be classified on the following two categories: -

I. Remedies for the Problem of International Double Taxation

a) Agreement for Mutual Exemption: - The countries may enter an agreement

to exempt the income of non-residents when they take the income outside.

b) Basis for Incidence: - The double taxation can be avoided when the taxes

are levied either on residential status or on citizenship and not on the both.

c) Special Measures: - special measures should be devised so that

Governments or two countries may tax different parts of income earned by

a person.

II. Remedies for Internal or National Double Taxation

The following are the remedies to avoid internal or federal double taxation: -

a) Separate List: - There should be a separate list of taxes that can be levied by

the Union Government and State Governments.

b) Co-ordination between the Fiscal Policies: - There should be a perfect co-

ordination between the fiscal policies of the National and the County

Governments. And the problem of double taxation can be solved through

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the centralization of finance. Getting the final approval from the Central

Finance Minister for the State budgets can help achieve this.

c) Avoiding Overlapping of Taxes: - There should not be any overlapping of

taxes. The problems of double taxation can be solved to a considerable

extent if due consideration is given in this regard. To avoid the double

taxation caused by overlapping of sales tax and excise duties, they may be

replaced by a centrally administered value added tax.

5.5. Classification of tax systems

Classification of taxes can be done in two different ways, namely: -

a) Incidence of tax (Tax burden)

b) Rates of tax

A. Classification by Incidence of Tax

Incidence refers to the point or person on whom tax is imposed. Burden on tax refers

to bearing of the tax that is he/she who pays tax i.e. when tax (VAT) is imposed on a

trader he pays it to the government but he recovers it from the customer through the

selling price, in this case the incidence of the tax is on the trader but the burden is on

the customer, whereas, when tax (PAYE) is levied on once salary, he/she pays it to the

government but cannot recover it from anybody else in which case both the tax

incidence and tax burden is on him. Under this classification therefore there basically

exist two types of taxes namely: -

1) Direct taxes

2) Indirect taxes

1) Direct Taxes

This refers to the type of taxes whereby both the incidence and the burden is on the

same person. That is the person on whom the tax is imposed cannot transfer it to

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another person. He/she pays it himself/herself. They include Income tax; corporation

tax; Capital gains tax; Inheritance tax etc.

Advantages of Direct Taxes

- Equitable - Direct taxes are based on income hence people pay per ability.

- Certainty - Usually the taxpayers knows how much to pay and at what time to

pay since incomes is certain. The government also knows how much to collect and

when to collect it.

- Economical - The cost of collection is usually low since they are deducted and

remitted to the government at source, which reduces the government’s cost of

collection and the taxpayers’ cost of payment.

- Elastic - It is possible for the government to vary the rates of tax from time to time

to conform to the needs of the economy.

- Simplicity - The tax system is such that it is easy to understand and make returns.

- Civic Consciousness - They are the most understood taxes by the public since the

public knows that they pay taxes to the government. They therefore take interest

in knowing how the government uses the taxes, which promote accountability in

government.

Disadvantages of Direct Taxes

- Discourages Investment and Savings - Direct taxes consume what could have been

saved and taxes on interest and Dividends are direct taxes and discourage savings

and investments.

- Low Coverage - Some people don’t fall under these tax brackets and those who do

not earn income do not pay taxes, yet they’ll enjoy the benefits of projects funded

with such taxes.

- Discourages Production - Companies may reduce production to avoid paying

high taxes especially when faced with financial problems.

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- Prone to Evasion - Taxpayers usually avoid direct taxes by making false

statements to reduce their tax liability.

- Inconvenient - Persons paying such taxes must undergo the process of registration

with many formalities and tax payers must take their own time and resources to

make tax returns to the government.

2) Indirect Taxes

These are taxes whose incidence and burden fall on different persons. That is the

person on whom tax is levied or imposed can recover the tax so paid from another

person. They include, Value Added Tax; Import Duty; Export Duty etc.

Merits of Indirect Taxes

- Wide coverage - Since they are based on expenditure they cover all classes of

people since everyone must spend.

- Elastic - The government can easily vary the tax rates from time to time as per the

needs of the economy.

- Economical - Those making returns are charged with the responsibility of paying

the money to the government hence the governments cost of collection is minimal.

- Diversity - These taxes can be levied on a wide variety of goods and services. This

diversity increases the revenue collected by the government.

- Less Evasion - The person charging the tax acts like an agent of the government

he/she collects money from buyers hence such taxes are not a cost to him since the

burden falls on the buyer. And because the taxes are included in the prices collect

ability is high.

- Economic Policy Tool - Indirect taxes can be used to promote exports and

discourage imports by taxing imports and making exports tax free hence building

the domestic market.

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- Social welfare - Indirect taxes are levied heavily on harmful commodities like Beer

and Cigarettes, which reduce their consumption.

Demerits of Indirect Taxes

- Uncertainty - Since they are based on expenditure government revenue is

uncertain because it’s not easy to tell how much people will spend in any period.

- Regressive - The rich and the poor pay tax at equal rates in so doing the poor pay

a bigger proportion of their wealth than the rich hence the burden is more on the

poor than the rich.

- Uneconomical - They can be uneconomical to collect especially for the customs

duty. The government must employ officers at all points of entry into Kenya.

- Inflation - Indirect taxes are included in the prices leading to high costs of

production and high selling prices to consumers hence inflation.

- Lack of Civic Consciousness - They are paid in commodity prices therefore the

public is not usually aware that they are paying taxes They will not therefore be

much concerned with allocation of such funds.

NB: While Direct taxes are based on income and wealth of persons such taxes cannot be

passed to another person once paid. Indirect taxes on the other hand are based on

expenditure hence can be passed over by he/she who pays to another through commodity

prices.

B. Classification by Rates of Tax

Unlike incidence of tax this classification uses the trend in tax rates to classify taxes as

follows: -

a) Progressive Taxes

b) Proportional Taxes

c) Regressive Taxes

d) Digressive Taxes

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A. Progressive Taxes

A tax is progressive when the marginal rate of tax rises with income. A good example

of a progressive tax in Kenya is the income tax on individuals.

Merits of Progressive Taxes

- Equitable - High-income earners pay more than low-income earners

- Productive - It yields more revenue, as the rate of tax is high on higher incomes.

- Economical - Collection cost will not increase with the increase in tax payable.

- Better Distribution of Wealth - High-income earners surrender more of their

earnings than the low-income earners. This is then used to raise the living

standards of the poor.

Demerits of Progressive Taxes

- Discourages Savings - Since the rate of tax is high on high incomes this may reduce

the funds available for savings and investment.

- Arbitrary - Progressive taxes are based on scales hence complex to understand.

- Assumption - It assumes that different people get equal utility from equal incomes.

B. Proportional Taxes

A tax is proportional when the same rate of tax is applied to all tax payers irrespective

of their income level, for example the corporation tax which currently stands at 30%

for all firms.

Advantage of Proportional Tax Structure

- It is simple in nature

- It is uniformly applicable

- It leaves the relative economic status of taxpayer unchanged

Disadvantages of Proportional Tax Structure

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- Inequitable distribution

- Inadequate resources: means that the tax for the rich and poor are the same.

Hence, the government cannot obtain from the richer sections of the society as

much as they can give

- Inelastic in nature: because the government cannot raise the rate whenever it

wants to raise the revenue.

NB: Proportional tax system suffers from the defects of inequitable distribution of the tax

burden, lack of elasticity and inadequacy of funds for the increasing needs of the modern

government. Hence, it is not particularly and universally accepted.

C. Regressive Taxes

A regressive tax is one where the rate of tax falls as income rises. Here, the poor are

called upon to make a greater sacrifice than the rich.

D. Digressive Taxes

These are taxes that call upon the higher income earners to contribute less than their

due contribution compared to the lower income earners. i.e.

a) The burden is relatively less since the tax is mildly progressive-the rate of

progression is not sufficiently steep, or

b) There is progression up to a certain point beyond which the rate becomes

proportional.

NB: In deciding on whether a tax regime is progressive, proportional, regressive or

digressive it’s important to consider the proportion paid than the amount of

money paid.

Taxes can also be classified as Base of Tax on the basis if object of taxation i.e.

Tax Base for example Income Tax, Turnover Tax & Value Added Tax

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Figure 1: Tax Systems

Economic Effects of Taxation

1. Distribution of income

Progressive taxes make income more evenly distributed while regressive widen the

gap of distribution. Proportional taxes on the other hand leave the distribution

unchanged. Most indirect taxes are regressive because they impose a higher burden

on the poor than on the rich. This is because low-income earners tend to spend a

greater proportion of their income on basic commodities, which are taxed indirectly.

2. Consumption

Direct and indirect taxes affect both the total consumer spending and the pattern of

consumer spending. A direct tax reduces the disposable income hence its effect will

depend upon the propensity to consume and save. If savings are desirable, then the

person must cut down on consumption. Indirect taxes will reduce the total demand

for the goods because of higher prices; higher prices will also reduce people’s

purchasing power.

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3. General Price Levels

Direct taxes fall on income and do not have a direct influence on the general price

levels. However, since they reduce disposable income they could reduce inflation by

lowering aggregate demand. A rise in general in indirect taxes will raise the general

price levels if not checked this could result into inflation.

4. Incentives

Direct taxes (income tax and corporation tax) are criticized as being disincentives to

work save and invest. Income taxes will discourage people from working more hours

because what they’ll earn as overtime is taxed on higher brackets. Higher interest rates

on income from savings are taxed and this discourages people from saving. High

corporate taxes will also reduce the ability and incentive to invest.

5.6. Tax shifting

Tax shifting is the transferring of some or all of a tax burden of an entity to another

(for example, by a subsidiary to the parent firm, or by a producer or supplier to the

consumer).

One of the very important subjects of taxation is the problem of incidence of a tax. By

incidence of taxation it’s meant “final money burden of a tax or final resting place of

a tax”.

It is the desire of every government that it should secure justice in taxation, but if it

does not know as to who ultimately bears money burden of a tax or out of whose

packet money is received, it cannot achieve equality in taxation. If government knows

who pays tax, it can evolve an equitable tax system. It can easily tap important sources

of taxation and thus can collect large amount of money without adversely affecting

economic and social life of the citizens of the country.

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Incidence of Tax - The problem of the incidence of a tax is the problem of who pays

it. Taxes are not always borne by the people who pay them in the first instance. They

are sometimes shifted on to other people.

Incidence means the final resting place of a tax. That is to say, the incidence is on the

man’ who ultimately bears the money burden of the tax.

Impact of Tax - is on person from whom government collects money in first instance.

While incidence of a tax is on person who finally bears burden of a tax

Illustrations: - Distinguishing Impact & Incidence.

As we have already seen, the impact of the tax is on the person who pays it in the first instance

and the incidence is on the one who finally bears it.

a. Now, take for instance, if excise duty is imposed on sugar, it is paid in the

first instance by the sugar manufacturers; the impact is on them. But the

duty will be added to the price of the sugar sold, which, through a series

of transfers, will ultimately fall on the consumer of sugar. The incidence is,

therefore, on the final consumer.

b. Suppose government levies a tax on electric goods in USA. Manufacturers

of electric goods will pay tax to Government in first instance. Impact of tax is,

therefore, on them. If manufacturers of electric goods industries add tax

to price and succeed in selling goods at higher prices of electric goods to

consumers, burden of tax is thus shifted on to consumers.

Incidence and Shifting of a Tax

Incidence is final resting place of a tax while shifting is process of transferring money

burden of tax to someone else. Shifting finally ends in incidence. When a person on

whom tax is levied tries to shift tax on to the other, he may succeed in shifting tax

completely, partly, or may not succeed at all. Shifting of tax can take place in two

directions forward and backward.

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If tax is shifted, from seller to consumer, it is a case of forwarding shifting.

Backward shifting takes place when consumers do not purchase commodities at

increased prices. Sellers are then forced to cut down prices and bear burden of tax

themselves.

NB: The process of shifting may be slow or may be only partially effective so that the burden

of a tax may not fall entirely on the person, who is intended to bear it.

Incidence and Effect of a Tax

As stated earlier incidence is direct money burden of a tax. Effect of taxation is

repercussions or consequences of imposition of a tax on individuals and on

community in general.

The effect of a tax therefore, refers to incidental results of the tax. There are several

consequences of the imposition of tax, which are quite distinct from the problem of

incidence.

Illustration

The imposition of excise duty on sugar (as discussed above), we have seen, the excise

duty is shifted ultimately to the consumer of sugar. The incidence is on the consumer,

but the effects of this duty may be far-reaching! E.g.

a) A heavy excise duty may cripple the industry.

b) The manufacturer’s profits will be reduced.

c) Wages may be reduced.

d) Labour and capital m ay must leave the industry

e) Thousands of middlemen engaged in the distribution of sugar may find their earnings

reduced.

f) Reshuffling (middlemen) of their family budgets may affect the demand for certain other

goods.

g) The consumption of sugar may decrease and that of its substitutes may increase.

All these are the effects of the tax.

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5.7. Factors that determine tax shifting

1. Elasticity of demand and supply

The more the elasticity, the lower the incidence on the sales. The higher the

incidence on supply.

2. Nature of markets

In an oligopolistic market (i.e. sellers and many buyers) tax shifting to buyers

is high since few sellers can team up to determine the market price. In a

situation where there are many buyers and sellers, a large portion of tax will be

borne by sellers. For a monopolistic market, the entire tax burden falls on the

shoulders of the buyer.

3. Government policy on pricing

In the case of government price control, the supplier cannot increase prices

hence cannot shift tax burden to buyers and vice versa.

4. Geographical location

If taxes are imposed on certain regions, it is hard to shift them to consumers

because consumers will move to regions with low taxes.

5. Nature of tax (direct or indirect tax)

Direct tax e.g. PAYE cannot be shifted whatsoever while indirect taxes can be

shifted through increase in prices.

6. Rate of tax

If too high, shifting can occur backwards or forwards, if too low, it may be

absorbed by the manufacturer.

7. Time available for adjustment

The person who can adjust faster (buyer or seller) will be able to shift tax e.g. if

the buyer cash shift to substitute goods, the seller will bear the tax burden.

8. The tax point

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5.8. Tax evasion and tax avoidance

Tax avoidance and evasions constitute a problem in almost all the countries of the

world. Tax avoidance is different from tax evasion, while evasion is against the law;

In contrast, avoidance is within the ambit of law.

Tax evasion is the illegal evasion of taxes by individuals, corporations, and trusts. Tax

evasion often entails taxpayers deliberately misrepresenting the true state of their

affairs to the tax authorities to reduce their tax liability and includes dishonest tax

reporting, such as declaring less income, profits or gains than the amounts earned, or

overstating deductions.

Tax avoidance is the legal use of tax laws to reduce one's tax burden. Both tax evasion

and avoidance can be viewed as forms of tax noncompliance, as they describe a range

of activities that intend to subvert a state's tax system, although such classification of

tax avoidance is not indisputable, given that avoidance is lawful, within self-creating

systems.

A. Tax Avoidance (Tax planning)

The newly enacted (Date of Assent: 15th December 2015) Tax Procedures Act, 2015

defines “tax avoidance” as a transaction or a scheme designed to avoid liability to

pay tax under any tax law.

Section 85 of the Act whose commencement date was 19th January 2016 provides that,

If the Commissioner has applied a tax avoidance provision in assessing a taxpayer, the taxpayer

is liable for a tax avoidance penalty equal to double the amount of the tax that would have been

avoided but for the application of the tax avoidance provision [Section 23 of the of the Income

Tax Act (Cap. 470 – Laws of Kenya)]. Some tax planning opportunities, which are

exercised by companies, include: -

(a) Lease/buy decision - Whether to lease asset and pay lease charges, which are a

tax allowable, expense or buy assets and enjoy capital allowances.

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(b) Financing decision - Whether to use debt capital where interest charges are

allowable or equity capital where dividends are not allowable

(c) Form of business ownership - Whether to operate as a partnership a sole

proprietorship or a Limited liability company

(d) Trading decision - Whether to produce goods for sale locally, which are subject

to VAT or produce for exports which are deemed to be zero-rated.

Previously, no specific penalty or imprisonment term was provided in the tax law.

However, the Commissioner had powers to reverse a transaction he adjudged to

constitute tax avoidance scheme and impose penalties under various tax laws. Under

the current law (Tax Procedures Act, 2015) however, a penalty equal to 200% of the

amount avoided by a taxpayer has been introduced. This penalty is not eligible for

waiver by the Commissioner or the Cabinet Secretary.

B. Tax Evasion (Tax fraud)

Tax evasion means fraudulent action on the part of the taxpayer with a view to violate

civil and criminal provisions of the tax laws. It can be defined as “tax evasion implies

the activities involving an element of deceit, miss-representation of facts,

falsification of accounts including down right fraud”. Thus, Tax crime is a deliberate

attempt to illegally obtain a tax benefit through violation of tax laws. Domestic tax

crimes come in many forms which include: -

a) Nil/non-filing income tax returns,

b) Failure to register as a tax entity,

c) Failure to furnish tax returns,

d) Failure to pay taxes,

e) Failure to keep records,

f) Failure to remit withheld taxes,

g) Dealing with excisable goods without a valid license,

h) Fraudulent VAT refund claim,

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i) Under declaration of income, and

j) Falsification of books of accounts.

Customs Tax crimes, on the other hand, include concealment,

a) Tariff manipulation,

b) Manifest fraud,

c) Use of fake security bonds to clear transit goods,

d) Diversion/dumping of transit goods,

e) Customs miss-declarations,

f) Smuggling,

g) Fraudulent cancellation of export entries, and

h) Import or export prohibited or restricted goods.

However, human intelligence devices new methods of evasion and the Governments

are constantly trying to remove the loopholes in the tax laws.

Causes of Tax Evasion

The following are the important causes for Tax evasion:

a) Multiplicity of Tax Laws

b) Complicated Tax Laws

c) High Rates of Taxation

d) Inadequate Information as to Sources of Tax Revenue

e) Investment in Real Property

f) Ineffective Tax Enforcement

g) Deterioration of Moral Standards

Remedies for Tax Evasion

If steps are not taken to reduce tax evasion, it may cause irreparable harm. The

following are the remedies to prevent tax evasion.

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(a) Thorough Overhauling of Tax Laws One of the main reasons for tax avoidance

and tax evasion is loose drafting of tax laws which contain several loop-holes and

weak points that enable the tax evaders to carry on the unlawful activities. Hence,

it is necessary to re-draft the tax laws thoroughly without any loopholes and weak

points.

(b) Reduction in Tax Rates The prevalence of high rates is the first and foremost

reason for this tax evasion. Hence, the rate of tax should be reduced to a reasonable

level.

(c) Maintenance of Proper Accounts Maintenance of proper accounts should be made

compulsory for persons whose business and professional income exceeds a

prescribed limit. In the Income Tax law, a provision to this effect has been

introduced recently.

(d) Tightening of Tax Enforcement This may be said to be the crucial remedy if the

penalties for violation of tax laws are strictly enforced, incidence of tax evasion

could automatically be reduced.

5.9. Taxable capacity

Taxation on people must be levied with great care and rationality. To practice this

rationality and care, the taxing agency must follow certain code of conduct in the form

of principles of taxation while determining the type and amount of tax.

The term ‘taxable capacity’ occupies an important place in public finance particularly

in the domain of taxation.

The perception of taxable capacity has racked the brains of not a few economists and

publicists. Dalton describes it "a dim and confused conception". Findlay Stirras, on

the other hand, thinks that it is of great practical importance. "It is always wise and

useful," he says, "for a government to know even roughly the limit that the country

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can contribute by way of taxation both in the ordinary and extra-ordinary

circumstances."

One writer describes it as "the limit of squeezability". But this is a very vague

definition. Some nations will permit themselves to be squeezed much less than others.

Moreover, inside a nation, the limit of squeezability varies from person to person.

Another more useful definition of taxable capacity is that it is the maximum amount,

which can be deducted from a country's income consistent with the maintenance of

that income for years to come.

Josiah Stamp observed that, “taxation capacity is the total production minus the

amount required to maintain the population at subsistence level”. This definition

asserts, that total production refers to the total volume of income produced and

available for the people.

To put it in another way, there must be a minimum, which must be left with the people

to ensure their continued ability and willingness to work.

Taxable capacity is normally used into two senses, that is the absolute taxable capacity

and the relative taxable capacity.

a) The absolute taxable capacity: - The absolute taxable capacity indicates the

amount of money or the proportion of national income that can be taken away

by the government from people in the form of taxes without producing

unfavorable effects.

b) The relative taxable capacity: - The relative taxable capacity refers to the

proportion in which two or more community can contribute in the form of taxes

to meet some common expenditure. In other words, relative taxable capacity of

the community to contribute to some common expenditure in relations to the

capacities of other communities

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Factors Affecting Taxable Capacity

Taxable capacity is influenced by a variety of factors. In the short run, taxable capacity

may be less. In the long run, taxable capacity of a country may increase because

economic growth and rise in national and per capita income. Again, distribution of

income and wealth also affects taxable capacity.

Findlay Shirras says that taxable capacity of a nation is determined by the following

major factors: -

1. Number of Inhabitants. The bigger the amount, the larger is the taxable capacity of

the society to add towards the operating cost of the management.

2. Distribution of Wealth. If capital is more uniformly disseminated, the taxable

capacity will be equally abridged. But if there are big accretions of capital in the

minority hands, the management can collect additional money by levying taxes on the

rich.

3. Method of Taxation. A systematically created tax system with an intelligent

collaboration of several types of taxes, direct as well as indirect, is certain to fetch in a

better yield.

4. Purpose of Taxation. If the intention of taxation is to encourage interests of the

public, they will be more eager to taxing themselves.

5. Psychology of Taxpayers. Much relies on the people's approach towards an

administration. A well-liked government can stimulate the will of the public and train

them for larger sacrifice.

6. Stability of Income. If the revenue of the residents is unstable, there will be not

much capacity for additional taxation. It is only on stable incomes that long-term

financial arrangements can be based.

7. Inflation. It reduces the buying capacity of the nation and it cripples countless

individuals; it has an unpleasant result on taxable capacity.

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5.10. Fiscal policies

To Adams Smith fiscal policy refers to use of government spending program and

government revenue program to produce desirable effects and avoid undesirable

effects on national income, production and employment. While, to Keynes fiscal policy

uses public finance as a balancing factor in the development on the economy.

Fiscal policy therefore, includes government budget decisions regarding government

spending, money raised by the government through taxes and budget deficits or

surpluses. By adjusting overall demand for goods and services through changes in

taxation and government spending, the government hopes to control:

a) Unemployment levels;

b) Price levels/Inflation, which adversely affect the economy's health;

c) Desirable employment level, and;

d) Income distribution

Instruments of Fiscal Policy

The tools of fiscal policy are taxes, Public, expenditure, public debt and a nation’s

budget. They consist of changes in government revenues or rates of the tax structure

so as to encourage or restrict private expenditures on consumption and investment.

1) Public expenditure

During inflation, the government increases its expenditure and reduce taxes so

that unemployment may be decreased and vice versa during deflation.

2) Public debt

In times of inflation the government raises money through public debt

(Treasury Bills and Treasury Bonds) this reduces money in supply and

effectively reduces prices. While in times of deflation the government pays

back the debts to increase money supply.

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3) Public Revenue

In times of inflation the government raises taxes to reduce disposables income

of people, which effectively lowers the prices. In times of deflation the

government reduces taxes to increase the disposable income.

5.11. The Revenue Authority; history, structure and

mandate

Establishment
The Revenue Authority (KRA) was established by an Act of Parliament, Chapter 469

of the laws of Kenya, which became effective on 1st July 1995 to enhance the

mobilization of Government revenue, while providing effective tax administration

and sustainability in revenue collection.

The functions of the Authority are: -

a) To assess, collect and account for all revenues in accordance with specific laws

and the specified provisions of the written laws.

b) To advise on matters relating to the administration of, and collection of revenue

under the written laws or the specified provisions of the written laws,

c) To perform such other functions in relation to revenue as the Cabinet Secretary

to the National Treasury may direct.

Theme

KRA is currently implementing the Sixth Corporate Plan (2015/16 – 2017/18) and is in

the process of coming up with the seventh Corporate Plan (2018/19 – 2020/21) The

current plan’s theme is:

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Vision Statement

"To facilitate Kenya's transformation through Innovative, Professional and Customer-

Focused Tax Administration"

Mission Statement

"Building Trust through Facilitation to foster Compliance with Tax and Customs

Legislation"

Core Values

- Trustworthy - Competent

- Ethical - Helpful

Laws Administered
The Purpose of KRA is, Assessment; Collection; Administration; and Enforcement

of laws relating to revenue. The written laws relating to revenue include, the Income

Tax Act (Cap. 470); the Excise Act, 2015; the East African Community Customs Management

Act (EACCMA); the Value Added Tax Act (Cap. 476); the Road Maintenance Levy Fund Act

1993 (No. 9 of 1993); the Air Passenger Service Charge Act (Cap. 475); the Entertainment

Tax Act (Cap. 479); the Traffic Act (Cap. 403); the Transport Licensing Act (Cap. 404); the

Second Hand Motor Vehicle Purchase Tax Act (Cap. 484); the Widows and Children’s

Pensions Act (Cap. 195); the Parliamentary Pensions Act (Cap. 196); the Stamp Duty Act

(Cap. 480); the Betting, Lotteries and Gaming Act (Cap. 131); the Directorate of Civil Aviation

Act (Cap. 394); the Standard Acts (Cap. 496); and Government Lands Act (Cap 280).

KRA also collects levies for various Government Agencies under the provision of

various Acts. These are: Sugar Development Levy collected under the Sugar Act, Petroleum

Development Fund Act, and Merchant Shipping Act, 2009. The Railway Development Levy

(RDL) introduced in 2013 is now Exchequer Revenue.

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Organizational Governance
KRA’s governance and management structure is organized as per recommended

international best practice for Semi-Autonomous Revenue Authorities (SARA’s). The

Board of Directors (BoD) is the governing Body of KRA as set out in the KRA Act. It

has two ex-officio members from the Government (representative of the Cabinet

Secretary to the National Treasury and the Attorney General), the Commissioner

General and six other members from private sector. The BoD is responsible for the

review and approval of policies and monitoring the functions of KRA.

The day-to-day management of the Authority is the responsibility of the

Commissioner General, assisted by Commissioners in charge of Customs and Border

Control, Domestic Taxes, Investigations and Enforcement, Corporate Support

Services, and Strategy, Innovation and Risk Management departments. Internal Audit

Department reports to the Commissioner General though it is answerable to BoD on

its core mandate. All non-revenue functions relating to road transport have since

become the responsibility of the National Transport and Safety Authority (NTSA). The

Commissioner for Corporate Support Services is also in charge of the regional offices.

In addition, there are three Headquarter Departments (Ethics and Integrity, Legal

Services and Board Coordination and Commissioner General’s Operations Office)

while the Kenya School of Revenue Administration (KESRA) has been elevated to

report directly to the Commissioner General

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Chapter Six: Taxation of Income of Persons

Table of Contents
Chapter Six
6 TAXATION OF INCOME OF PERSONS ................................................................ 2

6.1. TAXABLE AND NON-TAXABLE PERSONS ................................................................ 2

6.2. SOURCES OF TAXABLE INCOMES ............................................................................ 7

6.3. EMPLOYMENT INCOME ............................................................................................ 8

6.3.1. TAXABLE AND NON-TAXABLE BENEFITS ............................................................... 10

6.3.2. ALLOWABLE AND NON-ALLOWABLE DEDUCTIONS ............................................. 20

6.3.3. TAX CREDITS (WITHHOLDING TAX, PERSONAL AND INSURANCE RELIEF,

OTHERS) .............................................................................................................................. 23

6.3.4. INCOMES FROM PAST EMPLOYMENT.................................................................... 27

6.4. BUSINESS INCOME ................................................................................................. 31

6.4.1. SOLE PROPRIETORSHIP .......................................................................................... 38

6.4.2. PARTNERSHIPS (EXCLUDING CONVERSIONS) ...................................................... 39

6.4.3. INCORPORATED ENTITIES (EXCLUDING SPECIALIZED INSTITUTIONS) .............. 42

6.4.4. TURNOVER TAX (TOT) ......................................................................................... 44

6.5. INCOME FROM USE OF PROPERTY - RENT AND ROYALTIES ................................ 46

6.6. FARMING INCOME ................................................................................................. 49

6.7. INVESTMENT INCOME ........................................................................................... 51

6.8. MISCELLANEOUS TAXES AND OTHER REVENUES ................................................ 53

6.8.1. STAMP DUTY .......................................................................................................... 53

6.8.2. CATERING LEVY ..................................................................................................... 55

6.8.3. MOTOR VEHICLE ADVANCE TAX ......................................................................... 55

6.8.4. CAPITAL GAINS TAX (CGT) ................................................................................. 55

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6 TAXATION OF INCOME OF PERSONS

6.1. Taxable and Non-Taxable Persons

Introduction
Section 3(1) of the Income Tax Act (Cap. 470 Laws of Kenya) provides that Subject to,

and in accordance with, the Act, a tax to be known, as income tax shall be charged for

each year of income upon all the income of a person, whether resident or non-resident,

which accrued in or was derived from Kenya.

Definitions

1) “Tax” means the income tax charged under of the Income Tax Act (Cap. 470

Laws of Kenya)

2) “Individual” means a natural person

3) “Company” means a company incorporated or registered under any law in

force in Kenya or elsewhere

4) “Year of income” means the period of twelve months commencing on 1st

January in any year and ending on 31st December in that year

5) “Accounting period”, in relation to a person, means the period for which that

person makes up the accounts of his business

6) “Minister “means the Cabinet Secretary for the time being responsible for

matters relating to finance

7) “Kenya” includes the continental shelf and any installation thereon as defined

in the Continental Shelf Act (Cap. 312)

8) “Resident”, when applied in relation: -

a) To an individual, means: -

(i) That he has a permanent home in Kenya and was present in Kenya for any

period in any year of income under consideration; or

(ii) That he has no permanent home in Kenya but: -

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a. Was present in Kenya for a period or periods amounting in the

aggregate to 183 days or more in that year of income; or

b. Was present in Kenya in that year of income and in each of the two

preceding years of income for periods averaging more than 122 days in

each year of income;

b) To a body of persons, means: -

(i) That the body is a company incorporated under a law of Kenya; or

(ii) That the management and control of the affairs of the body was exercised

in Kenya in a year of income under consideration; or

(iii) That the body has been declared by the Minister, by notice in the

Gazette, to be resident in Kenya for any year of income;

Importance of Residence

- Kenyan resident individuals pay Kenyan income tax on the income derived from

Kenya and worldwide employment while non- resident individuals pay Kenyan

income tax only on incomes derived from Kenya.

- Kenyan resident individuals pay Kenyan income taxes at graduated scale rates.

But non-resident individuals pay Kenyan income taxes on special rates on

specified incomes.

- Withholding tax is deducted at source on all incomes of non-resident individuals

while on resident individuals; withholding tax is on only some specified incomes.

- Kenyan resident companies are taxed at a corporate rate of 30% of their chargeable

income. Whereas non-resident companies with branches in Kenya are taxed at

37.5% of their chargeable income. Non-resident companies with no branches in

Kenya are taxed on certain specified incomes at specified rates.

9) “Director” means: -

a) In relation to a body corporate, the affairs of which, are managed by a board

of directors or similar body, a member of that board or similar body

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b) In relation to a body corporate, the affairs of which, are managed by a single

director or similar person, that director or person,

c) In relation to a body corporate, the affairs of which, are managed by the

members themselves, a member of the body corporate, and includes any

person in accordance with whose directions and instructions such persons

are accustomed to act

10) “Whole time service director” means a director of a company who is required

to devote substantially the whole of his time to the service of such company in a

managerial or technical capacity and is not the beneficial owner of, or able,

either directly or through the medium of other companies or by any other

means, to control more than five per cent (5%) of the share capital or voting

power of such company;

11) “Incapacitated person” means a minor, and any person adjudged under any

law, whether in Kenya or elsewhere, to be in a state of unsoundness of mind

(however described);

A. Taxable Persons (Persons Assessable)

Part VII of the Income Tax Act (Cap. 470 Laws of Kenya) provides for persons

assessable to tax as follows:

a) Income of a person assessed on him.

Where under the Act the income of a person is chargeable to tax, that income shall, be

assessed on, and the tax thereon charged on, that person.

b) Wife's income

The income of a married woman shall be deemed to be the income of the husband

unless where such married woman opts to file a separate return from that of her

husband.

c) Income of Incapacitated person

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The income of an incapacitated person shall be assessed on, and the tax thereon

charged on, that person in the name of his trustee, guardian, committee or receiver

appointed by a court.

d) Income of non-resident person

The income of a non-resident person shall be assessed on, and the tax thereon charged

on, that person either in his name or in the name of his trustee,

e) Income of Deceased person, etc.

The income accrued or received prior to death of a deceased person, which would,

have been assessed and charged to tax on him, shall be assessed on, and the tax

charged on, his executors or administrators for that year of income.

f) Liability of joint trustees

Where two or more persons are trustees, an assessment made on the trustee may be

made on any one or more, but each trustee will be jointly and severally liable for the

payment of tax.

g) Indemnification of representative

Any person responsible for the payment of tax on behalf of another person may retain

out of money coming to his hands, on behalf of that other person to the extent that is

sufficient to pay the tax.

B. Non-Taxable Persons (Income)

First Schedule, Part I of the Income Tax Act (Cap. 470 Laws of Kenya) provides that

income accrued in, derived from or received in Kenya which is exempt from tax

includes the following among others:

(a) The income of: The Tea Board of Kenya, The Pyrethrum Board of Kenya, The Sisal

Board of Kenya, The Kenya Dairy Board, The Canning Crops Board, The Central

Agricultural Board, The Pig Industry Board, The Pineapple Development

Authority, The Horticultural Crops Development Authority, The Kenya Tea

Development Authority, The National Irrigation Board, The Mombasa Pipeline

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Board, The Settlement Fund Trustees, The Kenya Post Office Savings Bank, The

Cotton Board of Kenya.

(b) The income, of an amateur sporting association, whose sole or main object is to

foster and control any outdoor sport; and whose members consist only of

amateurs

(c) The income of any county government. [Act No. 16 of 2014, s. 20.]

(d) The income of any registered pension scheme.

(e) The income of any registered trust scheme.

(f) The income of any registered pension fund.

(g) The income of a registered provident fund.

(h) Pensions or gratuities granted in respect of wounds or disabilities caused in war

and suffered by the recipients of such pensions or gratuities.

(i) Any payment in respect of disturbance, not exceeding three months’ salary, made

in connexion with a change in the constitution of the Government of a Partner

State or the Community to any person who, before such change, was employed

in the public service of any of those Governments or of the Community.

(j) The income of the East African Development Bank and of Corporations

established under Article 71 of the Treaty for East African Co-operation together

with the income of subsidiary companies wholly owned by that Bank or by any

of the said Corporations.

(k) The emoluments of any officer of the Desert Locust Survey who is not resident in

Kenya.

(l) The emoluments of any foreign Government employee resident in Kenya solely

for the purpose of performing the duties

(m) Interest on a savings account held with the Kenya Post Office Savings Bank.

(n) Interest earned on contributions paid into the Deposit Protection Fund

established under the Banking Act (Cap. 488).

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(o) Interest paid on loans granted by the Local Government Loans Authority

established by section 3 of the Local Government Loans Act (Cap. 270).

(p) The income of a registered individual retirement fund.

(q) The income of a registered home ownership savings plan.

(r) Income of the National Social Security Fund provided that the Fund complies

with such conditions as may be prescribed.

(s) The income of the National Hospital Insurance Fund established under the

National Hospital Insurance Fund Act, 1998

(t) Dividends received by a registered venture capital company special economic

zone enterprises, developers and operators licensed under the Special Economic

zones Act. [Act No. 14 of 2015, s. 16(b).]

(u) Interest income on bonds issued by the East African Development Bank. [Act No.

38 of 2016, s. 16.]

(v) Dividends paid by Special Economic Zone Enterprise, developers or operators to

any non-resident person. [Act No. 15 of 2017, s. 15.]

6.2. Sources of Taxable Incomes

Income Chargeable to Tax (Specified Sources)

Section 3(2) of the Income Tax Act (Cap. 470 Laws of Kenya) provides that, the income

upon which tax is chargeable is income in respect of: -

1) Business;

2) Employment, Self-employment & Professional practice;

3) Rent;

4) Investment: Dividends or interest;

5) Incomes from past employment

a) A pension, charge or annuity; and

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b) Withdrawals/payments from, a registered pension fund or a registered

provident fund or a registered individual retirement fund; and

c) Any withdrawals from a registered home ownership savings plan;

6) An amount deemed to be income of a person under the Act or by rules made

under the Act;

7) Gains from disposal of property in accordance with the Eighth Schedule;

8) Net gain from disposal of an interest in a person, if the interest derives twenty per

cent or more of its value, directly or indirectly, from immovable property in Kenya

subject to section 15(5A); and

9) A natural resource income;

Criteria for Charging Income Tax

(a) Income must have accrued in Kenya

(b) Services must have been rendered in Kenya

(c) Payment of services must have been made in Kenya

Exemptions to the above rules are: -

- Where a resident person carries on a business partly within and partly outside

Kenya, the whole of the gains or profits from that business shall be deemed to

have accrued in or to have been derived from Kenya.

- In case of a resident his worldwide employment income is taxable in Kenya

6.3. Employment Income

What is Employment Income?

Section 5(2) of the Income Tax Act (Cap. 470 Laws of Kenya) refers to employment

income as "gains or profits from employment" which includes: -

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a) wages, salary, leave pay, sick pay, payment in lieu of leave, fees, commission,

bonus, gratuity, or subsistence, travelling, entertainment or other allowance

received in respect of employment or services rendered, and any amount

received in respect of employment or services rendered in a year of income other

than the year of income in which it is received shall be deemed to be income in

respect of that other year of income:

b) Unless otherwise expressly provided, the value of benefit, advantage, or facility

whose total value is not less than thirty-six thousand shillings given because of

employment or services rendered;

c) Amounts paid by the employer as a contribution to a pension fund, or a

registered provident fund or scheme;

d) Balancing charge under Part II of the Second Schedule;

e) The value of premises provided by an employer for occupation by his employee

for residential purposes;

f) Amounts paid by an employer as a premium for an insurance on the life of his

employee and for the benefit of that employee or any of his dependants:

Section 2 of the Income Tax Act (Cap. 470 Laws of Kenya) defines “Employer” as any

resident person responsible for the payment of, or on account of, any emoluments to

any employee, and any agent, manager or other representative so responsible in

Kenya on behalf of any non-resident employer.

NB: -All cash allowances are taxable

-Refunds/reimbursements to an employee by his/her employer is not taxable

Tax Rates (Graduated Scale)

Subject to section 34(1) of the Income Tax Act (Cap. 470 - Laws of Kenya), Tax upon

the total income of an individual, excluding wife's employment income, fringe

benefits and the qualifying interest, shall be charged for a year of income at the

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individual rates for that year of income as illustrated below as provided by the third

schedule: -

Rate Tax Band p.a (Kshs) Tax Band p.a (Kshs) Tax Band p.a (Kshs)

Effective January, 2018 Effective January, 2017 Effective January, 2001

10% 147,580 134,165 121,968

15% 139,043 126,403 114,912

20% 139,043 126,403 114,912

25% 139,043 126,403 114,912

30% Over 564,709 Over 513,374 Over 466,704

Illustration

Salmon Okong’o whose annual chargeable pay for the year ended 31st December 2018

is Kshs. 2,249,191.00 will have his PAYE calculated as Follows; -

Solution

Salmon Okong’o

Tax Payable for the year ended 31st December 2018

Item Amount Rate PAYE

On the first Shs.147,580 147,580.00 10% 14,758.00

On the next Shs.139,043 139,043.00 15% 20,856.45

On the next Shs.139,043 139,043.00 20% 27,808.60

On the next Shs.139,043 139,043.00 25% 34,760.75

On all income over Shs.564,709 1,735,818.00 30% 520,745.40

Tax Liability 618,929.20

6.3.1. Taxable and non-taxable benefits

A. Benefits in kind

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(1) Non-Cash Benefits

Where an employee enjoys a benefit, advantage or facility in connection with his/her

employment or services rendered; the value of such benefit should be included in

employee’s earnings and charged to tax. S.5 (2) (b)

The maximum total tax-free value of non-cash benefits is Kshs. 3,000 per month (Kshs.

36,000 per annum) with effect from 1st January 2006. Any total amount that is more

than Kshs. 3,000 is a taxable benefit on the employee. The value is the higher of: -

- The cost to employer or

- Fair market value of the benefit,

These Benefits may include goods/services, travelling tickets, Christmas vouchers, food

stuffs, house helps, Transport to and from work, security, etc.

B. Cash Benefits

Cash benefit compensations are benefits that are considered to have been given out

by the employer in cash. According to the Act, cash benefits are received in three ways:

1. Cash given direct to employees or directors.

2. Employer pays for employee’s or director’s expenditure.

3. Employee or director enjoy a facility/property owned by the employer.

(1) Employment Income

(a) Tax free remuneration: Any individual earning below Kshs. 12,260 p.m.

effective 1st January 2017 is not subject to tax. This amount has been increased

to Kshs. 13,486 p.m. 1st January 2018.

(b) Persons with disability: The first Kshs. 150,000 per month of total income

earned by disabled persons registered with the National Council for Persons

with Disabilities and approved by the Commissioner in not subject to tax.

(c) Bonuses, overtime: With effect from 1st July 2017, Income from employment

paid in the form of bonuses, overtime and retirement benefits employees

whose taxable employment income before bonus and overtime allowances

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does not exceed the lowest tax band (Kshs. 11,180 per month) are exempt from

tax

(2) Per-Diem

Per diems are ‘per day’ allowances normally given for upkeep of staff when on official

travel. W.e.f. 16 June 2006 the first Kshs 2,000 is deemed to be a reimbursement hence

Per diems are ‘per day’ allowances normally given for upkeep of staff when on official

travel. W.e.f. 16 June 2006 the first Kshs 2,000 is deemed to be a reimbursement hence

not taxable, amounts in excess of Kshs 2,000 are taxable and should ideally be

supported preferably with vouchers from arms-length source. S.5 (2) (a) (ii)

(3) School fees paid by employer

School fees paid on behalf of employees and directors for their dependents is a taxable

benefit on the employee. S.5 (4) (d)

However, where the tax is borne by the employer, through addback in the

computation, the benefit will not be taxable on the employee.

(4) Benefits with Commissioner’s prescribed rates

These Benefits are taxable at the higher of cost or fair market value. The Commissioner

has prescribed the value of benefits where the cost to the employer is difficult to

ascertain on the following: -

Commissioner ‘s prescribed benefit rates (Effective from 12th June 2003)

Monthly Rates Annual Rates

A. Services (Kshs) (Kshs)

(i) Electricity (Communal or from a generator) 1,500 18,000

(ii) Water (Communal or from a borehole) 500 6,000

(iii) Provision of furniture, 1% per month of cost to employer (If hired the cost

of hire should be brought to charge)

(iv) Telephone (Landline & Mobile Phones) 30% of bills

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B. Agricultural employees: reduced rates of benefits (Required to reside in the

plantation)

Monthly Rates Annual Rates

(Kshs) (Kshs)

(i) Water 200 2,400

(ii) Electricity 900 10,800

(5) Meals

Previously, meals provided to low income employees (earning less than Kshs 29,316 per

month) W.e.f 13th June 2008 in cafeterias operated or established in company premises

were exempt from taxation. This was irrespective of whether the meals were supplied

by the employer or are outsourced. However, W.e.f 2nd October 2014, all employees

and directors are allowed non-taxable meals benefits up to Kshs. 4,000 per month

which is Kshs. 48,000 per year.

(6) Tax-free remuneration

Sometimes, expatriate employees and directors negotiate for tax free compensation

for their services. Hence, it is the employers who pays the tax. Where employer wishes

to pay employees net of tax, the tax paid by the employer on behalf of employees is in

itself a benefit chargeable to tax.

For PAYE purposes, the Commissioner has given a formula to compute the ‘tax-on-

tax’ effect. The formula is found in Appendix 4C and 4D of PAYE guide (2006). An

employer can also use a calculator to determine the tax due.

(7) Passages

Passages arises when an employer pays for or reimburses the cost of tickets for

passages for expatriate’s employees, directors and their families including leave. S.5

(4) (a)

The value of the passages is a non-taxable benefit of the employee provided:

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1. The employee or director is not recruited from Kenya and is not a Kenyan.

2. The employee or director is in Kenya to work exclusively for the employer.

3. Payments to the employee or director are not made periodically within the year

– it is a one-off payment.

4. Payment to the employee or director is not a one time-off payment for more

than one year.

5. The employee or director is not free to save or use the payment for other

purposes. They must account for the payment by leaving the country.

(8) Medical Benefit

Provision of medical services to all employees/beneficiaries without discrimination is

a non-taxable benefit. S.5 (4) (b)

However, medical benefits are taxable on the employees and directors if:

1. There is no written medical scheme or plan.

2. Employees are paid cash for the medical services.

3. The medical benefits are discriminatory where some employees or directors are

provided with the medical benefit while the rest are not.

Medical benefits provided to a non-whole-time service director, partner and sole

proprietor including their beneficiaries, subject to a maximum value of Kshs. 1 million.

“Beneficiaries” means the full-time employee’s spouse and not more than 4 children

whose age shall not exceed 21 years.

(9) Car Benefits

Vehicle benefit tax was implemented with effective from June 9th, 2005. The following

are some of the factors used to determine whether the use of a vehicle by an employee

or director is a benefit or not.:

1. The type of work the employee or director does for the company.

2. Exclusive use and allocation of a vehicle.

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3. Personal use of the vehicle e.g. to and from work and over the weekends by the

employee or director.

(a) Company owned vehicles: Where the employer provides an employee with a

‘company’ car, the taxable benefit is the higher of: - S.5 (2B) (C)

a. Prescribed monthly rate of 2% per month of the initial cost of the car

W.e.f 1998

b. Fixed Monthly rate determined by the Commissioner. The current

Commissioner’s determined rates for W.e.f 2011 are: -

Prescribed benefit rates of motor vehicles provided by the employer

a) Saloons, Hatch backs, and Estates

CC Rating Monthly (Kshs) Annual (Kshs)

Up-to 1200 3,600 43,200

1201-1500 4,200 50,400

1501-1750 5,800 69,600

1751-2000 7,200 86,400

2001-3000 8,600 103,200

Over 3000 14,400 172,800

b) Pick-Ups and Panel Vans (uncovered)

CC Rating Monthly (Kshs) Annual (Kshs)

Up-to 1750 3,600 43,200

Over 1750 4,200 50,400

c) Land Rovers and Land Cruisers Monthly (Kshs) Annual (Kshs)

7,200 86,400

NB: Range Rovers and vehicles of similar nature are classified as saloons and

their prescribed rates for 2011 is: -

a) 2% of the initial cost of the vehicle or,

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b) Where such vehicle is hired from a third party the employee shall

be deemed to have received a benefit equal to the higher of the

cost of hiring the vehicle and the prescribed rate.

(b) Hired/Leased vehicles: Companies also hire/lease vehicles for specific time

periods. When the hired/leased vehicles are used exclusively by specific

employees or directors, the actual cost of hiring or leasing the vehicles is a

taxable benefit to the employee or director. The use must include personal use.

S.5 (2B) (a) (i)

(c) Restricted use Vehicles: The Commissioner may determine the lower rate of

the benefit depending on the usage of the vehicle. S.5 (2B) (a) (ii)

(d) Company transport services: Where a company provides transport services for

its employees or directors from home to office and back as pooled transport

service, the cost of providing the transport is not a taxable benefit. It may be

treated as a non-cash benefit.

Illustration

Benard Oyang’o an employee who is employed as a Financial Controller of Kenya

Airways is provided with a car (Honda CRV, cc rating 2,400), which was bought in July

2016 for Kshs. 2,500,000.

Solution

The Car benefit is calculated as follows: -

Ø Prescribed rate (2% x Kshs. 2,500,000) = Kshs. 50,000 per month

Ø Commissioner’s fixed rate (cc. rating 2,400) = Kshs. 8,600 per month

The chargeable car benefit is therefore Kshs. 50,000 per month.

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(10) Vehicle mileage claims

Where employees or directors use their personal vehicles to and claim mileage subject

to prove of the same. The mileage claims are allowed and paid for under the following

conditions:

1. When employees use own vehicles on official duty.

2. Vehicle logs are used to record mileage for purposes of reimbursement of

mileage.

3. Receipts and invoices for supplies towards the travel are maintained and

lodged with the company. the expenses must have been incurred in the name

of the company.

The Revenue Authority allows use of the Automobile Association (AA) mileage rates

for mileage reimbursement, which are not taxable benefits.

(11) Housing Benefits

Sometimes companies provide ordinary employees, whole time service directors and

other directors with housing. Such housing benefit is taxable. S. 5 (3) (b) & (d)

(a) House rented by employer: The value of the taxable housing benefit for

ordinary employees and whole-time service directors:

a. If the employer pays rent under an arm’s length agreement, is the higher

of the following, less nominal rent in any:

1. Actual rent paid by employer.

2. 15 % of gains or profits from that employment, excluding housing.

b. If the employer pays rent under a non-arm’s length agreement, is the

higher of the following, less nominal rent in any:

1. 15 % of gains or profits from that employment, excluding housing.

2. The fair market rent value.

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(b) House owned by employer: The value of the taxable housing benefit for

ordinary employees and whole-time service directors is the higher of the

following, less nominal rent in any:

1. 15 % of gains or profits from that employment, excluding housing.

2. The fair market rent value.

In the case of a director of a company, other than a whole-time service director, the

15% is on his/her total income (including incomes from other sources, but for Capital

gains) S. 5 (3) (a)

In the case of an agricultural employee required by the terms of employment to reside

on a plantation or farm, an amount equal to 10% of the gains or profits from his

employment. S. 5 (3) (c)

Where:

(i) “plantation” does not include a forest or timber plantation; and

(ii) “agricultural employee” doesn’t include a director other than a whole-time

service director;

NB: If the premises are occupied for part of the year only, the value is 15% of

employment income relative to the period of occupation.

Illustration

Vivianne Adhiambo, a Manager who earns basic salary of Kshs. 30,000 per month plus

other benefits (e.g. Motor Car, House Servants etc.) of Kshs. 15,000 per month is housed

and the employer pays to the Landlord rent of Kshs. 20,000 per month (i.e. Kshs.

240,000 per annum) under an agreement made at arm’s length with the third party.

Calculation for value of quarters (housing benefit)

Solution

Basic Salary = Kshs. 30,000

Add: Benefits = Kshs. 15,000

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Gains or profits from her employment, excluding housing. = Kshs. 45,000

15 % of gains or profits. (Kshs. 45,000 x 15%) = Kshs. 6,750

Rent paid by the employer of Kshs. 20,000 per month is the amount to be brought to

charge and not 15% value of quarters (Kshs. 6,750), since it’s the higher of the two.

(12) Interest free or Low Interest Loan Benefit

When employer provides loan to an employee and charges interest, which is below

the prescribed rate of interest, then the difference between the prescribed rate and

employer's loan rate is a benefit from employment chargeable to tax on the employee.

The benefit applies and will continue to apply even after the employee or director has

left employment provided the loan remains un-paid.

Following amendment to the law by the 1998 Finance Act which introduced "Fringe

Benefit Tax", the determination of the chargeable benefit is now in two categories:

S.12B

a) Loans provided on or before 11th June 1998 (Low interest benefit); and

b) Loans provided after 11th June 1998 (Fringe benefit).

(a) Fringe benefit: This is the difference between the loan interest rate charged by

employer and the prescribed interest rate (published quarterly) by the

Commissioner on new loans from 12th June 1998. Fringe benefit is not a taxable

benefit on the employees or directors. Fringe benefit tax (FBT) is the tax on the

fringe benefit paid by the employer at the corporate tax rate of 30% every

month and remitted on or before the 10th day of the following month to the Pay-

Master. Fringe benefit tax is payable even where corporation tax is not due by

the employer in question

(b) Low interest benefit: This is the difference between the loan interest rate

charged by employer and the prescribed interest rate (published half-yearly) by

the Commissioner. Low Interest Benefit (LIB) applies old loans taken on or

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before 11th June 1998, the interest is taxed on employees at graduated scale

rates.

Illustration

Loan provided by employer = KShs.1, 500,000

Employer's Loan Interest Rate = 0% (interest free)

Prescribed Rate of Interest =2%

Calculation of Low Interest/fringe benefit:

Difference between loan interest rate & prescribed interest rate (2% - 0%) = 2%

Low Interest/fringe benefit (LIB/FB) (2% x Kshs 1,500,000) = Kshs. 30,000 p.a.

(13) Retirement contributions by non-taxable employers

Where exempt employers contribute for their employee’s or director’s retirement

benefits, any contributions by such employers i.e. Non-Governmental Organization

(NGOs) for employees or directors to non-registered retirement schemes are taxable

benefits on the employees or director. (W.e.f. July 2004). All retirements schemes

should be registered with the Retirement Benefits Authority (RBA) in Kenya.

In addition, any excess contributions, above Kshs. 240,000, to registered schemes are

taxable benefits on the employees or director.

6.3.2. Allowable and non-allowable deductions

A. Retirement Benefit Schemes

(a) Pension Scheme and Provident Fund

Pension and provident funds arise from payments or contributions relating to

retirement period. Whereas a provident fund would cease upon living employment,

pension on the other hand is long term and continues even after employment.

Contribution is in two ways as follows: -

a) Contributory Scheme - Where both the employer and the employee contribute to

the scheme.

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b) Noncontributory scheme - Where only one party contributes to the scheme

Rules Relating to Registration of Schemes/Funds

• Established in Kenya under irrevocable trust

• Money payable to the Scheme/fund should be made in Kenya

• Contributions to the Scheme/fund should be made in Kenya

• Approved by the commissioner of Domestic Taxes

Contributions to the Scheme/Fund

An employee's contributions to registered pension, provident and individual

retirement schemes up to a maximum of Kshs. 240,000 per annum, effective 1st January

2006 is tax allowable. S.22A

The employee's deductible contribution is the lesser of:

► 30% of pensionable pay;

► KShs.240,000 or proportion for the year; or

► Actual contributions.

However, contributions by employers to unregistered schemes or excess contributions

to registered schemes are a taxable benefit on employee, where the employer is not

taxable. S.5 (4) (c)

Benefits of Pension schemes/ Provident funds

• Employer’s contribution on behalf of the employee is not taxed on the employee

• Employee’s contribution is an allowable deduction against employee’s income

• Employer’s contribution on behalf of the employee to a registered scheme is an

allowable deduction against employer’s taxable income

(b) National Social Security Fund (NSSF)

Contributions made to the National Social Security Fund (NSSF) qualify as a

deduction with effect from 1st January 1997. Where an employee is a member of a

pension scheme or provident fund and at the same time the National Social Security

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Fund (NSSF) the maximum allowable contributions should not exceed Kshs.20, 000

per month in aggregate.

Illustration

Mr. Victor Ouma, an employee of Strathmore University in the year 2017 earned a

Kshs. 30,000 P.m. He contributed to a pension fund Kshs. 6,000 p.m.

Calculate his deduction for pension contribution and his tax liability.

Solution

Ø Actual pension contribution ═ {Kshs. 6,000*12 Months} = Kshs. 72,000

Ø Upper Limit = Kshs. 240,000

Ø 30% of pensionable pay = 30% of [Kshs. 30,000*12 Months] = Kshs. 108,000

Hence deductible amount is Kshs. 72,000

Total taxable income (Kshs. 360,000 - Kshs. 72,000) = Kshs. 288,000

B. Other Contributions

(a) Mortgage interest

This is available to owner occupier residential home owners (purchase or

improvement of premises) who seek finance from the following institutions:

a) A bank or financial institution or mortgage finance company licensed and the

Banking Act (Cap. 488).

b) An insurance company licensed under the Insurance Act (Cap. 487).

c) The Kenya Reinsurance Corporation established by the Reinsurance

Corporation Act.

d) A building society registered under the Building Societies Act (Cap. 489).

The tax-deductible interest is capped at Kshs. 300,000 per annum with effect from 1st

January 2017. No claim for more than 1 residence. S .15 (3) (b)

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(b) Home ownership savings plan (HOSP)

A depositor to a registered home ownership savings plan qualifies for a deduction of

up to Kshs. 48,000 for the first 10 years. Interest earned on deposits of up to Kshs. 3

million is also tax exempt.

(c) Non-reimbursed costs to disable persons

Subject to the satisfaction of the Commissioner, non-reimbursed hospital admission

costs, drugs treatment, cost of disability related assisting devices, and home care

services for disabled persons registered with the National Council for Persons with

Disabilities and approved by the Commissioner, a deduction not exceeding Kshs.

50,000 p.m. be considered when determining total taxable income. Validity of such

exemption is 5 years if granted. L/N 36 of 2010

6.3.3. Tax credits (withholding tax, personal and insurance relief,

others)
1. Resident Personal Reliefs

The third schedule to the Act, provides for two categories of personal relief’s namely:

a) Personal relief; and

b) Insurance relief.

(a) Personal Relief

Section 30 of the Act provides that, a resident individual in receipt of taxable income

is entitled to a tax relief referred to as personal relief, which is a uniform deduction

granted against tax due from all individuals irrespective of their marital status or level

of income of Kshs. 1,280 per month (i.e. Kshs. 15,360 per annum) with effect from 1st

January 2017 as provided by the third schedule. This has further been increased by

10% to Kshs. 16,896 per annum. Individuals serving several employers qualify for

personal relief from only one employer (i.e., main employment).

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(b) Insurance Relief

Section 31 (1) of the Act provides that, a resident individual who can proves that; -

(a) He has paid insurance premium on his life, or the life of his wife or his child; or

(b) His employer paid insurance premium on the life and for the benefit of the

employee which has been charged to tax on that employee; or

(c) Both employee and employer have paid premiums for an education policy with

a maturity period of at least 10 years.

(d) Health insurance with effect from 1st January 2007.

is entitled to a personal relief referred to as the insurance relief, which is a deduction

granted against tax due from such individuals at the rate of 15% of premiums paid

subject to maximum relief amount of Kshs. 5,000 per month (or Kshs. 60,000 per

annum). with effect from 1st January 2007.

2. Pay as You Earn (PAYE)

Section 37 (1) of the Act, appoints an employer paying emoluments to an employee to

deduct therefrom, and account for tax (PAYE) thereon. Once deducted at source it is

used to reduce tax payable when filling personal returns at the end of the year.

3. Withholding Tax (WHT)

This is a method whereby, on Agency basis, the payer of certain incomes deducts tax

at source from payments due to certain payees and then remits the tax so deducted to

the Commissioner, Domestic Taxes on or before the 20th day of the following month.

Withholding Tax is mainly subjected to payment made to irregular earners and non-

payroll earners.

Section 34 (2) of the Income Tax Act (Cap. 470 - Laws of Kenya) provides that, tax

upon the income of a non-resident person not having a permanent establishment in

Kenya. Withholding Tax is levied at varying rates (3% to 30%) on a range of payments

to residents and non-residents. Resident WHT is either a final tax or creditable against

tax payable. Non-resident WHT is a final tax.

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Payments Resident WHT rate (%) Non-resident WHT rate (%)

Dividend > 12.5% voting power Exempt 10

Dividend < 12.5% voting power 5 10

Interest:

Bearer instruments 25 25

Government bearer bonds (maturity ≥ 2 yrs.) 15 15

Bearer bonds (maturity ≥ 10 years) 10 N/A

Other 15 15

Qualifying interest:

Housing bonds 10 N/A

Bearer instruments 20 N/A

Other 15 N/A

Royalty 5 20

Winnings from gaming and betting (1) Varied Varied

Management or professional fees 5 20

Consultancy fees - Citizen of EAC member states 5 15

Training (including incidental costs) 5 20

Rent/leasing:

Immovable property N/A 30

Others (other than immovable) N/A 15

Pension/retirement annuity Varied (2) 5

Contractual fees 3 20

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Payments Resident WHT rate (%) Non-resident WHT rate (%)

Sale of property or shares in oil, mining, or mineral

10 20
prospecting companies

Notes

1. The taxation of the betting, lottery, and gaming sector has undergone

significant change in Finance Bill, 2017.

2. This will vary depending on the payments paid out.

Oil and gas sector WHT rates

WHT rates applicable on payments to non-residents in the oil and gas sector are

shown in the table below:

Payments Non-resident (oil and gas) WHT rate (%)

Dividends 10

Interest 15

Natural resource income 20

Management or professional fees 12.5

Illustration

Salmon Okong’o is employed as the Head of Finance, Wananchi (K) Ltd. His annual

chargeable pay for the year ended 31st December 2018 is Kshs. 2,249,191.00 out of

which, his employer deducted Kshs. 373,814 PAYE and remitted to the Revenue

Authority. He paid insurance premium of Kshs. 84,000 in 2018 towards his child’s

education for 10 years.

Required:

Calculate Salmon Okong’o’s taxable income and tax payable for the year ended 31st

December 2018.

Solution

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Salmon Okong’o

Tax Payable for the year ended 31st December 2018

Item Amount Rate PAYE

On the first Shs.147,580 147,580.00 10% 14,758.00

On the next Shs.139,043 139,043.00 15% 20,856.45

On the next Shs.139,043 139,043.00 20% 27,808.60

On the next Shs.139,043 139,043.00 25% 34,760.75

On all income over Shs.564,709 1,735,818.00 30% 520,745.40

Tax Liability 618,929.20

Deduct: Tax Credits

PAYE (Paid) 373,814

Personal Relief 16,896 15,360

Insurance Relief 12,600 (403,310.00)

Tax Payable 215,619.20

6.3.4. Incomes from Past Employment

A. Lump Sum Payment

a) Compensation for loss office

Section 5(2) (c) of the Income Tax Act (Cap. 470 Laws of Kenya) provides that, an

amount received as compensation for the termination of a contract of employment or

service, whether provision is made in the contract or not for the payment of that

compensation is taxable.

(i) Where the contract is for a specified term Amount received as compensation

on termination of contract shall be deemed to have accrued evenly and assessed

over the unexpired period of the contract;

Illustration

A contract for five (5) years is terminated on 31st December 2015 after it has run

for 3 years. Compensation of Kshs.1, 100,000 were paid.

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The amount is to be spread evenly and assessed in the remaining period of 2

years as follows: -

Year Taxable Amount (Kshs)

2016 550,000

2017 550,000

(ii) Where the contract is for an unspecified term and provides for compensation

on the termination thereof, the compensation shall be deemed to have accrued

in the period immediately following the termination at a rate equal to annual

rate of remuneration from the contract immediately prior to;

Illustration

A contract for an unspecified term provides for payment of Kshs. 700,000 as

compensation in the event of termination. It is terminated on 31st December

2014 and the employee's rate of earning was Kshs. 300,000 per annum. The

amount is spread as follows

Year Taxable Amount (Kshs)

2015 300,000

2016 300,000

2017 100,000

(iii) Where the contract is for an unspecified term and does not provide for

compensation on the termination thereof, any compensation paid on the

termination of the contract shall be deemed to have accrued evenly in the three

years immediately following such termination;

Illustration

A contract is for an unspecified term with no provision for payment of

compensation. The contract is terminated on 31st December 2014 and Kshs.

1,500,000 compensation is paid.

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The amount is to be spread forward and assessed evenly in three years as

follows: -

Year Taxable amount (Kshs)

2015 500,000

2016 500,000

2017 500,000

NB: Use the current rates of tax (i.e. 2017) until subsequent years’ rates are enacted.

Personal Relief is not granted in advance before commencement of any year of

income.

b) Gratuity/Bonuses

Where an amount is received in respect of employment or a service rendered in a year

of income different from the year of accrual, such income is deemed to be income of

the year of accrual. However, where the year of accrual is earlier than four (4) years

prior to the year of receipt, the income is to be treated as that of year of income which

expired 5 years prior to the year in which the income is received or prior to the year

of income in which employment ceased. S. 5 (2) (a) (i)

Illustration

Billian Rachael left employment in September 2017 after 30 years of service and was

paid severance pay/service gratuity of Kshs. 660,000; three months’ notice pay Kshs.

90,000 and Kshs.25, 000 for his 20 leave days not taken for the year 2016.

Solution

- ► The service gratuity amount is to be spread backwards and taxed together with

income earned in the relevant years.

- ► Notice pay is assessable in the period immediately after date of leaving

employment.

- ► Pay in lieu of leave should be taxed in the year to which the leave days relate.

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Breakdown of Lump sum payment

Year Taxable Amount Kshs

2017 Notice Pay 90,000+22,000

2016 Gratuity/Leave pay 22,000+25,000 = Kshs.47, 000

2015 Service gratuity 22,000

2014 Service gratuity 22,000

2013 Service gratuity 660,000-22,000 = Kshs.572, 000

NB: To calculation tax on lump Sum, aggregate: total taxable pay for the year and

lump sum amount for that year then calculate tax chargeable on the revised

total taxable income

If termination of employment occurs during the year, the portion of lump sum

payment for that period is taxable in that year.

Calculate the tax for each year using annual rates of tax and then add up tax for all the

years involved to arrive at total tax to be deducted from the lump sum payment. It

should be noted that any lump sum payment relating to the year of income 2011 and

prior years is assessable in 2012 being the 5th year prior to the year of receipt (2017)

B. Pension

a) Commutation from a Fund

According to section 8 (5) (a) of the Income Tax Act (Cap. 470 Laws of Kenya) in the

case of a lump sum commuted from a registered pension or individual retirement

fund, the first six hundred thousand shillings (Kshs. 600,000) is not chargeable to tax

this takes place at normal retirement, ill health or if one has been a pensionable

member of a fund for fifteen years or more.

b) Withdrawal/ Payment from Fund

According to section 8 (5) (b) & (c) of the Income Tax Act (Cap. 470 Laws of Kenya) in

the case of a withdrawal from a registered pension or individual retirement fund upon

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termination of employment, the first six hundred shillings (Kshs. 600,000) is not

chargeable to tax if pensionable service is ten years or more, but where the period is

less than ten years an amount of sixty thousand shillings per year (Kshs. 600,000 p.a.)

of pensionable service is tax free.

NB: Monthly or lump sum pension granted to a person who is sixty-five (65) years

of age or more is TAX-FREE

Past Paper Questions: Q2 June 2011, Q1(c) December 2013

6.4. Business Income

Introduction
Section 2 of the Income Tax Act (Cap. 470 Laws of Kenya) defines a “business” to

includes any trade, profession or vocation, and every manufacture, adventure and

concern in the nature of trade, but does not include employment.

A business will involve the buying and selling of goods and services but the mere

activity of selling of goods and services may not constitute a business. The following

are some of the common Indices of trade: -

a) Profit Seeking Motive: This is a prima facie evidence of a business activity. It is

more pronounced in companies and partnerships, which are formed mainly for

carrying out profitable operations as specified by their memorandum of

Association and partnership agreements. For an individual it is not easy to rule

out an isolated transaction is a trading venture without getting other facts

(indicators) associated with the transaction.

b) Mode of acquisition: This refers to the way the asset was acquired, it is therefore

easy to conclude that trading has taken place where an asset was purchased and

then sold thereafter as opposed to where it was inherited and then sold, making

the latter sale likely non-trading venture.

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c) Nature and Quantity of Asset: This can be a pointer to trading say where a person

purchases an asset (say a tractor) that is not used privately (say for enjoyment

purposes) or from an investment point and sells it later. Any gains arising are

likely to be trade profit given that such a transaction would be mainly motivated

by commercial speculation. In addition, dealing in large quantity of goods is a

pointer to a scheme with a profit motive.

d) Length of Time Asset is Held: The shorter the interval between purchase and

sale of an asset, the higher the likelihood that the acquisition was motivated by

profit in contrast, when an asset is acquired, held for a longer period and used

(say for residential purposes or to earn rent) it is easy to deduce trade granted the

use it was put in by the buyer before selling it.

e) Treatment of Asset while Held: This is an important pointer especially where it

is repaired, blended, reconstructed or renovated so as to enhance its value and

fetch a higher price when sold. These acts are motivated by profit motive.

f) Number of Transaction: Where they are numerous, serial or carried out

methodically; they are likely to be pointers of trading venture. However, courts

have also held that a single isolated transaction could constitute a trade or a piece

of business.

g) Business Interest in the same Field: Where one engages in related or connected

activities, the second line of activity is likely to be trading i.e. A Motor vehicle

dealer engaging in spare part sale of insurance brokerage for vehicles.

h) Method of Financing: A purchaser who buys goods and pays for them from sales

proceeds from a previous sale or borrows money to buy goods and then sells them,

is likely to be engaged in a trade.

i) Destination of Proceed: This may also be a trading indicator where such proceeds

are used to acquire a similar asset, unless the asset was held as an investment and

then sold and replaced by a similar investment.

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j) Sale organization: This is a pointer to trading where a person organizes his selling

system can determine whether trading is going on or not granted that the sale

may be promoted by advertising or engaging a sales person.

Having looked at the ten factors, one can tell whether trading is going on or not, which

is easy to detect in case of an ordinary business but not so for borderline cases.

However, it is important to note that these factors must be looked at in entirety and

not singularly, each case must also be dealt with on its own merit/facts.

Income Tax Computation of Business Income

For the purposes of section 3(2)(a)(i) of the Income Tax Act (Cap. 470 Laws of Kenya)

where a business is carried out or exercised partly within and partly outside Kenya

by a resident person, the whole of the gains or profits from such business will be

deemed to have accrued in or been derived from Kenya and is taxable. However, any

loss in the business is carried forward to be offset against the profit in the following

period up to 10 years. The accounting net profit/loss from a business must be adjusted

for income tax purposes.

Allowable and Non-Allowable Deductions

1. Allowable Deductions

Pursuant to section 15(1) of the Income Tax Act (Cap. 470 Laws of Kenya), for

ascertaining the total income of a person for a year of income there shall, be deducted

all expenditure incurred in that year of income which is “expenditure wholly and

exclusively incurred” by him in the production of that income.

Where under section 27 (Accounting Periods not coinciding with year of income) any

income of an accounting period ending on some day other than the last day of that

year of income is, for ascertaining total income for that year of income, taken as income

for that year of income, then the expenditure incurred during that period shall be

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treated as having been incurred during that year of income. Examples of Allowable

deductions may include: -

(a) Any cost an employee incurs in running or maintaining a car to enable him to

perform his duties

(b) Any costs an employee incurs on traveling for performing his duties

(c) Cost of living away from home necessitated by employment

(d) Cost of tools and implements if the employee provides his own

2. Disallowable Deductions

Section 16 (2) of the Income Tax Act (Cap. 470 Laws of Kenya), provides that,

notwithstanding any other provision of the Act, no deduction shall be allowed in

respect of the following: -

(a) Expenditure incurred by a person in the maintenance of himself, his family or

establishment or for any other personal or domestic purpose including the

following: -

(a) Entertainment expenses for personal purposes; or

(b) Hotel, restaurant or catering expenses other than for meals or

accommodation expenses incurred on business trips or during training

courses or work-related conventions or conferences, or meals provided to

employees on the employer’s premises;

(c) Vacation trip expenses except those customarily made on home leave as

provided in the proviso to section 5(4) (a)-Passages;

(d) Educational fees of employee’s dependents or relatives; or Club fees

including entrance and subscription fees except as provided in section

15(2(v)-paid by employer.

(b) Expenditure or loss which is recoverable under any insurance, contract, or

indemnity;

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(c) Income tax or tax of a similar nature including compensating tax paid on income;

except foreign tax in respect of which a claim is made under section 41(Special

Arrangements for relief from double taxation.), a deduction shall be allowed in

respect of income tax or tax of a similar nature paid on income which is charged

to tax in a country outside Kenya to the extent to which that tax is payable in

respect of and is paid out of income deemed to have accrued in or to have been

derived from Kenya.

(d) Premium paid under an annuity contract;

(e) Expenditure incurred by a non-resident person not having a permanent

establishment within Kenya.

Adjustment Rules for Net Profit/Loss

a) Add back disallowable expenses if already deducted i.e. Personal salaries, personal

expenses, capital expenses, and Depreciation & general provisions for bad

debts etc.

b) Add any assessable income, which has been omitted.

c) Deduct the allowable expenses, if not already deducted i.e. expenses wholly and

exclusively incurred in the production of that income, this includes capital

deductions.

d) Deduct any in assessable income if already included.

Illustration

Anna-Marie posted the following figures for the year ended 31st December 2018.

Kshs. Kshs.

Sales 800,000

Cost of sales

Opening stock 100,000

Purchases 600,000

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700,000

Less: Closing stock (150,000) (550,000)

Gross profits 250,000

Other Incomes

Dividends (BAT) 50, 000

Interest (KCB) 50, 000 100, 000

Total income 350, 000

Sundry expenses (200,000)

Net Profit 150,000

In the sundry expenses the following were included: Purchase of computer 60,000;

Personal salary 20,000; Stationary 10,000; Electricity 20,000

Required

Calculate his taxable income

Solution

Kshs. Kshs.

Accounting net profit 150,000

Add: Purchase of computer 60,000

Personal salary 20,000 80,000

Deduct: Dividends (BAT) 50,000

Interest (KCB) 50,000 (100,000)

Taxable Profits 130,000

Past Paper Questions: Q5(c) September 2015

Income from Management and Professional Fees

A profession is the exercise of and skill obtained through specialized training; such

profession may be exercised independently through self-employment. In case of such

self-employed professionals, returns of income will be made based on fees earned

during that accounting period. Expenses may be claimed against the incomes of the

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same principal as for a normal trading concern. That is the expenses to be allowed

must have been incurred, wholly and exclusively in earning that income. In addition

to the normal expenses the following are also allowable: -

(a) Cost of replacing existing/obsolete books.

(b) A proportion of car expenses and W&T deductions may be allowed to the

extent that the car was used for professional services.

(c) A proportion of rent if dwelling house is used as office may be deducted.

(d) Professional subscriptions made by a self-employed professional are allowable.

(e) Payment by local branches to the head office are disallowed as business

expenses

The Income Tax Act (Cap. 470 Laws of Kenya), recognizes the following professions:

a) Medical: Any person who is registered as a medical practitioner under the

Medical Practitioners and Dentists Act

b) Dental: Any person who is registered as a dentist under the Medical Practitioners

and Dentists Act

c) Legal: Any person who is an advocate within the meaning of the Advocates Act

d) Surveyors: Any person licensed as a surveyor under the Survey Act.

e) Architects & Quantity Surveyor: Any person who is registered as an architect or

a Quantity surveyor under the Architects and Quantity Surveyors Act

f) Veterinary Surgeons & Veterinary: Any person who is registered or licensed as

a veterinary surgeon under the Surgeons Act

g) Engineers: Any person who is registered under the Engineers Registration Act

h) Accountants: Any person who is registered as an accountant under the

Accountants Act

i) Certified Public Secretaries: Any person who is registered under the Certified

Public Secretaries Act of Kenya (Sec 133)

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6.4.1. Sole Proprietorship

A sole proprietorship is simply a business structure operated and owned by one

person. The person remains solely liable to all the losses and returns of the business.

Starting a business as a sole proprietor is cheaper and easier to set up compared to

limited company. This legal structure for a business gives more control to the

entrepreneur over decision making in all different parts of the business.

Taxation of Sole Proprietorship

Sole proprietorship businesses are not entirely required to file for taxes as a business

to Kenya Revenue Authority, rather they can do this through Income Tax Return as

an individual every June 30th. If Sole proprietor charges VAT on his or her

products/services, then they are required by law to make monthly returns before 20th

of every month.

Advantages of Sole Proprietorships

1. Ease of formation: Becoming a sole proprietor is as simple as buying newspapers

and selling on the street, one only needs to develop an idea, set goals and then

develop it into a profitable operation. The simplicity of a sole proprietorship makes

this form of business structure attractive to small entrepreneurs.

2. Tax benefits: As an individual, owners of sole proprietorships file individual tax

returns and list down the figures and information in their individual returns. This

saves extra costs of accounting and tax filling. The business is therefore taxed at

the rate of personal income instead of 30% as a corporation.

3. Decision-making: The owner has control of all decisions and makes them alone.

This makes it easy to make business decisions.

4. Secrecy: The owner alone handles the whole business and one person knows most

of the business secrets. The owner can maintain high standards of secrecy of profits

or special techniques.

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Disadvantages of Sole Proprietorships

1. Unlimited liability: The business owner will be held directly responsible for any

losses or debts coming from the business.

2. Lack of continuity: The continuity or permanence of a sole proprietorship is

difficult to maintain. If the owner dies or is incapacitated and there is no suitable

successor, the business will not continue.

3. Difficulty in raising funds: The volatile nature of sole proprietorship makes it

difficult for other investors to put their money into such a business. This is

especially when the business needs to grow.

6.4.2. Partnerships (excluding conversions)

A partnership is a relationship that subsists between two or more people carrying on

business together with a view to making profits. Gains or profits from a partnership

are assessed on the partners and not the partnership. The profits/losses arising from

the partnership is added to the partner’s total income from another source. A

partnership is usually established by an agreement known as a “partnership deed”

which outlines the following: -

(a) Amount of capital to be contributed by each partner

(b) Salaries to be paid to partners

(c) Interest to be charged on drawings by partners

(d) Interest to be paid on capital contributed by partners

(e) The profit-sharing ratio

In the absence of a deed it is assumed that, there is no interest paid on capital, no

interest charged on drawings, no salaries payable to partners and that, profits & losses

will be shared equally

Taxation of Partners

The income of the partnership is taxed on the partners.

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The net profits/losses of a partnership must be adjusted for taxation of purposes, this

includes adding back disallowable expenses if already deducted and deducting non-

taxable incomes if already included. These adjustments are: -

(a) Expenses to be allowed must have been expended wholly and exclusively in

the production of that income.

(b) Capital expenses are not allowable

(c) Personal expenses are not allowable

(d) Salaries to partners are not allowed

(e) Interest on capital to partners is not allowable

(f) Interest paid by partners on drawings is not taxable

(g) Wife’s salaries are not allowable

(h) Drawings are not allowable

(i) Disposal of fixed assets is not taxable

After these adjustments, net amount is then distributed to the partners as per the deed

Illustration

Hazel & Grace are in partnership and share profits/losses equally in the year of income

2018 when they posted a loss of Kshs.65, 000. Their accounts were as follows: -

Incomes Kshs

Dividends (KCB) 40,000

Interest (BIDCO) 50, 000

Sales 600,000

Disposal of delivery van 20,000

Refund of income tax 65,000

Sales of Grace’s Shamba 250,000

Expenses:

Purchases 300,000

Salaries: - Hazel 40,000

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- Grace 50,000

Interest on capital: - Hazel 20,000

- Grace 20,000

Commission to Hazel 40,000

Purchase of van 400,000

Advertising 100,000

Workers’ salaries 20,000

Electricity 100,000

Required

a) Adjusted partnership profit/loss

b) Distribution of the partnership profit/loss

Solution

Adjustment of net loss Kshs Kshs

Loss as per accounts (65, 000)

Add:

Salaries to Hazel & Grace 90, 000

Interest on capital to Hazel & Grace 40, 000

Commission to Hazel 40, 000

Purchase of van 400, 000 570, 000

Less:

Dividends (KCB) 40, 000

Interest (BIDCO) 50, 000

Disposal of delivery van 20, 000

Refund of income tax 65, 000

Sales of Grace’s Shamba 250, 000

WTD-M/V (25% 0f 400,000) 100,000 (525, 000)

Adjusted profit (20, 000)

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Computation of Partner’s Taxable Income

Item Hazel Grace Total

Salaries 40, 000 50, 000 90, 000

Interest on capital 20, 000 20, 000 40, 000

Commission 40, 000 Nil 40, 000

Balance (shared in PSR) (95, 000) (95, 000) (190, 000)

Taxable Income 5, 000 (25, 000) (20, 000)

Past Paper Questions: Q1(c) May 2012

6.4.3. Incorporated Entities (excluding specialized institutions)

Corporation tax is charged at 30% for residents and 37.5% for non-residents on

company incomes after the adjustment of the same in the same manner as discussed

under 1.4.

However, the following items should be allowable.

(a) Director’s fees paid out wholly and exclusively to produce the income.

(b) Director’s salaries are allowable

(c) Payments made between two associated companies are allowable.

Deductions not allowable are:

(a) Bad debts related to loans advanced to Directors

(b) Formation expenses

(c) Dividends and other distribution from profits

(d) Corporation tax

(e) Interest/penalties on arrears on corporation tax

Illustration

Lake Nakuru Ltd. posted the following accounts in the year 31st December 2018.

Incomes Kshs. Kshs

Gross profits 2,000,000

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Deposit interest 50,000

Dividends 400,000

Discounts received 50,000

Total income 2,500,000

Expenses

Salaries and wages 120,000

Rent & rates 130,000

VAT 100,000

Electricity 10,000

Insurance 30,000

Office expenses 50,000

Dividends paid 200,000

Neon sign post 180,000

Directors holiday payment 100,000

Corporation tax 120, 000 1, 040,000

Net Profits 1, 460,000

Solution

Adjustment of net Profit

Incomes Kshs. Kshs

Net profit as per accounts 1,460,000

Add:

VAT 100,000

Dividends paid 200,000

Corporation tax 120,000

Directors holiday payment 100,000

Neon sign post 180,000 700,000

Less:

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Dividends 400,000

Deposit interest 50,000 (450,000)

Adjusted profits for tax purposes 1,710,000

Past Paper Questions: Q4(b) November 2017

6.4.4. Turnover Tax (TOT)

Turnover tax was introduced vide Finance Act of 2006 through the provision of the

Income Tax Act (Cap. 470 Laws of Kenya), under Section 12C and become operational

on 1st January 2008 until it was replaced by Presumptive tax by the Finance Act, 2018.

The applicable rate is 3% of the gross income from business, no expenditure or capital

allowances is granted. TOT is a final Tax

Interpretation

A. “Income from Business” - Includes gross receipt, gross earnings, revenue,

takings, yield, proceeds or other income chargeable to tax under section 12c.

B. “Person” - includes partnerships, individuals

C. “Tax period” - Means every three calendar months commencing 1st January

every year

Eligibility, Registration & Administration of TOT

Persons whose income from business exceeds Kshs 500,000 but not more than Kshs

5,000,000 in any year of income is be liable to pay turnover tax, unless such a person

elects not to be subject to turnover tax by notice in writing to the commissioner. In

which case the person shall be liable to pay corporate tax, however turnover tax shall

not apply to: -

- Rental income and management or professional or training fees

- Income of incorporated companies

- Any income which is subject to a final Withholding tax i.e. Interest & Dividends

received by individuals

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A registered person is issued with a certificate (TOT2) and shall be required to keep

records including: -

a) Cashbooks

b) Sales receipts and invoices

c) Daily sales summary (TOT 4)

d) Purchase invoices

e) Bank statements

Where a business is in possession of an Electronic Tax Register (ETR) records as

provided under the VAT Act (ETR) Regulations, 2004, those records shall be sufficient.

Turnover Tax is due on or before the 20th day of the month following the end of the

quarter/tax period. However, one may remit tax due on monthly basis and offset the

tax paid in the tax return. Failure to submit a return or submits the return and fails to

pay the tax due is liable to pay a default penalty of two thousand shillings.

Benefits of Turnover Tax

(i) Easier tax procedure and simplifies tax computation

(ii) Makes return filling easier and simplifies record keeping

(iii) Reduces cost of compliance

Update: Imposition of presumptive income tax

Eligibility: Presumptive tax is only be applicable to persons whose turnover from

business does not exceed KES 5,000,000 per annum, who are issued a single business

permit by the County Governments and is not applicable to the following:

1) management and professional services; or

2) rental business; or

3) incorporated companies

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Rate: The rate of the presumptive tax is 15% of the single business permit fee, is final

tax and is payable at the time of payment of the single business permit or renewal of

the same.

Deregistration: A person may opt out of the presumptive tax upon notifying the

Commissioner, after which the person will be liable to tax on his/her income in the

normal way.

Analysis: The success of this measure will depend on its implementation and will

require collaboration with the county governments.

While the introduction of presumptive tax appears to collect less tax as compared to

turnover tax, the ease of its implementation and administration will enhance its reach

and expand the tax base. It may also be used to enroll new taxpayers for ease of

follow-up should the government decide to increase the tax rate in future.

6.5. Income from use of Property - Rent and Royalties

A. Income from Occupation of Property (Rent Income)

Rental Income is taxable under section 3(2)(a)(iii) of the Income Tax Act (Cap. 470

Laws of Kenya). It refers to the payment received by a person from his tenant for the

occupation of his property. In addition, rent on non-residential buildings (Commercial)

is taxable under Value Added Tax Act, 2013.

Any rental income below KES144, 000 per annum is EXEMPT from residential income

tax. Effective 9 June 2016.

In determining taxable rent income all costs incurred wholly and exclusively in

earning such rent income are deducted, some of these costs include: -

(a) Specific bad debts and rental losses

(b) Reasonable advertising and promotional costs

(c) Legal costs and stamp duty on acquiring a lease for less than 99years.

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(d) Water rates and land rates

(e) Repairs and renewals to maintain the existing rent amount.

(f) Management cost of land or agent i.e. Telephone, rent collection costs.

(g) Insurance premium of the building

(h) Wages for staff and security working in the premises

(i) Heating and lighting

(j) Reasonable amount in respect of diminution in value of implements or similar

articles used in a building

(k) Industrial building allowance (IBD)

(l) Alteration to the premise which is done to maintain the existing rent

Assessment of Rental income may be made at any time prior to the expiry of seven (7)

years after the year of income; (Section 79(1) of the Income Tax Act, Cap 470)

NB: Any amount incurred with the aim to increase the rent will be disallowed

Any cost in respect of extension or replacement of the premise is disallowed

All costs of capital nature are also disallowed

Illustration

Mr. Gabriel owns a block of four (4) flats let out at Kshs. 2,000 pm per flat in the year

2017. He incurred the following costs in the year 2018.

Rates to Nairobi County Government 4,000 p.a.

Gardener wages 4,000 p.m.

Watchman 360 p.m.

Insurance 800 p.a.

Repair of fence 900 p.a.

Rent collection fees 10% of gross rent

Addition of servant quarters 10,000

He had rented out part of the servant quarters for 5,000 in December of 2018.

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Required:

Calculate his taxable rental income

Solution

Kshs. Kshs.

Rental income - Flats (Kshs 2,000*12 Months) 4 96,000

- Servant quarters 5,000

Total Rental Income 101,000

Expenses

Rates to NCG 4,000

Wages (4000x12) 48,000

Watchman (360x12) 4,320

Insurance 800

Fence repairs 900

Rent collection 10% 10,100 (68, 120)

Taxable Rental Income 32, 880

B. Royalty Income
This is a payment made as a consideration for the use of or right to use the following

intellectual properties like: -

- Literature, artistic, or scientific copyright

- Cinematograph including film and tapes used in radio cassettes or any other form

of broadcasting

- Any industrial, commercial or scientific equipment or information concerning

industrial, commercial or scientific equipment

Taxation of Royalty Income

Expenses will be allowed if they were incurred wholly and exclusively incurred to

generate that income. Expenses incurred prior to commencement will not be allowed

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i.e. research and development. Royalty on an individual is taxed bases on the

graduated scale while that of a corporate is taxed at corporate tax rate.

6.6. Farming Income

Profits arising from farming activities are subject to tax just as trade and professions

except hobby farming. Expenses incurred in earning such profits are also allowable

Hobby Farming: If farming is carried on without a view to the realization of profits it

may be exempted from taxation this will arise if the owner of the firm consumes a bigger

proportion of the farm produce. Income from such ventures is not taxable.

Treatment of Capital Expenditure

(a) Any expenditure of capital nature that is incurred in prevention of soil erosion is

allowable.

(b) Capital expenditure incurred in clearing of land or clearing and planting

permanent or semi-permanent crops are also allowable.

(c) A farmer is also entitled to farm work deductions.

Illustration

Bob Marshall is a farmer, he decides to sell off his cows and purchase pigs. His income

for the year 2018 was as follows: -

Incomes: Kshs Kshs.

Disposal of cows 156,000

Income from camping site 62,000

Sale of farm produces 200,000

Expenses:

Purchase of pigs 100,000

Clearing bush to plant 10,000

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Planting potatoes 20,000

Construction of pig sty 30,000

Interest paid on bank loan 20,000

Works to stop soil erosion 20,000

Purchase of fertilizer 30,000

Donation to local church 20,000

Subscription to Kogelo sports club 10,000

Court fine 30,000

Required:

Calculate his taxable income

Solution

Bob Marshall

Taxable income for the year ended 31st December 2018

Item Kshs Kshs

Disposal of cows (156,000 - 100,000) 56,000

Income from camping site 62,000

Sale of farm produces 200,000

Total Income 318,000

Less:

Clearing bush to plant 10,000

Planting potatoes 20,000

Interest paid on bank loan 20,000

Works to stop soil erosion 20,000

Purchase of fertilizer 30,000 (100,000)

Taxable Farming Income 218,000

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6.7. Investment Income

A. Dividend Income

Dividend refers to the distribution of profits of a company to its shareholders.

Dividend is considered in the year in which it is paid to the shareholders

a) Qualifying Dividends

These are dividends, which are taxed at the point they are paid to the shareholders.

This tax is called withholding tax, and dividends subject to this WHT are not taxed

again. All dividends received by a resident will be qualifying dividends

b) Dividends not paid in Cash

(a) When a company issues debentures or redeemable preference shears to any of

its shareholders and receives no payment from the shear holder, the issue of

such debentures or redeemable preference shares shall be deemed to be

payment of dividends. The value of such dividends shall be the nominal value

or redeemable value whichever is higher.

(b) Where a company issues debentures or redeemable preference shares to its

shareholders at a sum or amount less than the nominal value the issue of the

debentures or redeemable preference shares shall be deemed to include a

payment of dividend equal to the difference provided that if the sum paid for

such debentures or preference shares is 95% or more of the nominal value then

there is no dividend.

Item A (Kshs) B (Kshs) C (Kshs)

Nominal 100 100 120

Value

Amount Paid 95 75 75

Value of NIL 25 45

Dividend

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Illustration

In the year 2018 Mr. Kukuboh who is a resident earned the following incomes: -

o Salary 30,000 p.m.

o House allowance 7,000 p.m.

o Car allowance 8,000 p.m.

He lived in the company house and paid rent of Kshs 5,000 p.m. to the employer and

received dividends of 20, 000 in December from BIDCO.

Required:

Calculate the taxable income.

Solution

Taxable income - Cash Benefits {12(30,000+7,000+8,000)} = 540,000

- Non-Cash Benefits {[15% of 540, 000]-[5, 000x12]} = (21,000)

= 561, 000

Notes:

- Dividends received from sources outside Kenya are not taxable.

- Distribution of profits of a company that is voluntary closing down is dividends

- Dividends received by a resident company are not considered to be income

(taxable) unless the company receiving such dividend controls less than 12.5% of

the shares of the paying company.

- Debentures and preference shears that are redeemable are dividends when issued

to the shareholders without any payment.

- Dividends paid by corporative societies are not qualifying dividends except

dividends paid by a savings and credit cooperative society

B. Interest Income

This is a payment received by a person from another person for money lent. Money

can be lent in the form of loan deposit in the bank or debt. Interest also includes any

premium or discount received by way of interest.

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a) Qualifying interest income

This is interest income received by individuals. It’s taxed at the point of payment

hence not taxable again.

NB: Qualifying interest income only relates to individuals

Qualifying interest for building society is restricted to Ksh.300, 000 p.a. any amount

above that is added back when getting total taxable income.

Illustration

Calculate the taxable income for Mr. Weunda for the year of income 2017

o He owns shares in Unga Ltd. And has received dividend of 5, 000

o He earned interest of 3, 000

o He owns a house which he has let out from 1st April to 31stDecember at 5, 000 p.m.

o He paid 4,000 for his daughters’ school fees.

o His employment income was 15,000 p.m.

o He paid 10% of gross rent as rent collection fees

Solution

Income

o Salary (5,000x12) 180, 000

o Rent (5,000x9) 45, 000

o Rent collection fees (4, 500) (40,500)

Taxable Pay 220,500

6.8. Miscellaneous Taxes and other Revenues

6.8.1. Stamp Duty

Stamp duty is tax levied on various transactions such as transfer of properties, shares

and stocks. It is collected by the Ministry of Lands, which has seconded the function

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to Kenya Revenue Authority (KRA). KRA in turn contracts commercial banks to

collect the money at a commission.

The instruments that are required to be stamped include:

1. Lease/Transfer

3. Charge/Discharge

4. Mortgage/Re-conveyance of mortgage

7. Insurance policy

8. Debenture; and

9. Memorandum and Articles of Association

Stamp duty is major revenue earner for the government, regulated by Stamp Duty Act

(Chapter 480 Laws of Kenya). Stamp Duty rates are shown below:

Activity Stamp duty rate

Transfer of immovable property:

Urban 4%

Rural 2%

Creation or increase of share capital 1%

Registration of a company (nominal share capital) 0%

Transfer of unquoted shares or marketable securities 1%

Transfer of quoted shares of marketable securities Exempt

Registration of a debenture or mortgage:

Collateral security 0.05%

Supplemental security KES 20 per counter part

Lease:

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Activity Stamp duty rate

Period of three years and under 1% of annual rent

Period over three years 2% of annual rent

6.8.2. Catering Levy

Catering Training and Tourism Development Levy” means the levy imposed under

section 16 of The Hotels and Restaurants Act, (Chapter 494 Laws of Kenya)

The Levy is paid by Hotel and Restaurant owners at the rate 2 % of the gross receipts

derived from the sale of food and drinks and in the case of a hotel, the provision of

accommodation and other services supplied during each month.

6.8.3. Motor Vehicle Advance Tax

Section 12A of the Income Tax Act (Cap 470) was introduced by the Finance Act. 1995,

and came into force with effect from 1st January 1996. It provided for the payment of

a tax “to be known as Advance Tax”, in respect of commercial vehicles that are

licensed to operate on Kenyan roads.

Third schedule prescribes the rate of advance tax under section 12A as follows:

a) For vans, pick-ups, trucks, prime movers, trailers and lorries: Kshs. 1,500 per

ton per year or Kshs. 2,400 per year, whichever is the higher;

b) For saloons, station-wagons, mini-buses, buses and coaches: Kshs. 60 per

passenger capacity per month or Kshs. 2,400 per year, whichever is the higher.

NB: Tractors or trailers used for agricultural purposes are Exempt

6.8.4. Capital Gains Tax (CGT)

Introduction

CGT Was re-introduced by Finance Act of 2014 after 30 years, since its suspended-on

13 June 1985. It amended the Eighth Schedule of the Income Tax Act (Cap. 470 Laws

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of Kenya), providing for tax on gains accruing to a company or an individual on the

transfer of property situated in Kenya effective 1st January 2015.

The amendment also introduced the taxation of gains in the extractive industry i.e., a

firm acquiring more than a 50% stake in a “mineral block” will pay the capital gains

tax on the net gain of the transaction after deducting certain attendant costs while one

having lesser stake shall use a specified formula to calculate the taxable amount.

What is Capital Gains Tax?

CGT is a tax chargeable on whole of a gain, which accrues, to a company or an

individual on or after 1st January 2015 on the transfer of property situated in Kenya,

whether the property was acquired before 1st January 2015 or not.

The rate of tax is 5% of the NET GAIN. It is a final tax and cannot be offset against

other income taxes.

Definitions

1. What is property? Property is to include land, buildings and marketable securities

(traded off the exchange).

2. Who is liable to pay the tax? The tax is to be paid by the person (resident or non-

resident) transferring the property, that is, the transferor. The transferor can either

be an individual or a corporate body.

3. What constitutes a transfer? A transfer takes place: -

1) Where a property is sold, exchanged, conveyed or disposed of in any

manner (including by way of gift); or

2) On loss, destruction or extinction of property whether compensation is

received or not; or

3) On the abandonment, surrender, cancellation or forfeiture of, or the

expiration of rights to property

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Determination of Net Gain

The net gain is the excess of the transfer value over the adjusted cost of the property that

has been transferred. It is this excess that is subjected to tax at 5%.

The Transfer value of the property is the amount or value of consideration or

compensation for transfer of the property, less incidental costs on such transfer.

The Adjusted cost is the sum of the cost of acquisition or construction of the property;

expenditure for enhancement of value and/or preservation of the property; cost of

defending title or right over property, if any; and the incidental costs of acquiring the

property.

The adjusted cost can be reduced by any amounts that have been previously allowed

as deductions under Section 15(2) of the Income Tax Act.

Notes:

(a) Where there is concern of related party transactions, the Commissioner will

make necessary adjustments and/or revaluation to determine the market price

(b) This is a transaction-based tax and should therefore be paid upon transfer of

property but not later than the 20th day of the month following that in which

the transfer was made.

(c) When a loss is made, the loss may be carried forward to be offset/deducted

against a gain of a similar nature (that is, a capital gain) at a future date.

Exemptions from Capital Gains Tax

Transfer of property in the following circumstances do not constitute a transfer for

purposes of CGT:

(a) In the case of the transfer of property for the purpose only of securing a debt or

a loan, or on any transfer by a creditor for the purpose only of returning

property used as security for a debt or a loan;

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(b) In the case of the issuance by a company of its own shares or debentures;

(c) By the vesting in the personal representative of a deceased person by operation

of law of the property of that deceased person;

(d) By the transfer by a personal representative of any property to a person as

legatee in the course of the administration of the estate of a deceased person.

(e) Taking under a devise or other testamentary disposition or on an intestacy or

partial intestacy whether he takes beneficially or as a trustee;

(f) By the vesting in the liquidator by an order of a court of the property of a

company under section 240 of the Companies Act (Cap. 486);

(g) By the vesting in the official receiver or other trustee in bankruptcy of the

property of a bankrupt under section 57 of the Bankruptcy Act (Cap. 53);

(h) By the transfer by a trustee of property, which is shown to the satisfaction of

the Commissioner to be subject to a trust, to a beneficiary on his becoming

absolutely entitled thereto;

(i) By the transfer of assets: -

(1) Between spouses;

(2) Between former spouses as part of a divorce settlement or a bona fide

separation agreement;

(3) To immediate family;

(4) To immediate family as part of a divorce or bona fide separation agreement;

or

(5) To a company where spouses or a spouse and immediate family hold 100%

shareholding;

NB: “legatee” includes a person and "immediate family" means

children of the spouses or former spouses.

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Treatment of Extractive Industry

The net gains on disposal of interest in a person owning immovable property in the

mining and petroleum industry is taxable. The applicable rate of tax is 30% for

residents and 37.5% for non-residents with permanent establishments.

The taxable gain is the net gain derived on the disposal of an interest in a person, if

the interest derives its value from immovable property in Kenya.

Immovable property means a mining right, an interest in a petroleum agreement,

mining information or petroleum information.

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Table of Contents

Chapter Seven
7 CAPITAL DEDUCTIONS ........................................................................................... 2

7.1. RATIONALE FOR CAPITAL DEDUCTIONS ............................................................... 2

7.2. INVESTMENT DEDUCTIONS: ORDINARY MANUFACTURERS ................................ 3

7.3. INDUSTRIAL BUILDING DEDUCTIONS ................................................................. 10

7.4. WEAR AND TEAR ALLOWANCES ........................................................................... 14

7.5. FARM WORKS DEDUCTIONS ................................................................................. 21

7.6. SHIPPING INVESTMENT DEDUCTION ................................................................... 24

7.7. OTHER DEDUCTIONS............................................................................................. 26

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7 CAPITAL DEDUCTIONS

7.1. Rationale for Capital Deductions

Introduction
Capital allowances are akin to a tax-deductible expense. A capital deduction is an

incentive given to investors on capital expenditure incurred on Industrial buildings

and machinery used to produce income. In the case of machinery, capital deductions

are given in respect to wear and tear and in respect to capital expenditure in the case

of Industrial and Hotel buildings

The area of capital allowances is complex; there is no approved list of qualifying items

of expenditure for capital allowances purposes. Entitlement must be established, and

qualifying expenditure must be properly identified by reference to the facts.

Taxpayers must also satisfy several conditions established primarily through case law

and Revenue precedence.

According to the Income Tax Act (Cap. 470. Laws of Kenya), Capital

allowances/deductions are allowances granted to tax payers in respect of capital

expenditures incurred by such persons in the production of taxable income. They are

an example of tax incentives. As a business, you can claim tax allowances called capital

allowances, on certain capital purchases or investments. This means you can deduct a

proportion of these costs from your taxable profits and reduce your tax bill.

Capital Allowances are granted for tax purposes in lieu of depreciation. Examples of

capital allowances/deductions are: Wear and tear allowance; industrial building

allowance; Farm works allowances; Investment deduction; Shipping investment deduction;

Mining allowances, allowance on Telecommunication equipment, allowances on Computer

software et al

Objectives

Capital deductions are granted for the following reasons: -

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1) As a compensation for loss of capital value of an asset repeatedly used in a

business. The loss of value may be caused by wearing out of an asset due to

friction, corrosion and rusting, or obsolescence (change of fashion /technology)

2) To encourage development of industries e.g. manufacturing, tourism,

exportation (through EPZ) etc. They offer incentives to investors who would

invest in capital items such as industrial buildings and industrial machinery.

3) As an incentive to encourage the development of industries outside the main

urban centers of Nairobi and Mombasa.

4) They standardize losses in capital items for income tax purpose. The

depreciation and similar charges are not allowable expenses against taxable

income since they are not objective.

7.2. Investment Deductions: Ordinary Manufacturers

Introduction
Investment deduction (ID) was introduced in 1962 to encourage new industrial

enterprises in East Africa by giving additional deductions. This deduction is an

allowance to an investor who incurs capital expenditure on industrial building and

machinery used for manufacturing. ID is covered under section 24 of the second

schedule of the Income Tax Act (Cap. 470 Laws of Kenya)

Definitions
Building: This includes any building structure and where the building is used for

purposes of manufacture it includes the civil works and structures

deemed to be part of an industrial building

Installation: This means affixing to the fabric of a building in a manner necessary for

and appropriate to the proper operation of the machinery

New: This means not having previously been used by any person, or acquired

or held other than by a supplier in the normal course of trade

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Machinery: This means machinery and equipment used directly in the process of

manufacture, and includes machinery and equipment used for the

following ancillary purposes –

i. Generation, transformation and distribution of electricity;

ii. Cleanups and disposal of effluents and other waste products;

iii. Reduction of environmental damage;

iv. Water supply or disposal; and

v. Workshop machinery for the maintenance of the machinery.

Manufacture: This means the making (including packaging) of goods or materials from

raw or partly manufactured materials or other goods, or the generation

of electrical energy for supply to the national grid but does not extend

to any activities which are ancillary to manufacture, such as design,

storage, transport or administration;

Normal Investment Deduction

The qualifying Cost as per the second schedule is on the cost of: -

(a) Construction of a building and on the purchase and installation of new

machinery, and use of that machinery in that building for the purposes of

manufacture; or

(b) Purchase & installation of new machinery in a part of a building other than a

building or part previously used for the purposes of manufacture, and: -

i) The owner of the new machinery subsequently uses that machinery in that

building for the purposes of manufacture; and

ii) The machinery has not been installed substantially in replacement of

machinery previously in use in an existing business carried on by the

owner of that new machinery;

(c) Construction of a hotel building, which is certified as an industrial building;

(d) Construction of a building or purchase and installation of machinery outside

the City of Nairobi or the Municipalities of Mombasa or Kisumu

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The value of the investment must be more than 200 Million shillings;

(e) Purchase of filming equipment by a local film producer licensed by the

Minister responsible for matters relating to communication,

Investment Allowance (once only at a given percentage) in respect of qualifying Cost of

capital expenditure is administered as follows: -

(a) Hotel sector on the buildings, which are certified as Industrial Building under

the Act; 100%;

(b) Ordinary manufacturing sector on both machinery and buildings; 100%;

(c) Capital Equipment purchased and used by a local film producer; 100%.

(d) Investment in construction of a building or purchase of machinery whether

used for purposes of manufacture or not within satellite towns around major

cities of Nairobi, Mombasa and Kisumu; 150%.

Examples of assets that qualify for ID include, New factory plant & machinery;

Generators; Transformers; Water pumps; Water tanks; Extension to factory building; Parking

areas; Drainage systems; Recycling machines; Perimeter walls & security wall; Air condition

systems, sewerage systems; Conveyer belts affixed to the fabric if not fixed grants; and

Workshop machinery to maintain other machinery

NOTES:

- The deduction is NOT made in the year in which the capital expenditure is

incurred but in the year of income in which the asset is FIRST USED.

- Where, the building is used partly for the purposes of manufacture and partly

for other purposes, the capital expenditure for ID purposes shall be the

apportioned amount; but where the capital expenditure so attributable exceeds

nine-tenths (90%) of the total capital expenditure incurred on the construction

of the building the whole building shall be treated as used for purposes of

manufacture;

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- Where an existing building is extended by further construction, the extension

shall be treated as a separate building for ID purposes;

- Capital expenditure incurred on the construction of a building does not include

capital expenditure on the acquisition of, or of rights in or over, any land;

Sale of an Industrial Building Prior to Use

Where capital expenditure is incurred on the construction of a building and before

that building is used, it is sold: -

a) Expenditure incurred on the construction shall not qualify for the purposes of ID

in the books of the seller; but

b) The purchaser shall be deemed to have incurred capital expenditure on the

construction. In which case, qualifying cost shall be the lower of Cost incurred on

construction of the building or Amount paid But If the building is sold more than

once before it is used, then the qualifying cost shall be the lower of Cost incurred

on the construction of the building or last purchase price

NB: Please note that IBD & WTD are calculated on the residue value after granting ID

Rates

The amount of investment deduction shall be equal to the percentage of the capital

expenditure applicable in accordance with the following table: -

Commencement Date Outside NBO & MBA Within NBO & MBA

1st January 1988 60% 10%

1st January 1989 75% 25%

1st January 1990 85% 35%

1st January 1995 60% 60%

1st July 2000 100% 100%

1st January 2002 85% 85%

1st January 2003 70% 70%

1st January 2004 100% 100%

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1st January 2005 100% 100%

1st January 2006 100% 100%

1st January 2007 100% 100%

1st January 2008 100% 100%

Manufacturing Under Bond [MUB] Investment Deduction

This is a capital deduction due to those who manufacture under bond on capital

expenditure. Manufacturing under bond as per EACCMA, 2004 means, a facility

extended to manufacturers to import plant, machinery, equipment and raw materials

tax free, for exclusive use in the manufacture of goods for export.

Qualifying Cost On or after 1st January 1996

Cost of the purchase and installation of machinery to be used for the purposes of

manufacture under bond

Investment Allowance (given once) in respect of qualifying Cost of capital expenditure

incurred by a business that operates in the Manufacture under bond sector on both

machinery and buildings (Nairobi, Mombasa, Kisumu, Thika, Nakuru, Nyeri or within the

immediate environs of these towns); 100%.

Rates

The amount of investment deduction shall be equal to the percentage of the capital

expenditure applicable in accordance with the following table: -

Commencement Date Outside NBO & MBA Within NBO & MBA

1st January 1988 40% 90%

1st January 1989 25% 75%

1st January 1990 15% 65%

1st January 1995 40% 40%

1st July 2000 Nil Nil

1st January 2002 15% 15%

1st January 2003 30% 30%

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1st January 2004 40% 40%

1st January 2005 Nil Nil

1st January 2006 Nil Nil

1st January 2007 Nil Nil

1st January 2008 Nil Nil

NOTES:

- Please note that this deduction (MUB) is given in addition to ID normal

- If the manufacture under bond ceases within three (3) years then, the amount

of deduction so far awarded shall be treated as a trading receipt. However,

WTD & IBD is granted for the years he has operated

- Capital expenditure incurred in the construction of a building does not include

expenditure incurred on the acquisition of, or of rights in or over, land;

- "Building", "installation", and "new" shall have the meaning ascribed to those

words in ID normal.

Illustration

Gai Ltd. constructed a building on which they installed new machinery for the

manufacture of spoons for exports in Nairobi. The costs were as follows: -

1. Building Kshs. 15Milion

2. Machinery Kshs. 10Million

They commenced manufacturing on 1st January 1997 then stopped manufacturing

under bond on 1st January 1999.

Required:

Compute the capital allowances for the years 1997, 1998, and 1999

Solution

Investment deduction computation

Year Cost ID @60% MUB @40% Value C/d

1997 Kshs. 25Milion Kshs. 15Milion Kshs. 10Milion -

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1998 Kshs. 25Milion - - -

1999 Kshs. 25Milion - - -

Computation of IBD on building

Year Q. cost R.v b/f IBD @2.5% Residue Value

1997 6, 000,000 - 150, 000 5, 850,000

1998 6, 000,000 5, 850,000 150, 000 5, 700,000

1999 6, 000,000 5, 700,000 150, 000 5, 550,000

Computation of WTD on machinery

Year Q. cost R.v b/f WTD @12.5% Residue Value

1997 4, 000,000 - 500, 000 3, 500,000

1998 4, 000,000 3, 500,000 437, 500 3, 062,500

1999 4, 000,000 3, 062,500 382, 813 2, 679,688

Trading receipt 10, 000,000

Less: WTD & IBD (1, 237,500)

Taxable trading receipt 8, 762,500

Export Processing Zones [EPZ] Investment Deduction

EPZ arrangements are government projects for export promotion; however, the

manufacturer writes a bond to cover the goods under manufacturer.

Qualifying Cost On or after 1st January 1992

Capital expenditure incurred on the construction of a building or on the purchase

and installation of machinery for carrying out the business activities for which that

enterprise was licensed as an export processing

Investment Allowance (given once) in respect of qualifying Cost of capital expenditure

is administered at a rate of 100%.

NOTES: ID doesn’t include cost of acquisition of, or of rights in or over, land.

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7.3. Industrial Building Deductions

Introduction
Industrial Building Deduction (IBD) is a capital allowance given where a person

incurs capital expenditure on the construction of an industrial building to be used in

a business carried on by him or his lessee. IBD is covered under section 1 of the second

schedule of the Income Tax Act (Cap. 470 Laws of Kenya)

Definition

What is an Industrial Building?

An industrial building for the purposes of IBD is defined as: -

a) A building in use –

a. For the purposes of a business carried on in a mill, factory or other

similar premises; or

b. For the purposes of a transport, dock, bridge, tunnel, inland navigation,

water, electricity or hydraulic power undertaking; or

c. For the purposes of a business which consists of manufacture of goods

or materials or the subjection of goods or materials to any process; or

d. For the purposes of storage of goods or materials -

i. Which are to be used in the manufacture or other goods or

materials (Raw materials); or

ii. Which are to be subjected, during a business, to any process

(Semi-finished products); or

iii. Which, having been manufactured or produced or subjected, to

any process, have not yet been delivered to any purchaser

(Finished products); or

iv. On their arrival by sea or air into any part of Kenya (Imported

products); or

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e. For a business consisting of ploughing or cultivating agricultural land

or doing any other operation on the land, or threshing the crops of

another person; or

f. For the purposes of a business which may be declared by the CS by

notice in the Gazette;

b) A dwelling house constructed for and occupied by employees of a business;

c) A building which is in use as a hotel or part of a hotel and which the

Commissioner has certified to be an industrial building. A hotel building

includes any building directly related to the operations of the hotel contained

within the grounds of the hotel complex, including staff quarters, kitchens, and

entertainment and sporting facilities;

d) A building used for the welfare of workers employed in the premises.

e) A hostel or an educational building certified by the Commissioner (2007).

f) A building in use as a rental residential building where such building is

constructed in a planned development area approved by the Minister for the

time being responsible for matters relating to housing; (2010)

Qualifying Cost

a) Cost of the Building

b) The following civil works or structures on the premises of the building shall be

deemed to be part of the building where they relate or contribute to the use of

the building -

a. Roads and parking areas;

b. Railway lines and related structures,

c. Water, industrial effluent and sewage works;

d. Communications and electrical posts and pylons and other electricity

supply works;

e. Security walls and fencing.

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Construction of an industrial building includes the expansion or substantial

renovation or rehabilitation of an industrial building, (but does not include routine

maintenance or repair.) Hence is treated as a separate building for IBD computation. But

where: -

(a) Where the building was used for only part of that year of income, the deduction

shall be proportionately reduced;

(b) Where the building is sold, and continues to be an industrial building used by the

purchaser or his lessee, the purchaser continues to get the same deduction;

(c) Where the building also qualifies for investment deduction then the qualifying

amount shall be the net amount after such investment deduction is given.

Non-Qualifying Parts of a Building

- Cost of retail shop

- Cost of showroom

- Cost of office

- Cost of dwelling-house

Where the above costs are not more than one-tenth (10%) of the total capital

expenditure which has been incurred on the construction of the building, the whole

building shall be treated as an industrial building, hence qualify for IBD.

Non-Qualifying Expenditure

- Cost of land (which includes stamp duty and legal fees), or of rights in or over land

- Cost of machinery or on an asset which has been treated as machinery.

Sale of An Industrial Building Prior To Use

Where capital expenditure is incurred on the construction of a building and before

that building is used, it is sold: -

a) Expenditure incurred on the construction shall not qualify for the purposes of

IBD to the seller; but

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b) The purchaser shall be deemed to have incurred capital expenditure on the

construction. In which case, qualifying cost shall be the lower of Cost incurred

on construction of the building or Amount paid by him

Where the building is sold more than once before it is used, then the qualifying cost

shall be the lower of Cost incurred on the construction of the building or last purchase

price

However, if a building is sold by a person who carries on business as a builder, and

the sale made in the course if his trade, then the qualifying cost shall be that amount

paid to the builder. While, where sale is made by such a builder but changes hands

more than once before its put into use then the qualifying cost shall be the lower of

Price paid to the builder or Amount paid by the person who puts the building into

first use.

Rates
Industrial Building Allowance is provided for (on straight line) in respect of capital

expenditure on:

(a) Educational Buildings, Hostels and Training facilities: - 50% w.e.f. 1st January

2010. (2 Years)

(b) Other Industrial Buildings - 10% w.e.f 1st January 2010. (10 Years)

(c) Straight-line deduction of the expenditure on machinery and structures such

as roads, bridges and similar infrastructure over the concession period (e.g. Rift

Valley Railways).

(d) Commercial buildings where the cost of roads, sewage, power and social

infrastructure are borne by the Investor; 25% W.e.f 1st January 2010. (4 Years)

The table below compares the above rates against the current rates:

Industrial building allowances: Current Rates

Factories - (2.5% up to 2009) 10% from 1st January 2010

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Prescribed hotels - (up to 2006 was 4%) 10% from 1st January 2010

Prescribed low-cost residential housing developments 5% from 1st January 2008

Approved educational building - (10% from 2007) 50% from 1st January 2010

Commercial Buildings 10% up to 31st December 2012

Commercial Buildings with services 25% up to 31 December 2012

Residential Buildings with services 25% from 1st January 2010

NOTES: For any year of income during which a taxpayer owned and used the

building only for part of the year, IBD is apportioned.

7.4. Wear and Tear Allowances

Introduction
Wear and Tear Deduction (WTD) is granted as a compensation for loss of value of

fixed assets repeatedly used in a business. It is granted instead of depreciation, which

is considered arbitrary. For this purpose, the income tax authority seeks to standardize

the charge in respect of losses in capital items by granting uniform capital allowances

in respect of capital expenditures.

Any capital expenditure loss, diminution, exhaustion of capital such as depreciation,

amortization, loss on sale of fixed assets, obsolescence, provision for replacement of an asset

are not allowable expenditures against income.

However, the Income Tax Act (Cap. 470 Laws of Kenya) recognizes the loss of value

of assets used in business through usage, passage of time or obsolescence and so the

second schedule grants the wear tear allowance.

WTD is allowed on a reducing balance basis and is granted for the whole year

irrespective of when the asset was bought provided the business traded for the whole

year.

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Classification
For WTD, machineries are put into distinct pools/classes/categories. Each of the pools

is granted wear and tear on a given percentage. The categories are: -

Class I (37.5%) This is a class for heavy earth moving equipment and heavy self-

propelling (Producing own power to move) machineries or

equipment

Examples include: - Tractors, Combined Harvesters, Lorries of Load Capacity Of 3 Tons and

Over, Tippers, Buses, Loaders, Graders, Bulldozers, Mobile Cranes, Minibus, Trailer Engine

Heads, Trucks, Mobile Cranes, Jumbo Jets, Caterpillars Etc.

Class II (30%) This is a class for electronic office machineries and equipment

bought on or after 1st January 1992

Examples include: - Computers, Printers, Electronic Calculators, Electronic Tax Registers,

Adding Machines, Photocopiers, Duplicating Machines, Electronic Type Writers, Photo

Scanners, Peripheral Computer Equipment Etc.

Class III (25%) This is a class for light self-propelling machineries

Examples include: - Saloon Cars, Aircrafts, Pick-Ups, Motor Cycles, Lorries of Less Than 3

Tons Load Capacity, Helicopters, Vans Etc.

Class IV (12.5%) This is a class for all other machinery or equipment necessary for

the proper operation of the business

Examples include: - Factory Plant And Machinery, Ships, Furniture, Fixtures And Fittings,

Bicycles, Partitions (Temporary Or Movable), Carpets, Office Cabinets, Curtains, Shop

Counters And Shelves, Safes, Manual Typewriters, Fax Machines, Televisions, Shredders,

Ploughs, Milking Machines, Train Coaches, Conveyor Belts, Lawn Mowers, Wheel Barrows,

Lifts, Elevators, Water Pumps, Carts, Cash Registers Sign Boards, Fridges, Freezers, Phones

(Mobile And Landline), Advertisement, Billboards, Stands, Escalators, CCTVs, Etc.

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For telecommunication equipment purchased and used by a telecommunication

operator, other than machinery specified in class IV above, the amount of wear and

tear for a year of income shall be 20% of the amount of expenditure incurred.

Computer soft wares are allowed on a straight line at 20% on the amount of

expenditure incurred.

Purchase or acquisition of an indefeasible right to use a fiber optic cable by a

telecommunication operator, 20%

Qualifying Cost
The qualifying cost for wear and tear in each class is computed as follows:

a) Historical cost or purchase price on the first year. While for thee subsequent

years, the NBV.

b) Other incidental costs incurred before the machinery is brought into use i.e.

installation and transport charges

c) If an asset is acquired without any payment or consideration, then the fair

market value is acceptable

d) If the asset acquired is traded in, then the value of the asset traded in plus any

additional amount paid

e) For hire purchase transactions, the cash price is considered while the H.P

interest is expensed

f) For machinery that also gets investment deduction, then the amount after

investment deduction shall be considered

g) Where the machinery is sold at a price other than that which it would have

fetched if sold in the open market, then, the open market value is considered.

(Non-arm length transactions)

NOTES: Qualifying cost = [WDV b/d at the beginning of the year + additional

machinery during the year (at cost) - disposals during the year.]

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Class I Class II Class III Class IV

Balance B/F x x x x

Additions x x x x

Disposal (proceeds) (x) (x) (x) (x)

Qualifying cost xx xx xx xx

WTD (x) (x) (x) (x)

Balance C/F xx xx xx xx

Expenditure on Private Vehicles

Capital expenditure on vehicles other than a commercial vehicle, are restricted as

shown below: -

On or after the 1st January 1961, Kshs. 30,000

On or after the 1st January 1981, Kshs. 75,000

On or after the 1st January 1990, Kshs. 100,000

On or after the 1st January 1997, Kshs. 500,000

On or after the 1st January 1998, Kshs. 1,000,000

On or after the 1st January 2006, Kshs. 2,000,000

NB: Where the vehicle is sold, the sale, price shall be restricted if the cost was

restricted.

Restricted Amount X Selling Price

Cost price

Application to Lessors

Where machinery is let upon terms that the burden of the wear and tear falls directly

upon the lessor, WTD shall apply in relation to him as if the machinery were, during

the period of the letting, in use for the purposes of a business carried on by him.

Disposal Value

(a) Sales proceeds

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(b) For traded in, then the value of the asset traded in.

(c) Where an asset is destroyed, the insurance claim is taken.

(d) For non-commercial vehicles, whose value is over 2M, restrict the sales proceeds

NOTES:

- If the business has run for the whole year, WTD is given in full for assets in the

business at the end of the year irrespective of the date of acquisition or use.

- If the business has run for less than 12months WTD is apportioned.

- Where asset is used both for business carried on by him and for personal use,

then WTD is apportioned.

- Where business changes hand, by shares, the written down value left by the

previous owner is inherited.

- Where business changes hands by purchase of Assets, market value of the

assets shall be used for WTD purposes

Profit or Loss on Disposal of Assets

A. Continuing Business

(a) If assets are sold for a higher value than the WDV the gain thereof is known as

a Trading Receipt and is taxable.

(b) If assets are sold for a value less than the WDV the loss thereof is known as a

Trading loss and is allowable for taxation purposes.

B. Non-Continuing Business

(a) If assets are sold for a higher value than the WDV the gain thereof is known as

a Balancing Charge and is taxable.

(b) If assets are sold for a value less than the WDV the loss thereof is known as a

Balancing Deduction and is allowable for taxation purposes.

Illustration

Babu Ltd. incurred the following costs prior to commencement of manufacturing: -

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Item Kshs

Purchase of land 5 Million

Construction of industrial building 2 Million

Production machinery 1.5 Million

Transportation of machinery to site 0.5 Million

Two Lorries of 10 tones each 2 Million

Furniture 0.2 Million

Computers 0.07 Million

They commenced manufacturing on 1st January 2015

The industrial building includes an ultra-modern office costing Kshs. 150,000

Required:

Calculate the capital allowances for the year of income ended 31st December 2015

Solution

Computation of WTD

Item I @37.5% II @30% III @25% IV @12.5%

Balance b/f as at January 2014 - - - -

Two Lorries 2,000,000 - - -

Computers - 70,000 - -

Production machinery - - - 2,000,000

Furniture - - - 200,000

Total 2,000,000 70,000 - 2,200,000

WTD for the year 2014 (750,000) (21,000) - (275,000)

WDV Balance C/f to 2015 1, 250,000 49,000 - 1,925,000

WTD for the year 2015 (468,750) (14,700) - (240,625)

WDV Balance C/f to 2017 781, 250 34, 300 - 1, 684,375

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Computation of IBD

Item Cost IBD @10% Residue Value

Industrial building 2,000,000 200, 000 1, 800,000

Total Capital deductions

WTD 1, 046,000

IBD 200,000

Total 1,246,000

Illustration

Mr. Ekale purchased the following items on 1st January 2001

Item Kshs

Tractor 1 Million

Lorry over 3 tones 2 Million

Saloon car 2 Million

Computer 0.4 Million

Plant & machinery 2 Million

They disposed the saloon car for Kshs. 800, 000 in the year.

Required:

Compute WTD for the year ended 31st December 2001.

Solution

Computation of WTD

Item I @37.5% II @30% III @25% IV @12.5%

WDV Balance B/F January 2001 - - - -

Tractor 1,000,000 - - -

Lorry 2,000,000 - - -

Saloon car - - 1,000,000 -

Computer - 400,000 - -

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Plant & machinery - - - 2,000,000

Total 3, 000,000 400, 000 1, 000,000 2, 000,000

Disposals

Saloon car - - (400,000)* -

WDV 3, 000,000 400, 000 600, 000 2, 000,000

WTD for the year 2001 (1,125,000) (120,000) (150, 000) (250,000)

WDV Balance C/F to 2002 1,875,000 280,000 450,000 1,750,000

*Disposal value for WTD = Restricted Amount X Selling Price

Cost price

1,000,000 X 800,000

2,000,000 = Kshs. 400,000

7.5. Farm Works Deductions

Introduction
Farm Works Deductions (FWD) is a capital allowance granted to a farmer who incurs

capital expenditure on the construction of farm works. FWD is covered under

Paragraphs 22 and 23 of the second schedule of the Income Tax Act (Cap. 470 Laws of

Kenya). It is granted to encourage capital expenditure in agriculture sector

Definitions

“Agricultural land” means land occupied wholly or mainly for the purposes of a

trade of husbandry;

“Farm works” means farmhouses, labour quarters, and any other immovable

buildings necessary for the proper operation of the farm, fences,

dips, drains, water and electricity supply works other than

machinery, windbreaks, and other works necessary for the

proper operation of the farm.

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"Husbandry" This is not defined in the Act but as per case laws it means all

farming/agricultural activities on agricultural land;

Qualifying Cost
Capital expenditure in incurred on: -

(a) Farmhouse, one-third (1/3) of the only expenditure on one house qualifies.

(b) Employee houses.

(c) Assets other than a farmhouse, being an asset, which is to serve partly the purpose

of husbandry and partly other purposes, then apportion.

Non-Qualifying Cost

- Cost of clearing the land and planting permanent & semi-permanent crops

- Plant and machinery, as they are granted WTD

- Cost of prevention of soil erosion

NOTES:

- If the owner transfers land in the year of income, then such deductions will be

apportioned between the new and the old owner usually on time basis.

- If an incoming tenant makes any payment to the outgoing tenant, then its

considered to be a transfer of tenancy and the incoming tenant is entitled to the

whole deduction in that year of income.

Rates
Farm Works Allowance is calculated (on straight line basis) in respect of capital

expenditure incurred on a farm at the rate of 100% W.e.f 1st January 2011. Previous

rates were as follows: -

Period Rate

Up to 1984 20% for five (5) years

From 1st January 1985 to 31st December 2006 30% for three (3) years

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From 1st January 2007 to 31st December 2010 50% for two (2) years

From 1st January 2011 to date 100% for One (1) year

Illustration

Ms. Jeruto incurred the following costs in 2010 for her husbandry business.

Item Kshs

Cattle dip 750,000

Fence 600,000

Gabions 300,000

Farm house 1,500,000

Generator 500,000

Tractor 1,000,000

Combined harvester 2,000,000

Labour quarters 90,000

Required:

Calculate capital deductions for the year ended 31st December 2010 and 31st December

2011

Solution

FWD computation

Year Cost Value B/F FWD (@ 50% or 100%) Value C/F

2010 (w1) 1,940,000 1, 940,000 970,000 970, 000

2007 (w1) 1,940,000 970,000 970,000 Nil

Working 1: Qualifying Cost for FWD

Cattle dip 750, 000

Fence 600, 000

Farm house * 500, 000

Labour quarters 90, 000

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1,940,000

*Farm house (⅓ x 1,500,000) = 500, 000

7.6. Shipping Investment Deduction

Introduction
Shipping Investment Deduction (SID) is granted where a resident person carrying on

the business of a ship-owner. SID is covered under Paragraph 25 of the second

schedule of the Income Tax Act (Cap. 470 Laws of Kenya).

Qualifying Cost
It is granted on the following capital expenditure: -

a) On the purchase of a new and hitherto unused power-driven ship of more than

495 tons gross; or

b) On the purchase, and subsequent refitting for the purposes of that business, of a

used power-driven ship of more than 495 tons,

Rates
Shipping investment deduction is allowed ONCE at a rate of 40% of cost of ship

NOTES:

- Not more than one shipping investment deduction shall be allowed in respect

of the same ship;

- A ship in respect of which a shipping investment deduction has been given, is

sold within a period of five (5) years from the end of the year of income in which

the deduction was given, the deduction shall be withdrawn and treated as

income of the vendor for the year of income in which the sale takes place.

However, Compensation by way of wear and tear allowance will be granted.

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Illustration

Mr. Mulindi acquired a new ship of more than 495Tonnes on 1st January 2000 at a cost

of Kshs. 3.2 Million. It was sold in the year 2003 for Kshs. 3 Million.

Required:

Calculate the capital allowances for the year ended 31st December 2000, 31st December

2001, 31st December 2002 & 31st December 2003

Solution

Computation of SID

Awarded in the first year (40% of Kshs. 3.2 Million) = Kshs. 1,280,000

Computation of WTD

Year Q. cost Residue Value B/F WTD @12.5% Residue Value

2000 1,920,000 - 240,000 1,680,000

2001 1,920,000 1,680,000 210,000 1,470,000

2002 1,920,000 1,470,000 183,750 1,286,250

2003 1,920,000 - - -

Computation of WTD for Withdrawn Amount

WTD for the year 2003

Value Withdrawn 1,280,000

WTD for the year 2000 (160,000)

WDV Balance C/F to 2001 1,120,000

WTD for the year 2001 (140,000)

WDV Balance C/F to 2002 980,000

WTD for the year 2002 (122,500)

Residue Value 857,500

Income 1,820,000

Less: WTD (422,500)

Taxable trading receipt 857,500

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7.7. Other Deductions

A. Diminution in Value of Loose Tools
Introduction

Section 15(2)(g) the Income Tax Act (Cap. 470. Laws of Kenya), provide that, the

amount considered by the Commissioner to be just and reasonable as representing the

diminution in value of any implement, utensil or similar article, not being machinery or

plant in respect of which a deduction may be made under the Second Schedule, employed in the

production of gains or profits shall be an allowable deduction.

Diminution allows decrease in value of loose tools and implements that do not qualify

for wear and tear as an allowable expense against taxable income.

Qualifying Cost
One of the main features of loose tools and implements is that they are usually

susceptible to loss and breakage however; the definition of loose tools and implements

depends on the nature of the business i.e.

a) In a farm engaged in agriculture, which is also claiming formworks deduction,

loose tools include pangas, slashers, rakes, forks, shears etc.

b) In a workshop where vehicles and machinery are repaired loose tools include

spinners, screwdrivers, bolts, nuts, clamps, mallet and hammers

c) In a hotel building loose tools include a kettle, utensils, cutlery, crockery etc.

Rate
The rate for computation in diminution in value is 33⅓ % p.a on a straight-line basis.

The qualifying cost is written off over a period of three years.

B. Other Deductions

- Expenditure of a capital nature on scientific research;

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- Expenditure of a capital nature incurred by owner or occupier of farm land for

prevention of soil erosion;

- Expenditure of a capital nature incurred by a person on legal costs and stamp

duties in connection with the acquisition of a lease, for a period not in excess of,

or expressly capable of extension beyond, ninety-nine years;

- Expenditure of a capital nature incurred by owner or tenant of agricultural land,

on clearing that land, or on clearing and planting thereon permanent or semi-

permanent crops;

- Expenditure of a capital nature incurred by a person on legal costs and other

incidental expenses relating to the authorization and issue of shares, debentures

or similar securities offered for purchase by the public;

- Expenditure of a capital nature incurred by a person, on legal costs and other

incidental expenses, for the purposes of listing on any securities exchange

operating in Kenya, without raising additional capital.

- Expenditure of a capital nature incurred by a person on rating for the purposes

of listing on any securities exchange operating in Kenya;

- Expenditure of a capital nature incurred, with the prior approval of the

Minister, by a person on the construction of a public school, hospital, road or

any similar kind of social infrastructure.

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Table of Contents

Chapter Eight
8 ADMINISTRATION OF INCOME TAX ................................................................. 2

8.1. REGISTRATION AND DEREGISTRATION OF TAX PAYERS ...................................... 2

8.2. ASSESSMENTS AND RETURNS ................................................................................. 4

8.3. OPERATIONS OF PAYE SYSTEMS: PREPARATION OF PAYE RETURNS,

CATEGORIES OF EMPLOYEES ............................................................................................... 6

8.4. STATUTORY DEDUCTIONS (NSSF & NHIF) ....................................................... 13

8.5. NOTICES, OBJECTIONS, APPEALS AND RELIEF FOR MISTAKES .......................... 16

8.6. TAX DECISIONS; OBJECTIONS AND APPEALS ...................................................... 19

8.7. COLLECTION, RECOVERY AND REFUND OF TAXES .............................................. 21

8.8. ADMINISTRATIVE PENALTIES AND OFFENCES .................................................... 23

8.9. APPLICATION OF ICT IN TAXATION: ITAX ......................................................... 25

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8 ADMINISTRATION OF INCOME TAX

8.1. Registration and Deregistration of Tax Payers

A. Registration of Tax Payers
This entails the recruitment of persons liable to tax but not registered with the

Commissioner of Domestic Taxes. The Taxpayer Recruitment Programme Division

handles this function. The objective is to bring all eligible persons not paying tax as

required into the tax net. KRA does this through public recruitment drives but this

can be further enhanced through third party information.

The Tax procedures Act, 2015 Section 8 (1) (a )makes it mandatory for Anyone who

has accrued a tax liability or who expects to accrue a tax liability under the Income

Tax Act to apply to the Commissioner to be registered.

Personal Identification Number (PIN)

This is a unique computer-generated Personal Identification Number assigned to

every person who applies for registration. It identifies a person for purposes of

transacting business with Kenya Revenue Authority, other Government agencies and

service providers. It is processed by Domestic Tax Department.

NB: Person includes both an individual as well as an artificial person (i.e. company,

club, Trust, etc.)

Importance of a PIN

Under the 13th schedule of the Income Tax Act, transactions requiring PIN include,

among others, the following: -

(a) Registration of title, stamping of instruments by the Commissioner of Lands,

and payment of Land Rent.

(b) Approval of plans, payment of water deposits, application for a business

permit, payment of Land Rent by Local Authorities.

(c) Registration of Motor Vehicles.

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(d) Registration of Business Names and Companies.

(e) Trade licensing by the Ministry of Commerce.

(f) Application for Value Added Tax registration.

(g) Underwriting policies by Insurance Companies.

(h) To facilitate importation of goods.

(i) Power connections at Kenya Power and Lightning Co. Ltd.

(j) To facilitate all contracts for supply of goods and services to all Government

Ministries and Public bodies.

Taxpayer Recruitment by Kenya Revenue Authority

Taxpayer Recruitment is key in revenue collection hence besides several other

initiatives the revenue framework is built around broadening the tax base through an

enhanced taxpayer recruitment effort.

According to KRA’s 6th Corporate Plan (2015/16-2017/18), KRA’s objective was to raise

the number of active taxpayers to 4 million by 2018.

B. Deregistration of Tax Payers

The Tax procedures Act, 2015 Section 10 (1) allows any person who ceases to be

required to be registered for the purposes of a tax law to apply to the Commissioner

for deregistration under the Income Tax Act (Cap 470 Laws of Kenya).

However, Section 10 (5) of the same Act permits the Commissioner to deregister

anyone when satisfied that the person is eligible for deregistration, including the

following:-

(a) Death of natural person,

(b) Liquidated company, or

(c) Any other person that has otherwise ceased to exist.

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8.2. Assessments and Returns

A. Assessments
An assessment refers to the determination of the taxable pay and tax payable. There

are various types of assessment as discussed below: -

1. Self-Assessment

Every individual/company chargeable to tax should furnish the Commissioner a

return of income, (self-assessment) from all sources of income. The return of income

together with the declared self- assessment of tax on the declared income is done

on i-Tax and is calculated by reference to the appropriate relief and rates of tax in

force.

2. Default Assessment (Estimated/Provisional)

Where a taxpayer has failed to submit a tax return for a reporting period, the

Commissioner may, based on information available and to the best of his or her

judgement, make an assessment (referred to as a “default assessment”)

3. Advance Assessment

The Commissioner may, based on the available information and to the best of his

or her judgement, make an assessment (referred to as an “advance assessment”) of

the tax payable by a taxpayer before the date on which the taxpayer’s return for

the period is due.

4. Additional Assessment

Where the commissioner is of the opinion that the taxpayer has an assessment

showing either a lesser income or tax, he may issue an assessment on the additional

income or tax known as additional tax.

5. Installment Assessment

If a taxpayer who is to pay installment tax fails to do so the commissioner may to

the best of his knowledge make an assessment in respect of such installment tax,

such an assessment is known as installment assessment.

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Time Limits for Making Assessments

An assessment may be made at any time prior to the expiry of seven years after the

year income to which the assessment relates, except –

(a) Where fraud or gross or willful neglect has been committed in which case the

assessment in relation to that year of income may be made at any time;

(b) In the case of an assessment made upon the executors or administrators of a

deceased person, the assessment shall be made prior to the expiry of three years

after the year of income in which that deceased person died.

B. Returns
All registered persons are required to submit a return in the approved form and in

the manner prescribed by the Commissioner i.e. iTax not later than the last day of the

sixth month following the end of his year of income. The Commissioner my upon

application extend this time.

The Commissioner may require a taxpayer during a reporting period to submit a tax

return under the following circumstances:

a) Bankruptcy, winding up or liquidation proceedings have been instituted

against a taxpayer;

b) The Commissioner has reason to believe that a taxpayer is about to leave Kenya

permanently; or

c) A taxpayer has ceased, or the Commissioner has reason to believe that a

taxpayer will cease, carrying on any business in Kenya; or

d) A taxpayer has died.

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8.3. Operations of PAYE Systems: Preparation of PAYE

Returns, Categories of Employees
Introduction
"Pay as You Earn" is method of deducting income tax from salaries and wages applies

to all income from any office or employment. Thus "Pay as You Earn" applies to

weekly wages, monthly salaries, annual salaries, bonuses, commissions, directors'

fees (whether the director is resident or non-resident), pensions paid to pensioners who

reside in Kenya, where the amount from a registered pensions fund exceeds Kshs.

180,000 per annum, and any other income from an office or employment. The system

applies to all cash emoluments and all credits in respect of emoluments to employees'

accounts with their employers, no matter to what period they relate.

It includes the value of housing where the employer supplies this. It does not include

earnings from "casual employment" which means any engagement with any one

employer, which is made for a period of less than one month, the emoluments of

which are calculated by reference to the period of the engagement or shorter intervals.

Regular part-time employees and regular casual employment where the employees

are employed casually but regularly are not considered to be casual employees.

Employer's Duty
It is the employer's statutory duty to deduct income tax from the pay of his employees

whether or not he has been specifically told to do so by the Revenue Authority. The

normal P.A.Y.E. year runs from 1st January to 31st December. The necessary P.A.Y.E.

Stationery is issued to Employers before commencement of the year.

The Employer is to file monthly PAYE returns and generate payment E-slip through

KRA Online Services.

Every individual in receipt of income liable to tax is entitled to a relief, known as

"Personal Relief", granted against tax payable and is not refundable to Taxpayer.

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Unutilized personal relief can be carried forward from one month to another within

the same calendar year but not from one year to another.

Definitions
(a) Employer For "Pay as You Earn" purposes the term "employer" is to be taken, when

necessary, to include:

a) Any person having control of payment of remuneration;

b) Any agent, manager or other representative in Kenya of any employer who is

outside Kenya;

c) Any paying officer of Government or other public authority;

d) Any trust or insurance company or other body or person paying pensions.

(b) Employee This word is defined as inclusive of any holder of an appointment of

office, whether public, private or calling, for which remuneration is payable.

"Employee" should be read as including, for example, Cabinet Secretary, Chief, any

public servant, company director (resident or non-resident), secretary, individuals

working for any Religious Organization etc., in addition to those more commonly

known as employees. It includes an employee who retires on pension and stays in

Kenya where pensions received from a registered pension fund exceed Kshs. 15,000

per month (Kshs. 180,000 per annum).

(c) Paying Point is the place at which remuneration is paid. If a non-resident

employer calculates remuneration abroad and remits the remuneration direct to the

employee, then such remuneration should be notified to the Department through the

employer’s local representative and P.A.Y.E. tax operated on the remuneration

accordingly.

PAYE Operation

(a) Monthly Personal Relief

A resident who is a recipient of taxable income is entitled to a personal relief deducted

from the tax payable.

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(b) Calculation and Deduction of PAYE

The employer is expected to calculate tax on the taxable income and recover PAYE

from employees’ emoluments with reference to the graduated tax scales and

considering monthly personal relief. Unutilized relief can be carried from one month

to another within the same calendar year but not from one year to another. In arriving

at the taxable income, the employer must consider the following: -

a) Employees’ contribution to a registered pension fund and provident fund, A

maximum of Kshs. 240, 000 p.a is allowable

b) Interest paid on owner occupied property. Maximum allowable is Kshs.

150,000 p.a.

c) An amount deposited with a registered HOSP. A maximum allowable amount

is Kshs. 48, 000 p.a

(c) PAYE Filing Procedure (iTax platform)

Step 1: Download the PAYE excel sheet from iTax (similar to the one from the old tax-

payer software/ ITMS).

The PAYE excel sheet that you need to download is found under the “Returns” menu

item. You have to pretend that you are doing an actual return to actually get the

required files.

So, go to Returns >> File Returns >> Income tax – PAYE >> Download File.

The PAYE spreadsheet is available in both Excel format and Open Document Format

(for Open Office). For the smooth operation, a Windows machine.

Step 2: Fill out the details of the excel sheet and generate the output – zip file.

The PAYE excel sheet has various tabs and you need to fill out all the relevant ones.

When you are done, validate the spreadsheet – if it has any errors, the validation will

let you know otherwise it will prompt you to generate a zip file that you will upload

onto iTax.

Save the zip file on your machine where you can easily access it for uploading.

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Step 3: Upload the zip file onto iTax.

Using your company PIN and iTax password, log onto your iTax account then under

“Returns” on the two-menu item, select “File Return”.

This will take you to the “e-Returns” page. The type of “e-Return” and “Taxpayer

PIN” will already have been filled out for you so proceed to select the “Tax

Obligation”. In this case, it is the “Income Tax – PAYE” obligation.

Fill out the “Income tax – PAYE form” by selecting the “Return Period From”, the

“Return Period To” will automatically be filled out as the system only expects you to

do a return for one month at a time. Click the upload button to upload the zip file onto

iTax. Only click the Add File button if there is more than one file you want to upload,

otherwise, proceed to check the Terms and Conditions and “Submit” the form.

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If your uploaded file was correctly filled out, the system will successfully submit it

and give you a “Returns Receipt”. Otherwise, you will get an error message telling

you what you had done wrong.

If you get an error message, simply go back and correct the PAYE spreadsheet then

validate and save it a new. You do not need to use the “File Amended Return” menu

item, as technically, you had not successfully submitted the first time. Repeat the

process and you will be fine.

The “‘Returns Receipt” is in the form of a download link that you can click and

download for your filing. Note, you are not DONE with the process…all you have

done is successfully submitted the Income Tax – PAYE form.

Step 4: Generate payment slip for the just submitted PAYE liability.

What now needs to happen is that you need to generate a payment slip for the tax

obligation? The payment slip is what is used to make a payment for this liability at the

bank.

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Proceed to click the Payment button.

A lot of the details on the e-Payment Registration form will already be filled out

proceed and fill what isn’t. That should be as indicated in the image below.

Confirm the “Liability Details” as this indicates what you are meant to pay. When all

is good, select that liability entry and click the “Add” button.

The “Add” button from above adds the liability details to the “Payment Details”. This

should then give you the total that you are meant to pay (there could be more than one

liability that you are paying for).

Proceed to select the “Mode of Payment”; Cheque, Cash or RTGS and finally select the

“Receiving Bank” – this should be the bank where you intend to make your payment

from. Chances are, it is the bank that you bank with as a company. “Submit” the

payment details.

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A successful submission gives you back a “Payment Slip”‘ as indicated below. Click

the download link to access it.

Step 5: Pay the PAYE at your local bank

Final step is to print the “Payment Slip” in 2 copies and take both to your local bank

with a cheque for the amount indicated on the payment slip.

The bank will keep one of those copies as an indication of your payment while the

other one will be stamped and given back to you as your receipt for your own books.

This is a very important document as it’s actually shows that you have paid your

liability. In case the bank has an issue with their systems and miss to register your

payment, you can always fall back to this document as evidence for the payment.

iTax also sends you a confirmation email when you have made a payment and you

can always check your “General Ledger” on iTax for verification of the payment entry.

(d) Remittance of PAYE

The total PAYE for the month in respect of all employees should be remitted to the

account of the Paymaster General at CBK. The following is the sequence of payment:

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The employer is to remit PAYE to the PMG through their own banks using PAYE

payment slips, which is presented to the bank with a check or cash payment. The

minimum PAYE to the bank is Kshs. 100. If in any month PAYE is less than Kshs. 100

the employer should submit nil return. The due date for PAYE remittance is the ninth

(9th) day after the payroll month. Late remittances will be subject to penalty.

(e) PAYE Offences

Where a corporate body which is required to make a deduction fails to remit the

deducted amount, every director and every officer of the corporate body concerned

with the management thereof, shall be guilty of an offence, unless: -

a) He proves to the satisfaction of the court that he did not know, and

b) Could not reasonably be expected to know that the deducted amount had not

been remitted

c) That he took all reasonable steps to ensure that the offence was not committed.

The Commissioner may impose a penalty if an employer fails; -

(i) To deduct tax upon payment of emoluments to an employee

(ii) To account for tax deducted (on or before the 9th of the month)

(iii) To supply the Commissioner with a certificate prescribed under PAYE Rules.

The penalty is at the rate of 25% of the amount of tax involved or Kshs. 10,000

whichever is greater

8.4. Statutory Deductions (NSSF & NHIF)

Section 19(1) of the Employment Act empowers employers to deduct from employee’s

salary, any amount as a contribution to any fund or scheme approved by the

commissioner for labor to which the employee has agreed to contribute to.

Simply put, this is the statutory deduction. While an employee can opt out of any

voluntary deductions, contribution to the statutory deductions is a legal requirement.

Among them are NSSF & NHIF.

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National Social Security Fund

National Social Security Fund (NSSF) is the statutory retirement benefits scheme and

operates as a public trust. It provides retirement benefits for employees in the formal

and informal sectors. The deducted amount must be remitted by the 15th day of the

following month.

The National Social Security Fund (NSSF) ACT No. 45 of 2013 was assented on 24th

December 2013 with the effective date of commencement being 10th January 2014.

Consequently, new contribution rates for the purposes of the Act are:

1) The Upper Earning Limit (UEL) is KES. 18,000 whiles

2) The Lower Earnings Limit (LEL) is KES 6,000.

The pension contribution now made of 12% of the pensionable wages made up of two

equal portions of 6% from the employee and 6% from the employer subject to an upper

limit of KES 2,160 for employees earning above KES 18,000.

The contributions relating to the earnings below the LEL of the earnings (a maximum

of KES. 720) is credited to what is known as a Tier I account while the balance of the

contribution for earnings between the LEL and the UEL (up to a maximum of KES

1,440) is credited to what is known as a Tier II account.

National Hospital Insurance Fund

National Hospital Insurance Fund (NHIF) is a state parastatal which provides limited

in-patient medical insurance cover at accredited health facilities to eligible members

from both the formal and informal sectors. The deducted amount must be remitted by

the 9th day of the following month.

The medial benefits from the scheme is limited and most companies provide

employees with private medical insurance. NHIF Contribution Rates are as follows:

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Salary Contribution Rate

KSh 5,999 KSh 150

KSh 6,000 – 7,999 KSh 300

KSh 8,000 – 11,999 KSh 400

KSh 12,000 – 14,999 KSh 500

KSh 15,000 – 19,999 KSh 600

KSh 20,000 – 24,999 KSh 750

KSh 25,000 – 29,999 KSh 850

KSh 30,000 – 34,999 KSh 900

KSh 35,000 – 39,999 KSh 950

KSh 40,000 – 44,999 KSh 1,000

KSh 45,000 – 49,999 KSh 1,100

KSh 50,000 – 59,999 KSh 1,200

KSh 60,000 – 69,999 KSh 1,300

KSh 70,000 – 79,999 KSh 1,400

KSh 80,000 – 89,999 KSh 1,500

KSh 90,000 – 99,999 KSh 1,600

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Salary Contribution Rate

KSh 100,000 & Above KSh 1,700

Self-Employed KSh 500

Failure to Deduct

Any employer who fails to make such deductions, will be committing an offence and

shall on conviction be liable to a fine not exceeding Kshs. 100,000 or to imprisonment

for a term not exceeding two (2) years, or to both

8.5. Notices, Objections, Appeals and Relief for

Mistakes

Notice, Objections, & Appeals

A taxpayer who disputes or who does not agree with an assessment for any year of

income has a right to lodge an objection against such an assessment. Such an objection

is referred to as a “Notice of Objection” and for the objection to be a valid notice of

objection it must: -

a) Be in writing

b) State the grounds of objection

c) Be made within 30days after the date of service of the notice of assessment, that

is within 40days (30days of notice + 10days of service)

The return of income and any supporting schedules must be submitted before the

appeal is accepted. A taxpayer will dispute or will not agree with a notice of

assessment because of mistakes or errors relating to: -

(a) Amount of income/loss assessed

(b) Amount of tax payable

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(c) Allowance or deduction made or omitted to be made in computing chargeable

income/loss

(d) Imposition of interest penalties under section 72 of the ITA

(e) Relief granted or omitted

(f) Rates of tax used

(g) Assessment being time barred (limit of 7 years)

Late Notice of Objection

Where a taxpayer who disputes an assessment fails to object to an assessment within

the required time frame, he/she can lodge a notice of late objection, which must: -

a) Be in writing

b) State the grounds of objection

c) State the reasons for objecting late

The Commissioner may accept the late notice of objection under the following

circumstances: -

1. Return of income for the year, and accounts where applicable have been submitted

to The Commissioner.

2. If the lateness is due to the taxpayer being absent from Kenya, being sick, or other

reasonable cause e.g. death in a family sickness in the family etc. The

Commissioner would require proof of this.

3. There is no unreasonable delay on the part of the taxpayer in lodging the late

objection e.g. the notice was lost at post office.

4. Tax due is paid together with any late payment interest. The Commissioner can

waive this condition if he is satisfied that the tax due is excessive.

Late objection becomes valid notice of objection if accepted, if rejected, the notice of

assessment objected to remains in force.

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Processing a Valid Notice of Objection

The Commissioner would deal with the objection where a taxpayer has lodged a valid

notice of objection against an assessment for any year of income in any of the following

ways: -

(a) Amend (change) the assessment to be in accordance with the objection i.e. The

Commissioner agreeing with the grounds of the objection.

(b) Amend the assessment in the light of the objection (with some adjustments)

(a) If the taxpayer or the person objecting agreeing to the adjustments. An

agreed amended assessment would be issued by CIT.

(b) If the taxpayer or the person objecting not agreeing to the adjustments. The

Commissioner would issue a non-agreed amended assessment.

(c) Refuse to amend (change) the assessment and issue a notice to the taxpayer

confirming the disputed assessment.

Note: A taxpayer who is aggrieved by the manner in which an objection against an

assessment has been cleared by CIT may lodge an appeal to the local

committee, tribunal and finally to high court and court of appeal in the manner

described under 1.6

Relief of Mistake
Section 90 (1) of the Income Tax Act (Cap 470 Laws of Kenya) provides that, Where

for any year of income, a person who, having made a return of income, has been

assessed to tax under section 73(2)(a) or having submitted a self-assessment return of

income under section 52B and alleges that the assessment was excessive by reason of

some error or mistake of fact in the return, then he may, not later than seven years

after the expiry of that year of income, make an application to the Commissioner for

relief.

Section 90 (2) of the Income Tax Act (Cap 470 Laws of Kenya) states that, On receiving

an application the Commissioner shall inquire into the matter and, after taking into

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account all relevant circumstances, shall give such relief by way of repayment as is

reasonable and just; but no relief shall be given in respect of an error or mistake as to

the basis on which the liability of an applicant should have been computed where the

return of income was in fact made on the basis or in accordance with the practice

generally prevailing at the time the return of income was made.

8.6. Tax Decisions; Objections and Appeals

A. Tribunal
The Tax Procedures Act 2015 provides under section 52 (1) that, a person who is

dissatisfied with an appealable decision may appeal the decision to the Tribunal in

accordance with the provisions of the Tax Appeals Tribunal Act, 2013. In so doing, A

notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer

has paid the tax not in dispute or entered an arrangement with the Commissioner to

pay the tax not in dispute under the assessment at the time of lodging the notice.

B. High Court
Section 53 of the Tax Procedures Act 2015 allows a party to proceedings before the

Tribunal who is dissatisfied with the decision of the Tribunal in relation to an

appealable decision may, within thirty (30) days of being notified of the decision or

within such further period as the High Court may allow, appeal the decision to the

High Court in accordance with the provisions of the Tax Appeals Tribunal Act, 2013.

C. Court of Appeal
Section 54 of the Tax Procedures Act 2015 provides an avenue for any party to

proceedings before the High Court who is dissatisfied with the decision of the High

Court in relation to an appealable decision may, within thirty (30) days of being

notified of the decision or within such further period as the Court of Appeal may

allow, appeal the decision to the Court of Appeal.

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NB: In any Appeal case, the burden shall be on the taxpayer to prove that a tax

decision is incorrect

An appeal to the High Court or to the Court of Appeal shall be on a question of law

only.

Appeal Procedure
The Tax Appeals Tribunal Act, 2013 (TATA), which was assented to on 27th November

2013 and replaced by repealing section 32 of the Value Added Tax Act 1989 (Cap 476),

section 82 and 83 of the Income Tax Act (Cap 470) and section 127E of the Customs

and Excise Act (Cap 472) offers a framework of tax appeals through the tax appeals.

Part III of the Act provides that, A person who disputes the decision of the Commissioner

on any matter arising under the provisions of any tax law may, subject to the provisions of the

relevant tax law, upon giving notice in writing to the Commissioner, appeal to the Tribunal

after paying a non-refundable fee of twenty thousand shillings.

1. A notice of appeal in writing to be submitted to the Tribunal shall within thirty

(30) days upon receipt of the decision of the Commissioner.

2. The appellant submits, within fourteen (14) days from the date of filing the notice

of appeal (unless extended by the Tribunal), enough copies, as may be advised by

the Clerk, of the following documents: -

(a) A memorandum of appeal;

(b) Statements of facts; and

(c) The tax decision.

3. The appellant serves a copy of the appeal on the Commissioner within two days

(2) after giving notice of appeal to the Tribunal.

4. The appellant, unless the Tribunal orders otherwise, be limited to the grounds

stated in the appeal to which the decision relates.

5. The Tribunal shall hear and determine an appeal within ninety (90) days from the

date the appeal is filed with the Tribunal.

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He shall be liable to a fine of not less than ten thousand shillings but not more than

two hundred thousand shillings or to imprisonment for a term not exceeding two

years or to both.

8.7. Collection, Recovery and Refund of Taxes

A. Collection of Taxes from A Ship Owner

The Commissioner may, in a case where tax recoverable on the income of a person

who carries on the business of ship-owner, charterer or air transport operator, issue

to the proper officer of Customs by whom clearance may be granted a certificate

containing the name of that person and the amount of the tax due and payable and on

receipt of that certificate the proper officer of Customs shall refuse clearance from any

port or airport in Kenya to any ship or aircraft owned by that person until the tax has

been paid.

B. Collection of Taxes Through an Agent

The commissioner may appoint a person to recover tax on his behalf. This may include

the following: -

(a) Employer, to recover taxes on salaries and wages

(b) Banks, to recover taxes from defaulter who bank with them

(c) Provident funds/pension funds, to recover taxes from persons leaving

employment

(d) Tenants, to recover taxes from non-resident landlords from rent payable

(e) Insurance companies, to recover taxes on commissions paid to brokers and

agents

(f) Financial institutions, to recover taxes on dividends and interest payable

Failure to comply with such appointment can result to the tax being recovered from

the agent as if the tax was due and payable by the agent.

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C. Collection of Taxes from Persons Leaving Kenya

Where the Commissioner has reason to believe that a person who has been assessed

is about to leave Kenya without having paid the tax; or has left Kenya without having

paid the tax and his absence is unlikely to be only temporary, he may, whether or not

the due date for the payment of that tax has arrived, by notice in writing served on

the person assessed, require -

(i) That payment of the whole tax assessed be made within the time specified in

the notice; or

(ii) That security to his satisfaction is given for the payment.

D. Collection of Taxes from Guarantor

Where security has been given which consists of a form of guarantee under which, in

default of payment of tax in terms of the security, a person (guarantor) is obliged to

pay that tax.

E. Collection of Taxes from Deceased Persons

If one dies then tax charged in an assessment made upon him or executors has not

been paid, the amount of tax unpaid or charged, in the assessment shall be a debt due

and payable out of his estate.

F. Recovery of Taxes Through Suits

This is where one is sued in the court of law for taxes, which remain unpaid after the

due date. Collection of such taxes is dependent on the ruling of the court.

G. Recovery of Taxes Through Distrait

The Commissioner may, instead of suing for the tax, recover it by distress, upon the

goods and chattels of the person from whom the tax is recoverable, at the cost of the

person from whom the tax is recoverable, employ such servants or agents as he may

think necessary to assist him in the execution of the distress. The cost of distrait;

including cost of agents, storage and transportation are met by the defaulter.

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Refund of Taxes
Tax paid in excess of the amount payable, is to be refunded, together with any interest

payable. The taxpayer will be advised when it is necessary to carry out an audit before

payment of the refund claim.

The person can opt to have the refund or request for the amount to be utilized to clear

a tax liability in another year or a tax liability in any other Kenya Revenue Authority

Department and must inform the Commissioner in writing of the preferred option.

Refunds are processed within 120 days from the day of processing the return where

the return is for the immediate past year of income and 30 days where the return is

for a year of income other than the immediate past year of income.

8.8. Administrative Penalties and Offences

The Tax Procedures Act 2015 provides under section 80 (1) that, A person shall not be

subject to both the imposition of a penalty and the prosecution of an offence in respect

of the same act or omission in relation to a tax law.

Section 80 (2) provides that, if a person has committed an act or omission that may be

liable under a tax law to both the imposition of penalty and the prosecution of an

offence, the Commissioner shall decide whether to make a demand for the penalty or

to prosecute the offence.

Penalties
All persons are required by law to submit their returns to the Commissioner of

Domestic Taxes within 6 months after the end of the Accounting period. The balance

of tax not paid through installments is payable on or before the last day of the 4th

month after the end of the Accounting period. Failure to comply results in statutory

penalties being charged which include fines and/or imprisonment

The following penalties will be charged for the following offences: -

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(i) For failure to furnish by the due date, a return of income in relation to any year,

additional tax equal to five per cent of the normal tax.

(ii) For omitting from any return of income any amount of income which should have

been included therein, a penalty equal to double the difference between the tax

chargeable according to the return made and the normal tax properly chargeable

in respect of the total income assessable.

(iii) For negligence or disregard of the law by a person who is an Authorized Tax

Agent, and as a result, income is omitted as at (2) above. The Authorized Tax Agent

shall be penalized to the extent of one half of the penalty at (2) above but in any

case, not less than Kshs. 1,000 and not in excess of Kshs. 50,000 with respect to each

return.

(iv) For furnishing a return of income after due date: Additional tax equal to 5% of

the normal tax, or Kshs. 10,000 in case of Non-Individual Taxpayers and Kshs.

1,000 in case of Individuals whichever is higher, for each period of 12 months or

part thereof in which the delay occurs;

(v) For failure to deduct or remit withholding Tax, a penalty equal to 10% of amount

of tax involved is levied subject to a maximum penalty of Kshs. One million.

(vi) For underpayment of installment tax: -

a. A penalty of 20% chargeable on the difference between the amount of the

installment tax payable in respect of a year of income and the installment

tax actually paid.

b. Where any amount of tax remains unpaid after the due date, a penalty of

20% is charged and shall immediately become due and payable.

The 20% penalty shall not apply to matters arising under Withholding tax or PAYE

1. For failure to deduct PAYE, account for it or to supply the Commissioner with a

certificate: A penalty equal to 25% of the amount of the tax involved or Kshs. 10,000

whichever is greater.

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2. Personal Identification Number (PIN) related offence attracts Kshs. 2,000/= per

offence - e.g. not indicating PIN on return for proper identification.

3. Turnover Tax (TOT) payers who fail to submit the quarterly Returns pay a default

penalty of Kshs. 2,000/=

8.9. Application of ICT in Taxation: iTax

i-Tax is an Online Electronic system that was developed to replace the KRA Online

system (ITMS). It is a web-enabled and secure application system that provides a fully

integrated and automated solution for administration of domestic taxes.

i-Tax enables taxpayer internet-based PIN registration, returns filing, payment

registration to allow for tax payments and status inquiries with real-time monitoring

of accounts.

i-Tax was introduced with the view to:

a) Simplify tax processes and make it easy for Taxpayers to comply.

b) Shorten time taken to extract data and information on revenue.

c) Reduce time taken by Taxpayers when dealing with the KRA.

d) Re-engineer business processes for effectiveness and efficiency.

e) Enhance the ability of taxpayers to account for taxes.

f) Improve the accuracy of taxpayers to calculate for taxes.

Returns completed and filed through the i-Tax system include: -

a) All monthly VAT returns,

b) All monthly PAYE returns (for those who are registered),

c) Withholding tax payments,

d) Quarterly TOT (Turnover tax – for those who are registered),

e) Excise duty returns,

f) Installment taxes,

g) Advance taxes,

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h) Standards levy,

i) Individual self-assessment tax returns/Company and partnership tax returns,

j) Land rates,

k) Stamp duty on land transfers, and

l) Increase and issuance of share capital and any penalties and interest on any tax

Any payments to be made require one to complete an E-slip online before relevant

Cheques can be submitted through one of the Authorized banks. It is also mandatory

for individuals with only employment income to complete and submit the Annual

Self-Assessment Return online on i-Tax from the year of income 2014. However, the

i-Tax system requires data input to update your individual or company details, which

is also compulsory.

Due to the complexity and expansion of the system, the amount of time required to

collect all the correct data to update and the slow speeds experienced on the i-Tax web

page, i-Tax registration may be time consuming, hence taxpayers are urged to exercise

patience.

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Table of Contents

Chapter Nine
9. ADMINISTRATION OF VALUE ADDED TAX .................................................... 2

9.1. INTRODUCTION AND DEVELOPMENT OF VAT...................................................... 2

9.2. REGISTRATION AND DEREGISTRATION OF BUSINESSES FOR VAT ..................... 5

9.3. TAXABLE AND NON-TAXABLE SUPPLIES ................................................................ 8

9.4. PRIVILEGED PERSONS AND INSTITUTIONS .......................................................... 14

9.5. VAT RATES ............................................................................................................ 15

9.6. VAT RECORDS ....................................................................................................... 16

9.7. VALUE FOR VAT, TAX POINT ............................................................................... 17

9.8. ACCOUNTING FOR VAT ........................................................................................ 20

9.9. VAT RETURNS ....................................................................................................... 27

9.10. REMISSION, REBATE AND REFUND OF VAT ........................................................ 28

9.11. RIGHTS AND OBLIGATIONS OF VAT REGISTERED PERSON .............................. 30

9.12. CHANGES TO BE NOTIFIED TO THE COMMISSIONER .......................................... 32

9.13. OFFENCES FINES, PENALTIES AND INTEREST ...................................................... 32

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9. ADMINISTRATION OF VALUE ADDED TAX

9.1. Introduction and Development of VAT

History

The history of VAT dates back to the days after the end of the First World War when

European governments found it necessary to raise large sums of money quickly and

a number of them introduced tax on business turnovers. The taxes were calculated as

a small percentage of gross sales at each stage in the production and distribution

chain. This meant that every trader who bought and sold the goods had to pay tax on

a value, which included not only the buying price plus the margin, but also the tax,

which he had paid when he made the purchase.

In calculating the margin, one had to take into account the tax paid on capital items

purchased for the business and tax paid on the chargeable services provided to by

other traders. Because of this “Tax on tax” effect these taxes become known as

“Cumulative” or “Cascade” taxes. It was the French who helped developed VAT from

these “Cascade” taxes starting with a production tax charged at a single stage on

transactions in goods; chargeable goods for use as materials in manufacture were not

taxed.

Introduction and Development of VAT in Kenya

VAT was introduced in 1990, to replace sales tax, which was in operation since 1973.

The VAT Act was initially cited as the Value Added Tax Act, 1989 and it come into

operation as from 1st January 1990. It was later incorporated as chapter 476 of the laws

of Kenya. It was introduced as a measure to increase Government revenue through the

expansion of the tax base, which hitherto was confined to sale of goods at

manufacturing and importation level under the sales tax system.

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Sales tax was a reliable source of revenue but as the economy continued to grow and

become more sophisticated, the limitations of the system become more pronounced.

As a reform measure, it was found necessary to introduce a fairly simple and basic

Value added Tax System for flexibility and more revenue. At inception, the VAT

system was limited to manufactures, importers and selected services like land and

building surveyors, fire and marine surveyors, loss adjuster’s services supplied by

architects and brokers. Only items of jewelry were designated. There were 15 rates of

tax above the general rate, which was 17% then as inherited from its forerunner.

a) There were ad valerian rates, i.e. rates applicable to luxury goods such as TVs,

large cars, cosmetics, spirits, household electronic goods among others ranging from

5% to 210%;

b) Items like Beer and Petroleum products had specific rates expressed in shillings

per liter;

c) Natural gas in gaseous state & petroleum bitumen were expressed in cents per Kg;

d) Cinematograph film in cents meter; and

e) Electric energy in cents per Kwh

VAT today is levied on consumption of taxable goods and services supplied or

imported into Kenya and are collected by registered persons at designated points who

then remit it to the Commissioner. Registered persons only act as VAT agents in

collecting and paying the tax since the tax is borne by the final consumer of goods and

services.

Limitations in Sales Tax System Vs. VAT System

(a) Sales tax was confined to goods only hence narrow coverage/limited tax base; while

VAT is charged on goods and services, which ensures wider tax base.

(b) Sales Tax was only charged at manufacturing and importation level-tax burden

resting on a few while; VAT is charged at all points of sale hence tax burden

distribution.

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(c) Under sales tax system, refunds claims were lodged separately leading to cash flow

problems while; VAT operates on an Input/output tax system in place

(d) Sales tax system had no consideration for zero rating apart from exports by registered

persons while; VAT system allows for zero rating and hence promotes vital sectors

(e) No remission was given to investors under the sales tax system which is provided

for in the VAT system thus encouraging investors

(f) Sales tax system charged tax on tax {cascading Effect} while; VAT system does not

(g) The VAT system as opposed to the sales tax system is easy to manage due to its self-

policing nature and also creates a valuable alternative source of revenue to the Kenyan

government at relatively low administrative and compliance cost.

The VAT Law

The basic law was contained in the Value Added Tax Act, Cap 476 of the Laws of

Kenya and the Regulations stemming from it. From financial year 2011, the

Government of Kenya made various attempts to overhaul the VAT Act governing

administration and enforcement of VAT in the country through the VAT Bills 2011,

2012 and VAT Act 2013 which successfully went through parliament. The intention of

the overhaul was to: -

a) Increase government revenues,

b) Simplify VAT administration,

c) Reduce compliance costs, and

d) To deal with the ever-increasing burden of VAT refunds which presents an

administrative challenge to the Kenya Revenue Authority (“KRA”).

The VAT Bill 2013 was approved by parliament on Monday August 06th 2013, assented

on 14th, August 2013 making it an Act of Parliament, Gazetted on 16th August 2013 and

come into force on 2nd September 2013. This Act is cited as the “Value Added Tax Act,

2013”

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9.2. Registration and Deregistration of Businesses for

VAT

The threshold for registration was Kshs. 200, 000 per year as inherited from sales tax.

This was increased to Kshs. 3.6M and later reduced to Kshs. 3M W.e.f 1st October 2002;

it is now Kshs. 5M W.e.f 1st January 2007. This is determined by the economy and the

policy legislation deemed necessary by the government

A. Registration

Section 34 (1) of The Value added Tax act, 2013 outlines the conditions for registration

and one who meets such conditions must, within thirty days of becoming liable,

apply to the Commissioner for registration. The condition are as follows: -

- Has supplied taxable goods or taxable services or expects to supply taxable

goods or taxable services or both, valued at Kshs. 5,000,000 or more in a period

of twelve months; or,

- Is about to commence supplying taxable goods or taxable services or both

which, in the opinion of the Commissioner, will exceed Kshs. 5,000,000 in a

period of twelve months.

An application for registration is submitted on Form VAT 1 and where the

Commissioner is satisfied that a person is required to be registered issues a certificate

on Form VAT 2 on receipt of a proper application.

Effective Date of Registration

(a) For timely applications, registration is deemed to be effective from the date on

which the applicant receives the certificate, if the certificate is sent by registered

mail, it shall be deemed to have been received within seven days after posting.

(b) For late applications, registration is be deemed to be effective from the 30th day

from the date the person becomes a taxable person.

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Display of Certificate

A registered person must display the certificate of registration at a visible place in his

business premises; and in case of more than one place of business, certified copies of

the certificate should be displayed at each of these places failure of which attracts a

default penalty of twenty thousand shillings and, in addition, shall be guilty of an

offence and liable to a fine not exceeding two hundred thousand shillings or to

imprisonment for a term not exceeding two years or to both.

Types of Registration

i. Normal Registration - This occurs when a trader who meets registration

requirements applies for registration and is duly registered and given registration

certificates

ii. Voluntary Registration - This occurs when a trader who is not qualified for

registration applies for such so as to enjoy the benefits of a registered person i.e.

claiming input tax

iii. Compulsory Registration – This occurs when a trader who qualifies to register

fails to do so. If such a trader is identified he is issued with a certificate without

his application. Tax can also be demanded from him on any sales he has made in

the past.

iv. Temporary Registration - This is where a trader, who is not registered, applies to

be registered to enable him carry out certain transactions. He is provided with a

temporary registration number

Change of Particulars

A registered person should notify details to the Commissioner within twenty-one

days of any of the following changes occurring -

a) Whenever the address of the place of business is changed; or

b) Additional premises are used, or will be used, for purposes of the business; or

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c) Premises used for the business ceased to be so used;

d) The name, or trading name, of the business is changed; or

e) In the case of a limited company, an interest of more than thirty per cent of the

share capital has been obtained by a person or group of persons; or

f) The person authorized to sign returns and other documents is changed; or

g) The partners in a partnership are changed; or

h) A change occurs in the trade classification of the goods or services being

supplied.

NB: Where a person dies, becomes insolvent, or is legally incapacitated, the

executor, liquidator, or other person conducting the business, as the case may be, must

notify details to the Commissioner without delay.

B. De-Registration

This is the process of removal of a registered taxpayer name from the VAT register.

Any trader wishing to be deregistered for various reasons may apply to the

commissioner reasons for deregistration, which may be on grounds of: -

1) Closure of business

2) Sale of business

3) Death of a trader

4) Legal incapacitation

5) Insolvency

6) Change of status to a limited company

7) When turn over falls below the prescribed limit

However, before deregistration any tax outstanding must be remitted. Once the

taxpayer is deregistered, he’s notified of the effective date of deregistration and the

original registration certificate surrendered to the commissioner. Such a person

should cease from charging VAT from the effective date of registration henceforth.

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9.3. Taxable and Non-Taxable Supplies

Charge to Tax
According to the Value Added Tax Act, 2013, section 5, a tax, to be known as value

added tax, shall be charged on: -

a) A taxable supply made by a registered person in Kenya;

b) The importation of taxable goods; and

c) A supply of imported taxable services.

Definitions
a. Taxable Person This is any person liable to apply for registration, but does not

include an export processing zone enterprise

b. Tax Period This means one calendar month

c. Supply means a supply of goods or services. A supply is deemed to have taken

place in the following circumstances: -

“Supply of goods” means –

a) A sale, exchange, or other transfer of the right to dispose of the goods

as owner; or

b) The provision of electrical or thermal energy, gas or water;

“Supply of services,” means anything done that is not a supply of goods or

money, including –

a) The performance of services for another person;

b) The grant, assignment, or surrender of any right;

c) The making available of any facility or advantage; or

d) The toleration of any situation or the refraining from the doing of any

act;

d. Tax Amnesty This is a tax waiver on additional tax, penalties and fines on tax

arrears.

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1. Non-Taxable Supplies
Exempt Supplies

These are supplies of goods and services [specified in the First schedules of the VAT Act,

2013] which are not subject to tax and whose input tax is not deductible. The

following goods among others are exempt after the Finance Act, 2018:

a) Live animals, fish and birds;

b) Unprocessed meats and milk

c) Fertilizer;

d) Fruits, vegetables and cereals;

e) Taxable supply (excluding vehicles) for use in the construction of power

generating plant;

f) Supplies to be used in Geothermal, oil or mining prospecting or exploration

g) Pharmaceutical products;

h) Wheat, maize flour, infant food, rice and bread;

i) Various seeds (wheat & meslin) and (barley);

j) Plant and machinery exclusively used for the manufacture of goods;

k) Cereal straw and husks, unprepared, whether or not chopped, ground, pressed

or in the form of pellets;

l) Specialised equipment for the development and generation of solar and wind

energy, including deep cycle batteries which use or store solar power(wind

energy equipment was not previously exempt);

m) Parts imported or purchased locally for the assembly of computers (previously

this exemption was restricted to school laptops but has now been extended to

all computers to align with the incentives under the Big 4 agenda to encourage

computer assembly in Kenya);

n) Taxable good for the direct and exclusive use for construction of specialized

hospitals with a minimum bed capacity of fifty, approved by the Cabinet

Secretary (CS) upon recommendation by the CS responsible for health;

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o) Equipment for the construction of grain storage, upon recommendation by the

Cabinet Secretary for the time being responsible for agriculture;

p) Alcoholic /non-alcoholic beverages supplied to the Kenya Defence Forces

Canteen Organisation;

q) Goods imported/purchased locally for direct and exclusive use in the

implementation of projects under a special operating framework arrangements

with the Government;

r) Hearing aids, excluding parts and accessories; and

s) One personal motor vehicle, excluding buses and minibuses of seating capacity

of more than eight seats imported by a public officer returning from posting in

a Kenyan mission abroad and another motor vehicle for his spouse.

The VAT Act, 2013 reduced the number of services, which are exempt from VAT

making the exempt list largely similar with internationally accepted principles on

services that ought to be exempt. The list now includes among others: -

a) Financial services

b) Insurance and reinsurance

c) Education services

d) Medical services

e) Plant and animal husbandry

f) Transportation of passengers

g) Burial and cremation services

h) Sale, renting, leasing, hiring, letting of land or residential premises

i) Insurance agency and brokerage services, stock, tea and coffee brokerage

services

j) Betting, gaming and lotteries

k) Hiring, leasing and chartering of aircraft

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l) Accommodation and restaurant services provided within the premises listed

in the second schedule by the proprietors of such premises

m) Community, social and welfare services provided by National Government,

County Government or any Political Sub-division thereof

n) Conference services conducted for educational institutions as part of learning

where the Ministry approves such institutions for the time being responsible

for Education.

o) Car park services provided by National Government, County Government,

and any Political Sub-division thereof or by an employer to his employees on

the premises of the employer.

p) The supply of airtime by any person other than by a provider of cellular mobile

telephone services or wireless telephone services

Illustration

Miss. Olive purchased materials worth Kshs. 100,000 and paid VAT on them, he

produced commodity X and sold it for Kshs. 150,000, which is tax exempt.

Required

Show her VAT position.

Solution

No VAT is payable since the trader deals in exempt supplies.

2. Taxable Supplies
These are supplies, other than an exempt supply, made in Kenya by a person in the

course or furtherance of a business carried on by him/her, including a supply made in

connection with the commencement or termination of a business

(a) Taxable

These are taxable supplies that are taxable at 16%. Some of the items (goods and services)

that were previously zero-rated or exempt, which are now subject to tax, include: -

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a) Taxable services provided to oil exploration companies;

b) Medical equipment;

c) Books

d) Newspapers

e) Computers and software

f) Mobile phones

g) Processed milk

h) Cooking gas

i) Prime movers and passenger mini-buses and buses

j) Tour operation and agency services;

k) Airport landing and parking fees

l) Transportation of tourists

m) The sale of commercial buildings

n) Credit Reference Bureau services

o) Supply of taxable services in respect of goods in transit

p) Supply of taxable supplies to ships

(b) Zero Rated

Zero-rated supply means a supply listed in the Second Schedule of VAT Act, 2013,

they are taxable supplies that are taxable at 0%. Hence the tax on them is ZERO but is

treated as taxable supplies in all aspects, when a person makes a zero-rated supply,

he collects KES 0 VAT.

However, such a person will be entitled to claim all his input tax unlike in the case of

exempt supplies. The zero-rated supplies limited to: -

a) Export of goods and taxable services

b) Supply of goods and taxable services to EPZ enterprises

c) Ship stores to international airlines or ships

d) Supply of coffee and tea for export to tea and coffee auction centers

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e) Transportation of passengers by air carriers on international flights

f) Supply of taxable services to international sea or air carriers on international

voyages

g) Goods purchased from duty free shops by passengers departing to places

outside Kenya.

h) Supply of taxable services in respect of goods in transit.

i) Inputs or raw materials (either produced locally or imported) supplied to

pharmaceutical manufacturers in Kenya for manufacturing medicaments.

j) The supply of goods or taxable services to a special economic zone enterprise.

k) The supply of maize (corn) flour, ordinary bread and cassava flour, wheat or

meslin flour and maize flour containing cassava flour more than 10% in weight.

Illustration

Mr. Malewish a manufacturer of Bolts and Nuts; bought metal rods worth Kshs.

500,000 on which he paid VAT. He made Bolts and Nuts and sold them as follows: -

Local sales Kshs. 600,000

Exports Kshs. 40,000

Required

Calculate his VAT payable; Note that the prices quoted do not include taxes payable.

Solution

Stage: 1 Input Tax

Metal rods 500, 000

VAT @ 16% 80, 000

580, 000

Stage: 2 Output Tax

Local sales 600, 000

VAT @ 16% 96, 000

696, 000

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VAT payable

Output tax 96,000

Input Tax 80,000

16,000

Samples of Taxable Goods

Where taxable goods are given out as samples, they are not liable to tax, and for goods

to be treated as such, they should: -

(a) Be distributed for free by a registered person for furtherance of his business;

(b) Have a value of less than KES 2,000 for each sample;

(c) Are freely available; and

(d) Not limited in distribution to less than 30 people in any one calendar month.

9.4. Privileged Persons and Institutions

These are persons or institutions who if supplied with taxable supplies, such suppliers

shall be zero-rated when so supplied by a registered person before the imposition of

tax or if imported before clearance through the customs subject to the limitations

specified in the Second Schedule Part B.

They include: -

1) Supply to Commonwealth and other Governments

2) Supply to Diplomat or First Arrivals Persons

3) Supply to donor agencies with bilateral or multilateral agreements

4) Supply to international and regional organizations

5) Supply to the War Graves Commission

6) Supply to National Red Cross Society and St. John Ambulance

7) Supply of protective apparel, clothing accessories and equipment

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9.5. VAT Rates

(a) Rates of Tax

Section 5 (2) of the Value Added Tax Act, 2013 provides the rates of tax as: -

(i) In the case of a zero-rated supply, zero percent (0%); or

(ii) In any other case, sixteen percent (16%) of the taxable value of the taxable

supply, the value of imported taxable goods or the value of a supply of

imported taxable services.

The Finance Act, 2018 introduced a new VAT rate of 8% on petroleum products. This

is a reduction from the rate of 16% that was effective from September 2018. The taxable

value excludes excise duty, fees and other charges.

The introduction of VAT on petroleum products generated heated debate, with the

8% rate being the compromise position adopted by government. Given the revenue

constraints facing the government and the maturing debts that it needs to pay, the tax

was inevitable even though it will negatively affect key industries such as

transportation and the agricultural sector whose supply is exempt.

(b)Liability of Tax
Section 5 (3) bestows the Tax on a taxable supply to be a liability of the registered

person making the supply and, is due at the time of the supply. Section 5 (4) provides

that the amount of tax payable, if any, is recoverable by the registered person from the

receiver of the supply, in addition to the consideration.

Reverse Tax

Contrary to the provisions of Section 5 (3), section 5 (6) bestows the Tax on the supply

of imported taxable services to be a liability of the registered person receiving the

supply and, subject to the provisions of the Act relating to accounting and payment,

shall become due at the time of the supply. A system referred to as “Reverse Tax”

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9.6. VAT Records

Section 43 (1) of the Value Added Tax Act, 2013 requires every registered person to

keep in the course of his business, a full and true written record, whether in electronic

form or otherwise, in English or Kiswahili of every transaction he makes. The record

must be kept in Kenya for a period of five years from the date of the last entry was

made.

Section 43 (2) lists down the records to be kept under subsection (1) to include the

following: -

(a) Copies of all tax invoices and simplified tax invoices issued in serial number

order;

(b) Copies of all credit and debit notes issued, in chronological order;

(c) Purchase invoices, copies of customs entries, receipts for the payment of

customs duty or tax, and credit and debit notes received. to be filed

chronologically either by date of receipt or under each supplier's name;

(d) Details of the amounts of tax charged on each supply made or received,

sufficient written evidence to identify the supplier/recipient, and to show the

nature & quantity of services supplied, time, place, consideration for the

supply, among others;

(e) Tax account showing the totals of the output tax and the input tax in each

period and a net total of the tax payable or the excess tax carried forward, as

the case may be, at the end of each period;

(f) Copies of stock records kept periodically as the Commissioner may determine;

(g) Details of each supply of goods and services from the business premises, unless

such details are available at the time of supply on invoices issued at, or before,

that time; and

(h) Such other accounts or records as may be specified, in writing, by the

Commissioner.

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The said records must, at all reasonable times, be availed to an authorised officer for

inspection and The Commissioner may, in accordance with the regulations, require

any person to use an electronic tax register, of such type and description as may be

prescribed, for the purpose of accessing information regarding any matter or

transaction which may affect the tax liability of the person.

9.7. Value for VAT, Tax Point

(a) Taxable Value

This is the value of a supply on which VAT is due. It’s the consideration given in

exchange for a supply, which may be in money or in kind. Taxable Value is: -

a) In the case of a supply provided by the registered person to an independent

person dealing at arm’s length, the price for which the supply is provided;

b) In case of non-arm’s length transaction, the price at which the supply would

have been provided by a registered person to an independent person dealing at

arm’s length;

c) In the case of taxable goods imported into Kenya, the sum of the following

amounts-

- The value of taxable goods ascertained for the purpose of customs duty; and

- The amount of the duty of customs, if any.

d) In the case of a taxable service imported into Kenya the price at which the supply

is provided.

In calculating the price of any goods, the following shall be included: -

a) Any wrapper, package, box, bottle or other container in which the goods

concerned are contained;

b) Any other goods contained in or attached to such wrapper, package, box, bottle

or other container; and

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c) Any liability the purchaser has to pay to the seller in addition to the amount

charged as price i.e. provision for, advertising, financing, servicing, warranty,

commission, transportation, erection or any other matter.

NB:

- If a discount is offered, the taxable value shall be the selling price less the

discount

- If consideration is it wholly money, the taxable value shall be that

consideration

- If consideration is not in money or partly in money and partly in kind, the

taxable value shall be the consideration a person would pay if money were the

only consideration.

Illustration

Mr. Wanyiri a textile trader bought the following items, 20 Rolls of cloth at Kshs. 6

each; 6 Sewing threads at Kshs. 10 each; & 70 Buttons at Kshs. 2 each. He was given a

trade discount of 25%.

Required

How much is his Output VAT? (Taxable value and tax)

Solution

20 Rolls (20X6) Kshs. 120

6 Threads (6X10) Kshs. 60

70 Buttons (70X2) Kshs. 140

Total Kshs. 320

Discount @ 25% Kshs. (80)

Taxable value Kshs. 240

Output VAT @ 16% Kshs. (38)

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(b)Tax Point
This is also referred to as “Time of Supply”; it is the time when a supply is deemed to

have taken place. It is the point when tax becomes due and payable. VAT is accounted

for in the tax period in which the tax point occurs. Tax point is the earliest of: -

a) The goods and services have been supplied to the purchaser; or

b) A certificate is issued, by an architect, surveyor or any person acting as a

consultant or in a supervisory capacity, in respect of the service; or

c) An invoice is issued in respect of the supply; or

d) Payment is received for all or part of the supply;

Tax Point in Special Situations

1) For goods taken for personal or non-business use, tax point is the time when such

goods are taken or set aside for such use or purpose

2) For imported goods, the tax point shall be as follows: -

a) In the case of imported taxable goods cleared at the port of importation, at the

time of customs clearance either for home use or an Inland station;

b) In the case of taxable goods removed to a licensed warehouse subsequent to

importation, at the time of final clearance from the warehouse for home use.

c) In the case of taxable goods removed from an export processing zone at the time

of removal for home use;

3) For imported services, the tax payable shall be due and payable at the time when-

a) The taxable service is received; or

b) An invoice is received in respect of the service; or

c) Payment is made for all or part of the service, whichever time shall be the earliest.

4) For construction industry, the tax point shall be the earliest of: -

a) Provision of service such as design, advisory or supervision

b) Issue of a fee note

c) Receipt of any payment

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5) For goods sold on condition, the tax point shall be: -

a) When the buyer indicates that he wishes to retain the goods; or

b) An invoice is issued; or

c) Payment is received

6) Where supplies are made on a continuous basis, or by metered supplies, tax shall

become chargeable on the first meter reading and subsequently tax shall become due

and payable at the time of each determination or meter reading.

9.8. Accounting for VAT

After charging and collecting VAT the registered taxpayer is supposed to account for

the tax as well. VAT legislation stipulates ways in which a registered taxpayer should

account for VAT: -

1. Issuing a tax invoice

2. Input tax deduction

3. Partial exemption

4. Keeping of records (As discusses under paragraph 6.10.6)

5. Submission of returns (As will be discusses under paragraph 6.10.9)

6. VAT account

A. Issuing a Tax Invoice

A tax invoice is a sales document, which is the most important instrument of VAT

control. It is a transaction voucher that is issued by a registered trader when he makes

a taxable supply. The tax invoice (voucher) contains prescribed details for the supply

as follows: -

a) The name, address, VAT registration number and personal identification

number of the person making the supply;

b) The serial number of the invoice;

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c) The date of the invoice;

d) The date of the supply, if different from the invoice date;

e) The name, address, VAT registration number, if any, and Personal Identification

Number of the person to whom the supply was made, if known to the supplier;

f) The description, quantity and price of the goods or services being supplied;

g) The taxable value of the goods or services, if different from the price charged;

h) The rate and amount of tax charged on each of those goods and services;

i) Details of whether the supply is a cash or credit sale and details of cash or other

discounts, if any, that apply to the supply;

j) The total value of the supply and the total amount of VAT charged;

k) The logo of the business of the person issuing the invoice; and

l) The identification number of the register.

Where cash sales are made from retail premises, a registered person may issue a

simplified tax invoice immediately upon the payment for the supply, which quotes

price VAT inclusive, hence to get the VAT element: - [t / (1+t)] X Tax inclusive amount

B. Input Tax Deduction

(a) Input Tax

This is the tax paid or payable by a registered person on Purchases or importation of

goods or services.

(b) Output Tax

This is tax due or charged on taxable supplies (sales). A registered person is entitled

to claim input tax, from the tax payable by him on supplies by him (referred to as ‘output

tax’) in that tax period, except where the law prohibits these as non-deductibles.

The basis of claiming input is in possession of a tax invoice or a customs entry (C63)

duly certified by the proper officer in case of imported goods. No input tax however

can be deducted more than six (6) months after the input tax become due and payable.

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Section 17 (4) of the Value Added Tax, 2013 provides that, a registered person shall

not deduct input tax if the tax relates to the acquisition of: -

a) Passenger cars or mini buses, and the repair and maintenance thereof including

spare parts, unless the passenger cars or mini buses are acquired by the registered

person exclusively for the purpose of making a taxable supply of that automobile

in the ordinary course of a continuous and regular business of selling or dealing in

or hiring of passenger cars or mini buses; or

b) Entertainment, restaurant and accommodation services unless –

(i) The services are provided in the ordinary course of the business carried on by

the person to provide the services and the services are not supplied to an

associate or employee; or

(ii) The services are provided while the recipient is away from home for the

purposes of the business of the recipient or the recipient’s employer.

Tax Paid on Stock, Assets or Building Before Registration.

When a person on the date he becomes registered has in stock goods on which tax has

been paid or has constructed a building, civil works or has purchased assets for use in

making taxable supplies, he may, within thirty days, claim relief from taxes paid on

such goods, buildings, civil works or assets; Provided they were

constructed/purchased within twelve months prior to registration, or within such

period, not exceeding twenty-four months, as the Commissioner may allow. The

Commissioner may, authorize the registered person to make an appropriate

deduction of the relief claimed from the tax payable on his next return if satisfied that

the claim for relief is justified.

C. Partial Exemption
Section 17 (6) (c) of the Value Added Tax Act, 2013 provides that, deduction of input

tax attributable to both taxable supplies and exempt supplies, the amount of input

VAT allowed is restricted according to the following formula unless the ratio of

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taxable sales to total sales is over 90% in which case the taxpayer is allowed a full

deduction of the input tax: - A/C x B

Where: -

A is total amount of input tax payable during the tax period on acquisitions that

relate partly to making taxable supplies and partly for another use;

B is the value of all taxable supplies made by the registered person; and

C is the value of all supplies made by the registered person.

NB: If the ratio of taxable sales to total sales is less than 10% the registered person

shall not be allowed any input tax credit for total amount of input tax

Please note that “value of all taxable supplies” includes Zero Rated supplies and

“value of all supplies” includes Exempt Supplies

Illustration

Supplies @16% Kshs. 2,000

Zero rated supplies Kshs. 2,000

Exempt supplies Kshs. 2,000

Total Amount of input tax Kshs. 500

Required

Calculate deductible input tax

Solution

Value of all taxable supplies {2,000+2,000} = Kshs. 4,000

Value of all supplies {2,000+2,000+2,000} = Kshs. 6,000

Ratio of taxable sales to total sales {4,000/6,000} = 66.67%

Deductible input tax {(500/6,000)*4,000 = Kshs. 333.33

Past paper Questions: Q 2(b) August 2009

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D. VAT Account
This is a summary (“T-Account”) of the taxpayers’ monthly transactions showing the

total of output tax and input tax in each period and the net tax payable or refundable

at the end of the period. Where, Tax (VAT) Payable is the amount of tax a trader

remits to the commissioner of DTD. It’s the difference between the output tax charged

and the input tax paid.

That is: -

Tax payable = Output tax - Input tax

INPUT OUTPUT

Input tax xx Output tax xx

Add: Over Declaration xx Add: Under Declaration xx

Debit Note Received xx Debit Note Issued xx

Less: Returns Outwards xx Less: Returns Inwards xx

Discount Received xx Discount Allowed xx

Credit Note Received xx Credit Note Issued xx

Total Input Tax XX Total Output Tax XX

Total Input Tax (XX)

VAT Payable XX

Withholding VAT
Introduction

Withholding VAT was introduced in Kenya W.e.f 1st October 2003. It was not a new

tax but a reinforcement measure to ensure that all the VAT charged reaches the

Government. Prior to this some suppliers were tempted to suppress declaration of the

VAT due for payment. The Value Added Tax (Tax withholding) Regulations, 2004

come into operation on the 11th June 2004. In this Regulation, a ‘Supplier’ means a

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person who receives a payment for taxable supplies from a tax-withholding agent;

and a ‘Tax withholding agent’ means a person who has been appointed as such under

section 25A of the Value Added Tax Act, 2013. Which include: -

- Government Ministries

- Government Departments and Agencies

- Other persons appointed by the Commissioner

What Is Withholding VAT

This is a system, which involves the declaration of VAT by both the supplier and his

customer who have been appointed as a withholding VAT Agent. Under this system,

upon making payment to a supplier the tax withholding agent deducts tax there from,

keep records; and furnish the supplier with an acknowledgement of the payment

(WHT-Certificate VAT 32A).

Withholding VAT System

As mentioned above, when a taxpayer (trader) supplies and invoices an appointed

withholding VAT Agent the payment for supply is made less VAT charged or that

which ought to have been charged. The Agent withholds VAT irrespective of whether

the supplier is registered for VAT or not. The Agent issues a withholding VAT

certificate to the supplier indicating the VAT withheld. This certificate entitles the

trader to claim back the withheld VAT to avoid double taxation since the same tax is

declared and paid by the trader through a VAT 3 return.

Supplies Liable to Withholding VAT

Only taxable goods and services are liable to withholding VAT. No VAT is withheld

on exempt goods, exempt services and Zero-rated supplies. Any VAT withheld in

exempt and Zero-rated supplies is treated as tax paid in error and therefore refundable

by the Commissioner.

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Submission of Withholding VAT Returns

Withheld VAT is remitted by appointed withholding VAT Agents to the

Commissioner on weekly basis unless the Commissioner has accepted an alternative

method taxes but where no tax is withheld in any period, he should furnish a nil

return. The payments are made against VAT 32. A taxpayer whose VAT has been

withheld is still required to submit a VAT 3 return and pay the tax charged

irrespective of whether the tax has been or will be withheld. The same case applies

irrespective of whether the Supplier has been paid or not.

Currently, the potion of VAT that is withheld is 6 % out of the 16 % VAT. The VAT

withholding agents remit the withheld VAT on behalf of the suppliers to KRA by the

20th day of the following month.

VAT withholding agents are specific persons who have been appointed by KRA as

VAT withholding agents. Currently, the persons fall under any of the following

categories.

1. Government ministries and departments.

2. Government corporations.

3. County governments.

4. Other public bodies.

5. Banks and financial institutions.

6. Insurance companies and brokers.

7. Hospitals.

8. Cooperative societies.

9. All companies under Large Taxpayers Office (LTO).

10. Some companies under Medium Taxpayers Office (MTO).

The Commissioner has powers to appoint any person as a withholding VAT agent.

However, no person should withhold VAT unless they are appointed VAT

withholding agents.

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Refund of Excess Credit

A taxpayer is authorized to claim back the withheld VAT on subsequent VAT 3

return(s) provided he is in possession of withheld VAT certificate (s). Where the excess

arising from the system becomes a perpetual feature, the taxpayer has a right to claim

it from the Commissioner by lodging a claim on form VAT 4.

Offences Under Withholding VAT System

Offences under the System are as Follows: -

• Failure by the appointed Agents to withhold VAT

• Failure to remit the withheld VAT or to Submit a return where there is no

payment to make.

• Failure to issue withholding VAT certificates.

• Purporting to be a withholding VAT Agent.

A withholding VAT Agent who commits the above offences is liable to a penalty of

Kshs 10,000 or 10% of the Tax due whichever is higher.

9.9. VAT Returns

Due Date

Section 44 (1) of the Value Added Tax Act, 2013 requires, every registered person to

submit VAT return (on form VAT3), monthly. The return is submitted on or before the

due date, that is the 20th day of the month succeeding that in which the tax became

due, provided that where the 20th day of the month falls on a public holiday, Saturday

or Sunday, the return together with the payment of tax due, shall be submitted on the

last working day prior to that public holiday, the Saturday or Sunday.

Extension of Time

Section 44 (2) allows a registered person to, apply to the Commissioner for extension

of time to submit a return before the due date for submission of the return.

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Electronic Filling

Section 39 (1) empowers the Commissioner to establish and operate an electronic

system of filing tax returns or other documents by registered persons and electronic

service of notices and other documents by the Commissioner (iTax).

NB: ANY person who fails to submit his/her return as required is liable to a penalty

of Kshs. 10,000 or 5% of the amount of tax payable under the return, whichever

is higher.

Types of Return
(a) Payment Return occurs when output tax is more than input tax and it’s accompanied

by a payment to the commissioner. All payments return should be made to the

CBK or any other approved Commercial bank

(b) Credit Return occurs the amount of input tax deductible exceeds the amount of output

tax due; the excess shall be carried forward to the next tax period.

(c) Nil Returns occurs where no business has taken place and hence nothing to declare.

9.10. Remission, Rebate and Refund of VAT

A. Remission of VAT
Section 2 of the repealed Customs and excise Act, Chapter 472, had defined

"remission" to mean the waiver of duty or refrainment from exacting of duty; The

dictionary meaning is to cancel or reduce debt payable while according to VAT law,

remission refers to the waiver by the commissioner or refrainment from imposing tax

(VAT) which would have been collected on taxable goods and taxable services but is

foregone wholly or partly if he is satisfied that it is in the public interest to do so or on

additional tax where such remission is justified but must be approved by the minister

if such remission is over Kshs. 1,500,000.

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Where remission is granted under a certain condition then that tax shall become

payable in the event of breach of such condition as: -

- Official Aid funded projects

- Diplomats and other international organizations

- Agricultural input material

- Exports

- Privileged persons and bodies i.e. British Council, Common Wealth and other

Nations etc.

However, for control purposes remissions are not automatic, there are procedures to

be followed and an application has to be made. Remission are not be granted in respect

of Stocks in trade, Consumables, Office furniture, Typewriters, Copying equipment,

Stationery, Kitchenware, Crockery, Linen, Draperies, Carpets (in single pieces), Safes,

and Refrigerators

B. Rebate of VAT
Section 2 of the repealed Customs and excise Act, Chapter 472, had defined "rebate"

to mean a reduction or diminishment of charge for duty; therefore, rebate in line with

the VAT law unlike remission, rebate is the reduction of VAT payable.

C. Refund of VAT

Section 2 of the repealed Customs and excise Act, Chapter 472, had defined "refund"

to mean the return or repayment of duties already collected; hence in line with VAT

law, a refund refers to return, or repayment of VAT already paid, such circumstances

include: -

a) Taxable goods manufactured in or imported into Kenya and before being used,

those goods have been subsequently exported under customs control; or

b) Any tax has been paid in error (Claim within 12 Months); or

c) Making zero-rated supplies; or

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d) Tax withheld by appointed tax withholding agents; or

e) Physical capital investments where input tax deducted exceeds one million

shillings provided that the investments are used in making taxable supplies; or

f) Bad debts (Claim within 5yrs); or

g) Inventory/asset in stock (Claim to be done in 30 days); or

h) In the opinion of the Minister, it is in the public interest to do so.

But for the refund to be payable (apart from [f]&[g]), a registered person must lodge a

claim for the amount payable within twelve months from the date the tax became

payable, or such longer period, not exceeding twenty-four months, as the

Commissioner may allow. Every application however, for a refund of an amount

exceeding one million shillings must be accompanied by an auditor's certificate.

NB: No refund is payable unless the registered person is up-to-date in submitting

all VAT returns on Form VAT 3 together with the appropriate tax.

Where any tax has been refunded in error, the person to whom the refund has

been erroneously made shall, on demand by the Commissioner, pay the

amount erroneously refunded.

Any fraudulent claim for a refund of tax attracts a penalty of an amount equal

to two times the amount of the claim.

9.11. Rights and Obligations of VAT Registered Person

A. Rights of A Registered Person

A taxpayer has a wide range rights including the following among others: -

a) To claim input tax for the furtherance of a registered business

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b) To claim all types of refunds where applicable

c) To get VAT information

d) To be treated fairly and impartiality

e) Privacy and confidentiality

f) Courtesy and consideration

g) Presumption of honesty

h) To object to any disputed assessment

i) To demand identification of any visiting KRA officers

B. Obligations of A Registered Tax Payer

a) Register for VAT if qualified to do so

b) Display the VAT registration certificate in a conspicuous place within the

business premises

c) Charge VAT on all taxable supplies made

d) Issue serially numbered tax invoices or cash sale receipts (ETR generated and/or

supported by ETR receipt) on every sale made

e) Disclose and avail any relevant information, records or documents demanded

by an authorized officer

f) Declare true and correct VAT returns and file the same within the stipulated

period

g) Accord full cooperation to authorized officers

h) Pay immediately any undisputed assessment raised

Should one fail to fulfill the above obligations, he’ll be liable to penalties stipulated in

the VAT law and his records subjected to an audit and any assessment made

demanded with interest

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9.12. Changes to be Notified to the Commissioner

The Tax Procedures Act, 2015 Sec.9 provides that every person carrying on a business

must, within thirty (30) days of the occurrence of the following changes, notify the

Commissioner of any changes:

(a) in the place of business, trading name and registered address;

(b) in the case of:

a. A company, of the persons with share-holding of 10% or more of the issued

share capital;

b. A nominee ownership, to disclose the beneficial owner of the shareholding;

c. A trust, the full identity and address details of trustees and beneficiaries of

the trust;

d. A partnership, the identity and address of all partners; or cessation or sale

of the business, all relevant information regarding liquidation or details of

ownership.

9.13. Offences Fines, Penalties and Interest

(a) Fraud in Relation to Claims for Tax Refund

Any person who fraudulently makes a claim for a refund of tax is liable to pay a

penalty of equal to two times the amount of the claim.

(b)False Statements
Any person who makes any false statement, produces any false document or

information, or makes any false return is guilty of an offence and liable to a fine not

exceeding four hundred thousand shillings or double the tax evaded, whichever is the greater

or to imprisonment for a period not exceeding three years, or to both.

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(c) Visible Display

Any person who does not display the certificate or other required forms of

identification in such form and in a clearly visible place is liable to a default penalty of

twenty thousand shillings and, in addition, shall be guilty of an offence and liable to a

fine not exceeding two hundred thousand shillings or to imprisonment for a term not

exceeding two years or to both.

(d)Late Registration
Any person who applies for registration after the time limit is liable to a default penalty

of twenty thousand shillings.

(e) Failure to Issue an Invoice

Any person who fails to issue a tax invoice is liable to pay a default penalty of not less

than ten thousand shillings but not exceeding two hundred thousand shillings person and

shall be guilty of an offence and any goods in connection with which the offence was

committed shall be liable to forfeiture.

(f) Failure to Keep Records

Any person who fails to keep records is liable to pay a default penalty of not less than ten

thousand shillings but not exceeding two hundred thousand shillings.

(g) Failure to Submit Return

Any registered person who fails to submit a return within the allowed period is liable

to a penalty of ten thousand shillings and two percent per month compounded of the tax

due.

(h) Failure to Comply with ETR Regulations

Any person who fails to comply with these regulations is guilty of an offence and shall

be liable to a fine not exceeding five hundred thousand shillings or to imprisonment for a

term not exceeding three years or to both.

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(i) General Penalty

Any person guilty of any offence for which no other penalty is provided is liable to a

fine not exceeding five hundred thousand shillings or to imprisonment for a term not exceeding

three years or to both.

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Table of Contents

Chapter Ten

10. CUSTOMS TAXES AND EXCISE TAXES ........................................................... 2

10.1. CUSTOMS PROCEDURE ............................................................................................ 2

10.2. IMPORT AND EXPORT DUTIES................................................................................. 8

10.3. PROHIBITIONS AND RESTRICTION MEASURES.................................................... 10

10.4. TRANSIT GOODS AND BOND SECURITIES ........................................................... 14

10.5. PURPOSES OF CUSTOMS AND EXCISE DUTIES ..................................................... 14

10.6. GOODS SUBJECT TO CUSTOMS CONTROL ........................................................... 15

10.7. IMPORT DECLARATION FORM, PRE-SHIPMENT INSPECTION, CLEAN REPORT OF

FINDINGS ............................................................................................................................ 17

10.8. EXCISABLE GOODS AND SERVICES ....................................................................... 17

10.9. APPLICATION FOR EXCISE DUTY (LICENSING) ..................................................... 20

10.10. USE OF EXCISE STAMPS ..................................................................................... 21

10.11. OFFENCES AND PENALTIES ............................................................................... 22

10.12. EXCISABLE GOODS MANAGEMENT SYSTEM ................................................... 23

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10. CUSTOMS TAXES AND EXCISE TAXES

10.1. Customs Procedure

Introduction
An Act of Parliament established the Customs & Border Control department,

(previously known as Customs and Excise Department, then Customs Services

Department) of the Kenya Revenue Authority in 1978. It is the largest of the four

revenue departments in terms of manpower, revenue collection and countrywide

operational network. The primary function of the Department is to collect and account

for import duty, Excise duty, VAT on imports and other levies.

Customs Area
The East African Customs Community Management Act, 2004 defines “Customs

area” to mean any place appointed by the Commissioner under section 12 for carrying

out customs operations, including a place designated for the deposit of goods subject

to customs control (Amended 17th February 2011).

They include: -

a) Airports

b) Seaports

c) Lake ports

d) Inland Container Deports (ICD)

e) Customs and Bonded warehouses

f) Transit shades

Customs Warehouse
This is any place approved by the Commissioner for the deposit of un-entered,

unexamined, abandoned, detained, or seized, goods for the security thereof or of the

duties due thereon. They owned by the government.

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Bonded Warehouse
This is any warehouse or other place licensed by the Commissioner for the deposit of

dutiable goods on which import duty has not been paid and which, have been, entered

to be, warehoused. They are privately owned.

Import clearance into Kenya

A. Documentation Required

(a) Import declaration form (IDF) This must be applied for and obtained from the

Kenya Revenue Authority for any Import. The Importer is responsible for

applying for the IDF but may use an agent to consult or input this into the

ORBUS system. IDF contains the following key information: -

i. Value. This is what is used for tax calculation. Note that values may be

disputed by customs and cargo may be verified to solve any disputes.

ii. Quantity. Should be as detailed and correct as possible. Every slightly

different type of goods should have specified quantity rather than

grouping similar items.

iii. Quality. Whether the items are New, Used or otherwise

iv. Standards. This should also be backed up by inspection reports by other

government agencies i.e. Kenya Bureau of Standards, Public Health,

Agriculture (KEPHIS). etc. to ascertain if the expected standards have

been met. In case of suspicion, Tests may be carried out and

v. Certificates/Permits. Test Certificates from accredited bodies (In the

country of Origin) may be required.

vi. Classification (HS Code): This is the unique code that identifies an item,

different HS codes attract different taxes and tax rates.

(b) Certificate of Conformity (if applicable) Kenya Bureau of Standards has

appointed certain agents (INTERTEK, SGS, Bureau VERITAS) to carry

conformity inspection of certain commodities.

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These agents issue shipper/supplier with a Certificate of Conformity and the

test results.

(c) Bill of lading (sometimes abbreviated as B/L or BoL) is a document issued by a

carrier, which details a shipment of merchandise and gives title of that

shipment to a specified party. When issuing the bill of lading, the shipping line

should take care of the following: -

i. Consignee. The consignee column on the BL should read "Name & Full

address of actual receiver". This is carried over into the customs system

and identifies the taxpayer

ii. Notify Party. This is merely someone that needs to be notified about the

arrival of the cargo covered in the bill of lading. His Name, address and

contact information

iii. Place of delivery. This is the Country and port of destination

iv. Description. This is the description of cargo imported. It should always

mention the actual number of packages imported e.g. the BL should read

"1x 40' STC 456 packages of Tiles

v. CFS consigning. This is the inland Container Deport where the

consignment will the cleared from once offloaded at the port of

Mombasa.

(d) Packing List Description of goods on the packing list must match with the

details mentioned on the Bill of Lading and the Commercial Invoice. Packing

List must indicate the package number, description, weight in metric ton,

length in meter, width in meter, height in meter and cubic measurement of all

packages where applicable.

(e) Commercial Invoice must be detailed (as per the packing list) and the total CIF

value of the consignment must be indicated. It is preferable to have the exact

details reflected on the packing list copied and paste on the commercial invoice

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and values indicated in the adjacent column, and a total CIF value indicated at

the bottom of the document (Items cost, freight charges and insurance amount must

be duly broken down on each Commercial Invoice).

(f) Exemption letter (if applicable) Charitable organizations, government

projects, governmental organizations etc. may apply for exemption of duties

and/or VAT where applicable. Such beneficiary does this by writing to the

National Treasury. Exemption letters are usually granted for specific

consignments, which have to be exactly described in the application.

NB: Dispatch of documents should be done in good time so as to reach the

Consignee/Notifying party or Clearing agent at least 7 days prior to arrival of

the vessel at the port of Mombasa to avoid delays in processing paper work.

B. Customs Clearance Procedure

(a) Customs Declaration Prior to actual vessel arrival date in Mombasa, the

shipping line lodges its online manifest with customs (iCMIS) and the port

authorities (KWATOS). The manifest number pertaining to the concerned

shipment on board of the vessel is advised by the shipping line.

Special attention has to be given to the place of clearance (port or CFS) as this

may differ depending on: -

a) Nature of the cargo (dangerous cargo); or

b) Import regime (Transit or Home use); or

c) Request from the importer as stated on the bill of lading; or

d) Granted by the ports authorities

Against the uploaded manifest, a Customs Entry (Form C63) is lodged in the

Simba System by the importers clearing agent.

Parallel to this, once the shipping line uploads the manifest, the original Bill of

Lading duly endorsed by the consignee (or the telex release) is submitted to the

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shipping line for issuance and release of a delivery order. This is done after

settlement of the local shipping line charges. The shipping line has to ensure

the delivery order is also uploaded online.

Uploaded entries are passed after either payment of duties or confirmation of

exemption by means of the exemption letter code in the customs system.

(b) Other Customs Formalities The clearing agent prepares a customs folder,

including ALL the documents and presents it to customs where the documents

are endorsed after verification by customs. Endorsed documents are

dispatched to the point of final clearance, i.e. Port of Mombasa (KPA) or

nominated CFS to the resident customs officers.

At the point of clearance, the mode of verification is assigned by customs and

executed i.e. sight and release, direct release, normal verification, 100%

verification, scanning, etc.

(c) Customs Verification and / or Scanning: Scanning of container is done by

passing a loaded truck through the scanning machines either in the port or at

the CFS. If the scanned image shows any irregularities, customs will usually

proceed to do verification.

Verification is done by having the placed containers down and opened. If

verification is to be performed at a CFS, all cargo has to be transferred to the

respective CFS by the CFS operator.

A verification report, which must tally with the customs declaration, is input

in the Simba system by the Customs Officer. If the results of the designated

verification procedure indicate any abnormalities, then the customs will

usually proceed for 100% verification. Any discrepancies on value-quality-

quantity or the finding of any undeclared items will lead to customs raising an

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offence for which the outcomes are varied and guided by the East Africa

Customs Management Act, 2004.

If cargo was not verified / scanned or if the results of this was a clean bill,

customs can issue a customs release order once it is confirmed that the delivery

order obtained earlier is available online

(d) KPA Pick Up Order or CFS Release order for all consignments cleared within

the port of Mombasa, A pick up order is generated via the “KWATOS” system,

this pick-up order is attached to the set of documents (which includes the

delivery order, passed customs entry, customs release order) and presented to

CDO (Customs Documentation Office) at Port. Port Charges are then paid usually

by deducting the agents running account with the port after which Cargo can

then be allowed out of the port. Allocated truck and trailer must be booked via

“KWATOS” for loading purposes.

For CFS clearance, the principle is the same that the process though issuance of

release orders and payment of CFS charges can differ from one CFS to another

(some are manual, some electronic, some require bankers’ Cheques, others can give

credit). Once charges are secured and paid, a gate pass is issued for collection

of cargo and loading purposes.

C. Removal of Goods from the Port or CFS

(a) Containers: Containers are usually loaded on standard semitrailer trucks to

either the final destination or an intermediate staging area. Since the cargo is

fully customs cleared at this stage, it can be delivered to any storage area or

destination site not under customs control.

(b) Direct delivery of bulk / project cargo in the case of bulk/project cargo, direct

delivery from the vessel can be requested from the ports authority bypassing

any discharge into the port or CFS. For this to be granted the actual clearance

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has to be completed in advance and any special requests by customs have to be

adhered to.

i. Discharge Operations Once the vessel begins discharging, trucks

(standard semitrailers or low-loaders/modular trailers if required) will be

driven alongside the vessel and an independent surveyor can be present

if required. Approval for trucks to enter and exit the port with details of

the trucks and cargo on the vessel has to be processed in advance.

ii. Special Road Permit Application If required, the agent and/or the

transporter applies for the special road permit for all Out of Gauge cargo

– which implies that each particular load is duly weighed at a certified

weighbridge and physically checked and sighed by a representative of

the Ministry of Roads and Public Works. These permits are issued at the

discretion of the authorities and sometimes take time to process, even

longer if the item is out of gauge.

10.2. Import and Export Duties

Definitions
a) "Import" means to bring or cause to be brought into the Partner States from a

foreign country; [EACCMA, 2004] but the repealed Customs and Excise Act Cap

472 defined "import” to mean to bring or cause to be brought into Kenya from a

foreign country;

b) "Import duties" means any customs duties and other charges of equivalent effect

levied on imported goods; [EACCMA, 2004] while the repealed Customs and

Excise Act Cap 472 defined "import duty" to mean duty imposed on goods

imported into Kenya;

c) "Duty" includes any Cess, levy, imposition, tax, or surtax, imposed by any Act;

[EACCMA, 2004] while the repealed Customs and Excise Act Cap 472 defined

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"duty" to include excise duty, import duty, export duty, levy, Cess, imposition,

tax or surtax imposed on goods under this Act;

d) "Export" means to take or cause to be taken out of the Partner States;

e) "Export duties" means Customs duties and other charges having an effect

equivalent to customs duties payable on the exportation of goods;

Categories of Imports
a) Home use: - These are good imported for local consumption within Kenya

b) Transit: - These are goods passing through Kenya to destinations outside Kenya

c) Warehousing: - These are goods imported for storage awaiting further action

d) Use in EPZ: - These are goods imported for the production of goods for export

e) Use in Bonded factory: - These are goods imported for production of goods for

export

f) Temporary Imports: - these are goods imported for repairs or trade fair

Categories of Exports
a) Domestic Exports

b) Temporary Exports

c) Re-Exports

d) Transshipment

a) Domestic Exports: There are five (5) types of exports namely: -

i. Direct exports of home-produced goods using local raw materials i.e. Tea.

ii. Direct exports of home-produced goods incorporating imported raw

materials i.e. Tires & Plastics

iii. Direct export of home-produced goods under Export Promotion

Programme Office (EPPO)

iv. Export of home-produced goods under Essential goods production support

Programme (EGPSP) i.e. Medicaments

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v. Direct Export of ship stores i.e. water and other consumables

b) Temporary Exports: These are exports either to be returned in unaltered state i.e.

for trade fair or repairs i.e. machinery

c) Re-Exports: There are four (4) types of Re-exports namely: -

(i) Ex-Warehouse Exports

(ii) Ex-MUB Exports

(iii) EPZ Exports

(iv) Re-Export after temporary importation for repairs or trade fair

d) Transshipment Cargo: "Transshipment" means the transfer, either directly or

indirectly, of any goods from an aircraft, vehicle or vessel arriving in a Partner

State from a foreign place, to an aircraft, vehicle or vessel, departing to a foreign

destination.

10.3. Prohibitions and Restriction Measures

A. Prohibitions
The East African Customs Community Management Act, 2004 defines "Prohibited

goods,” to mean any goods the importation or exportation of which is prohibited

under the Act or any law for the time being in force in the Partner States.

1) Prohibited Imports

1. False money and counterfeit currency notes and coins and any money not being

of the established standard in weight or fineness.

2. Pornographic materials in all kinds of media, indecent or obscene printed

paintings, books, cards, lithographs or other engravings, and any other

indecent or obscene articles.

3. Matches in the manufacture of which white phosphorous has been employed.

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4. Any article made without proper authority with the Armorial Ensigns or Coat

of Arms of a partner state or having such Ensigns or Arms so closely resembling

them as to be calculated to deceive.

5. Distilled beverages containing essential oils or chemical products, which are

injurious to health, including thijone, star arise, benzoic aldehyde, salicyclic

esters, hyssop and absinthe.

6. Narcotic drugs under international control.

7. Hazardous wastes and their disposal.

8. All soaps and cosmetic products containing mercury.

9. Used tires for light Commercial vehicles and passenger cars.

10. Some Agricultural and Industrial Chemicals.

11. Counterfeit goods of all kinds. (Amended in L.N. EAC/13/2008 dated 30/6/2008)

12. Plastic articles of less than 30 microns for the conveyance or packing of goods.

(Amended in L.N. EAC/7/2007 dated 18/6/2007)

13. Worn underwear garments of all types (Inserted by L.N. EAC/15/2010 Dated

19/06/2010)

2) Prohibited Exports

1. Ivory and Rhino horns and all other products related to endangered species

2. Human Bones

3. Fire arms and ammunitions of all types exported by post

B. Restrictions
The East African Customs Community Management Act, 2004 defines "Restricted

goods" to mean any goods the importation, exportation or transfer of which is

prohibited, save in accordance with any conditions regulating such importation,

exportation, or transfer and any goods the importation, exportation, or transfer of

which is in any way regulated by or under this Act or by any written law for the time

being in force in the Partner State.

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1) Restricted Imports

1. Postal franking machines except and in accordance with the terms of a written

permit granted by a competent authority of the Partner State.

2. Traps capable of killing or capturing any game animal except and in

accordance with the terms of a written permit granted by the Partner State.

3. Unwrought precious metals and precious stones.

4. Arms and ammunition specified under Chapter 93 of the Customs

Nomenclature.

5. Ossein and bones treated with acid.

6. Other bones and horn - cores, unworked defatted, simply prepared (but not cut

to shape) degelatinized, powder and waste of these products.

7. Ivory, elephant unworked or simply prepared but not cut to shape.

8. Teeth, hippopotamus, unworked or simply prepared but not cut to shape.

9. Horn, rhinoceros, unworked or simply prepared but not cut to shape

10. Other ivory unworked or simply prepared but cut to shape.

11. Ivory powder and waste.

12. Tortoise shell, whalebone and whalebone hair, horns, antlers, hoovers, nail,

claws and beaks, unworked or simply prepared but not cut to shape, powder

and waste of these products.

13. Coral and similar materials, unworked or simply prepared but not otherwise

worked shells of molasses, crustaceans or echinoderms and cattle-bone,

unworked or simply prepared but not cut to shape powder and waste thereof.

14. Natural sponges of animal origin.

15. Spent (irradiated) fuel elements (cartridges) of nuclear reactors.

16. Worked ivory and articles of ivory.

17. Bone, tortoise shell, horn, antlers, coral, mother-of pearl and other animal

carving material, and articles of these materials (including articles obtained by

molding).

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18. Ozone Depleting Substances under Montreal Protocol (1987) and the Vienna

Convention (1985).

19. Genetically modified products.

20. Non-indigenous species of fish or egg of progeny.

21. Endangered Species of World Flora and Fauna and their products.

22. Commercial casings (Second hand tires).

23. All psychotropic drugs under international control.

24. Historical artefacts.

25. Goods specified under Chapter 36 of the Customs Nomenclature (for example,

percuassion caps, detonators, signaling flares).

26. Parts of guns and ammunition, of base metal, or similar goods of plastics.

27. Armored fighting vehicles.

28. Telescope sights or other optical devices suitable for use with arms, unless

mounted on a firearm or presented with the firearm on which they are

designed to be mounted.

29. Bows, arrows, fencing foils or toys.

30. Collector’s pieces or antiques of guns and ammunition.

2) Restricted Exports

These are goods the exportation of which is regulated under this Act or of any law for

the time being in force in the Partner States. They include: -

1. Waste and scrap of ferrous cast iron;

2. Timber from any wood grown in the Partner States;

3. Fresh unprocessed fish (Nile Perch and Tilapia);

4. Wood charcoal.

5. Used automobile batteries, lead scrap, crude and refined lead and all forms of

scrap metals (Amended in L.N. EAC/16/2010 dated 29/06/2010)

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10.4. Transit Goods and Bond Securities

The East African Customs Community Management Act, 2004 defines “transit” to

mean the movement of goods imported from a foreign place through the territory of

one or more of the Partner States, to a foreign destination, while Bond securities are

written agreement whereby an importer promises to pay to the commissioner an

amount equal to the duty on goods in case any conditions in the agreement are

breached. Such bonds are used to cover the following: -

a) CB3 - Goods to be moved to a bonded warehouse

b) CB4 - Ex- warehouse for export

c) CB5 - Ex-warehouse ship stores

d) CB6 - Warehoused goods

e) CB7 - Before entry is made for goods

f) CB8 - Goods on transit i.e. from Mombasa port to Uganda

g) CB9 - Indirect transshipment i.e. from Mombasa port to JKIA

h) CB11 - Clearing Agent

i) CB12 - From one customs area to another i.e. From Mombasa port to Embakasi

ICD

j) CB13 - MUB goods

10.5. Purposes of Customs and Excise Duties

Customs & Excise duties are levied on goods with the aim of raising revenue and

protecting the local market.: -

a) Raising Revenue: - Every government requires funding to carry out its operations.

A significant part of this funding is the revenue raised through taxation (including

Customs & Excise duties). Revenue is used to fund both recurrent and capital

expenditure.

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b) Protectionist policy: - The government uses Customs & Excise duties to protect

local industries from competition brought by foreign industries. This involves

taxation of similar goods imported into Kenya or the exemption of local products

from taxation.

c) Economic stability: - The government uses Customs & Excise duties in times of

inflation and deflation. This is used to control expenditure patterns in the economy

i.e. during inflation taxes rates are raised to suppress the purchasing power of

money while in times of deflation tax rates are lowered to increase the purchasing

power of people.

d) Sin Tax: - is excise tax on socially harmful goods. The most commonly taxed goods

are alcohol, cigarettes, and gambling. Excise taxes are collected from the producer

or wholesaler. They drive up the retail price for consumers hence making these

good undesirables due to their high prices.

e) Customs Control: - These are measures put in place to regulate movement of

resources from or into Kenya. Some of the common reasons for control include: -

i. Protection of infant industries

ii. Control of Arms and Ammunitions

iii. Maintenance of food security

iv. Protection of religion and culture

v. Preservation of National heritage

vi. Protection of Human, Animal and Plant Health

10.6. Goods Subject to Customs Control

Section 14 (1) of the East African Customs Community Management Act, 2004 gives

the Commissioner powers to, on application, license any internal container depot for

the deposit of goods subject to Customs control, and the Commissioner may refuse to

issue any such license and may at any time revoke any license which has been issued.

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Section 16 (1) of The East African Customs Community Management Act (EACCMA),

2004 enumerates the following as goods that must be subject to Customs control: -

a) Imported goods (including through Post Office), from the time of importation

until delivery for home consumption or until exportation.

b) Goods under duty drawback from the time of the claim for duty drawback until

exportation;

c) Goods subject to any export duty from the time when the goods are brought to

any port or place for exportation until exportation

d) Goods subject to any restriction on exportation from the time the goods are

brought to any port or place for exportation until exportation;

e) Goods stored in a Customs area pending exportation;

f) Goods on board any aircraft or vessel whilst within any part or place in a

Partner State;

g) Imported goods subject to duty where there is a change of ownership over such

goods from an exempt person to a non-exempt person;

h) Goods which have been declared for or are intended for transfer to another

Partner State;

i) Seized goods.

Inspection:

Goods subject to Customs control, may be examined at any time by a Customs Officer

Liability:

In case of any loss or damage is occasioned to goods subject to Customs control

through willful or negligence the Commissioner or an officer, action is taken against

the Commissioner or such officer.

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10.7. Import Declaration Form, Pre-Shipment Inspection,

Clean Report of Findings

REFER TO PARAGRAPH 9.1

10.8. Excisable Goods and Services

Definitions
The Excise Duty Act, 2015, enacted to provide for charge, assessment, collection, and

administration of excise duty defines the following terminologies: -

(a) “Ex-factory selling price” shall be: -

a) If the excisable goods are sold by the manufacturer, other than to a

purchaser in an arm’s length transaction, the price payable by the

purchaser; or

b) In any other case, the open market value of the goods at the time of

removal from the manufacturer’s factory.

(b) “Excisable goods” means the goods specified in Part I of the First Schedule;

(c) “Excisable services” means the services specified in Part II of the First Schedule;

(d) “Excise control” provides that, Excisable goods stored in the factory of a

licensed manufacturer shall be subject to the control of the Commissioner.

(e) “Excise duty” means t h e excise duty imposed under the Act;

(f) “Exempt goods” means goods specified in the Second Schedule;

(g) “Export” means to take or cause to be taken from Kenya to a foreign country

or to an export processing zone;

(h) “Import” means to bring or cause goods to be brought into Kenya from a

foreign country or an export processing zone;

(i) “Licensed manufacturer” means a person licensed under section 17 to

manufacture excisable goods.

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Excisable Goods and Rates

The following are the goods specified in Part I of the First Schedule which are subject

to excise duty with applicable rates: -

1) Condensates per 1000l @ 20degC Kshs. 6225.00

2) Motor Spirit (gasoline) regular per 1000l @ 20degC Kshs. 19505.00

3) Motor Spirit (gasoline) premium per 1000l @ 20degC Kshs. 19895.00

4) Aviation Spirit per 1000l @ 20degC Kshs. 19895.00

5) Spirit type Jet Fuel per 1000l @ 20degC Kshs. 19895.00

6) Special boiling point spirit and white spirit per 1000l @ 20degC Kshs. 8500.00

7) Other light oils and preparations Per 1000l @ 20degC Kshs. 8500.00

8) Partly refined (including topped crude) per 1000l @ 20degC Kshs. 1450.00

9) Kerosene type Jet Fuel Per 1000l @ 20degC Kshs. 5755.00

10) Other medium oils and preparations per 1000l @ 20degC Kshs. 5,300.00

11) Gas oil (automotive, light, amber for high speed engines) per 1000l @ 20degC Kshs.

10305.00

12) Diesel oil (industrial heavy, black, for low speed marine and stationery engines)

per 1000l @ 20degC Kshs. 3700.00

13) Other gas oils per 1000l @ 20degC Kshs. 6300.00

14) Residual fuel oils (marine, furnace and similar fuel oils) of a Kinematic viscosity of

125 centistokes per 1000l @ 20degC Kshs. 300.00

15) Residual fuel oils (marine, furnace and similar fuel oils) of a Kinematic viscosity of

180 centistokes Per 1000l @ 20degC Kshs. 600.00

16) Residual fuel oils (marine, furnace and similar fuel oils) of a Kinematic viscosity of

280 centistokes per 1000l @ 20degC Kshs. 600.00

17) Other residual fuels oils per 1000l @ 20degC Kshs. 600.00

18) Fruit juices (including grape must), and vegetable juices, unfermented and not

containing added spirit, whether or not containing added sugar or other

sweetening matter Kshs. 10 per liter

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19) Food supplements 10%

20) Waters and other non-alcoholic beverages not including fruit or vegetable juices

Kshs. 5 per liter

21) Beer, Cider, Perry, Mead, Opaque beer and mixtures of fermented beverages with

nonalcoholic beverages and spirituous beverages of alcoholic strength not

exceeding 10% Kshs. 100 per liter

22) Powdered beer Kshs. 100 per kg

23) Wines including fortified wines, and other alcoholic beverages obtained by

fermentation of fruits Kshs. 150 per liter

24) Spirits of un-denatured ethyl alcohol; spirits liqueurs and other spirituous

beverages of alcoholic strength exceeding 10% Kshs. 175 per liter

25) Cigars, cheroots, cigarillos, containing tobacco or tobacco substitutes Kshs. 10000

per kg

26) Electronic cigarettes Kshs. 3000 per unit

27) Cartridge for use in electronic cigarettes Kshs. 2000 per unit

28) Cigarettes containing tobacco or tobacco substitutes Kshs. 2500 per mille

29) Other manufactured tobacco and manufactured tobacco substitutes;

“homogenous” and “reconstituted tobacco”; tobacco extracts and essences Kshs.

7000 per kg

30) Motor vehicles of tariff heading 87.02, 87.03 and 87.04

(a) Less than 3 years old from the date of first registration Kshs 150,000 per unit

(b) Over 3 years old from the date of first registration Kshs. 200,000 per unit

31) Motor cycles of tariff 87.11 other than motorcycle ambulances Kshs. 10,000 per unit

32) Plastic shopping bags Kshs. 120 per kg

Excisable Services and Rates

The following are the services specified in Part II of the First Schedule which are

subject to excise duty with applicable rates: -

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1) Mobile cellular phone services, at the rate of 10% of their excisable value

2) Other wireless telephone services, At the rate of 10% of their excisable value

3) Excise duty on fees charged for money transfer services by cellular phone service

providers, banks, money transfers agencies and other financial service providers

shall be 10% of their excisable value

4) Excise duty on other fees charged by financial institutions, 10% of the excisable value

10.9. Application for Excise Duty (Licensing)

Activities Requiring a Licence

No person can undertake any of the following activities without a license from the

Commissioner (Anyone who intends to deal is such goods must apply for a licence): -

(a) Manufacture excisable goods in Kenya;

(b) Import into Kenya excisable goods requiring an excise stamp;

(c) Supply excisable services;

(d) Use spirit to manufacture goods in Kenya that are not excisable goods; or

(e) Any other activity in Kenya which, may impose a requirement for a licence.

Obligations of Licensed Person

1) Must display in a conspicuous place: -

a. the original licence at the principal place of business; and

b. in case of excisable services, a certified copy of the licence at every other

place of business.

2) Must notify the Commissioner, in writing: -

a. if the licensed person ceases to carry on the licenced activity;

b. it there is any change in the name, address, place of business, ownership,

constitution, or nature of the principal activity or activities carried on by the

licensed person;

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c. of any closure of operations on a temporary basis; or

d. if, the case of a licensed manufacturer, there is any change in the factory

specified in the licence, or the plant and equipment

NB: The Commissioner reserves the right of suspension or cancellation of the Excise

Licence

10.10. Use of Excise Stamps

An excise stamp is a type of revenue stamp affixed to some excisable goods to

indicate that the required excise tax has been paid by the manufacturer. They

are securities printed by the Kenya Revenue Authority. The Cabinet Secretary,

National Treasury, has the authority to specify: -

(a) the excisable goods to which excise stamps is affixed;

(b) the systems for management of excise stamps and excisable goods, and

(c) the place and time of affixing excise stamps.

NB: It is an offence under the act to fail to comply to such directions

The Excise Duty (Excisable Goods Management System) Regulations, 2017 recently

published in the Kenya Gazette Supplement No. 44 under Legal Notice No. 48

provides that every package of excisable goods, except motor vehicles, manufactured

in or imported into Kenya, are required to be affixed with an excise stamp. The

purpose of this is to:

• Deter counterfeiting;

• Facilitate tracking of the stamps and excisable goods along the supply chain;

• Enable accounting for the production of excisable goods manufactured or

imported; and

• Facilitate any persons in the supply chain to authenticate the stamps and

excisable goods.

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Exempt Goods from Excise Stamp Charges

The regulations exempt the following excisable goods from the requirement of excise

stamps: -

• Excisable goods manufactured for export, the Kenya Defence Forces, the

National Police Service or delivered to a duty-free shop;

• Excisable goods imported or purchased from a duty-free shop by privileged

persons or institutions listed in the Second Schedule to the Act; and

• Excisable goods imported into Kenya as samples which shall have been

exempted from import duty under the Fifth Schedule to the East African

Community Customs Management Act, 2004.

10.11. Offences and Penalties

1) undertaking an activity requiring a licence, without being licensed attracts a

penalty equal to double the excise duty that would have been.

2) A licensed manufacturer who manufactures excisable goods in premises that is not

specified on the manufacturer’s licence is liable to a penalty equal to double the

excise duty payable on those goods.

3) If a licensed manufacturer removes excisable goods from excise control, the

manufacturer shall be liable to pay a penalty equal to double the excise duty

payable on those goods.

NB: Interest payable under, The Tax Procedures Act, 2015 apply to penalties

imposed here.

Other Offences
1) If anyone: -

(a) removes excisable goods from excise control in contravention of section 24 (3) (b);

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(b) enters any place where excisable goods are stored under excise control without

authorisation; or

(c) is involved in the unauthorised removal, alteration, or interference with excisable

goods under excise control.

2) Any person who buys, or, without proper authority, receives or has in the person’s

possession, any excisable goods that have been manufactured contrary to the

provisions of this Act, or which have been removed from the place where they

ought to have been charged with excise duty before such duty has been charged

and either paid or secured.

These offences attract a fine not exceeding five million shillings or to imprisonment

for a term not exceeding three years, or to both a fine and imprisonment.

10.12. Excisable Goods Management System

The National Treasury published Excise Duty regulations, specifically, “Excise Duty

Remissions Regulation, 2017” and “Excisable Goods Management Regulations

(EGMS), 2017” on 7th April 2017.

The regulations govern the use of excise stamps and are made pursuant to Section 28

of the Excise Duty Act, 2015. The coming into force of the new regulations revoked

the previous Excisable Goods Management System Regulations, 2013.

Kenya Revenue Authority (KRA) since then, has been implementing new excise duty

stamps through the Excise Goods Management System (EGMS) for beer, mineral

water, juices and soft drinks.

The new EGMS system is designed such that details of each excise stamp appended

on a product at the point of manufacturing are captured by the system at the time of

printing and then tracked along the supply chain right from the production facility.

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Manner of Affixing Excise Stamps

Excise stamps are expected to be affixed on excisable goods in the following manner

specified by the Commissioner:

• In case of locally manufactured goods, at the production facility immediately

after packaging; or

• In the case of imported goods, at a place approved by the Commissioner within

five days of the clearance for importation of the goods for home use.

Excise stamps on imported excisable goods to be affixed at the production facility in

the exporting country may be allowed in accordance with such conditions as the

Commissioner might specify. In addition, the Commissioner can upon the application

by the manufacturer or importer, permit digital stamps to be printed by the System

on each package and in a visible place with indelible security ink to enable the

authentication of, tracking and tracing of, and production accounting for excisable

goods.

Kenya Revenue Authority (KRA) has deferred the implementation of Excisable

Goods Management System (EGMS) on bottled water and juice that was to

commence on 1st August 2018 to a date to be announced later.

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