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TAXATION LAW

Definition of Taxation
What is taxation?
It’s a means by which the government finances the expenditure by imposing charges
on citizens and corporate entities. Taxation is important to any government, as it is
the only source of self-income to governments. Tax is their only guaranteed income
and under their country. The richer one is the lower ones income could be in this country.
Income from business is taxed at the level of 12% corporate tax while we tax 30% in
income tax. If the government can get people to earn more, they can lower the level
of taxation. The fundamental purpose of taxation is to raise the revenue necessary to
provide government services.
THE PURPOSE OF TAXATION
The government has all kinds of taxes but the purpose of taxation among other things
to:-
1. Finance public expenditure;
2. Distribute income; - if the income is progressive, it can be distributed by taxing
those who have and giving those who do not have.
3. It is supposed to enhance government policies one of the policies being to encourage
positive behaviour.
THE RATIONALE USED TO IMPOSE TAX
The government uses two rationales to impose taxes
1. Benefit Rationale- the government is a shopkeeper, and a person pays for the
service, the government taxes and provides services security, health,
education etc. The benefit rationale cannot be achieved 100% although we
do expect at least 75% below that people ought to complain.
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2. Ability Rationale – the government taxes people on the basis of their ability
to pay. Where one gets the money, the government has no interest. In Kenya
it seems the government is only using the ability rationale and not the benefit
rationale.
Tax is compulsory; It is a compulsory charge by the state.
CLASSIFICATION OR TYPES OF TAXES
a) In Kenya taxes can be classified using the following basis
I. Rates of tax-this is the percentage being taxed in the case of the tax,
examples include the following- progressive tax, proportional Tax,
Regressive tax and Degressive tax
II. Base of Tax-This is based form is source or the source of the tax.
III. Impact of Tax- In this scenario this taxes are either Direct or Indirect.

RATES OF TAX
Taxes can be classified in 4 categories depending on their impact on the people
1. Regressive
2. Proportional
3. Progressive
4. Degressive

Progressive – where the marginal rate of the tax rises with the income then it is
progressive.
Proportional – if different blocks are taxed at different levels. Both progressive and
proportional are equitable although progressive is more equitable than proportional.
Corporate tax is a proportional tax, taxes the same from everyone.
Regressive – tax increases with ones fall of income. It requires that low and middle-
income families pay a higher share of their income in taxes than upper income families.
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Degressive Tax- occurs people with higher income do not make a due contribution
or when the burden imposed to them is relatively less

BASE OF TAX
A tax base of a given tax is the source of revenue and it is that source that is taxable.
Every taxation has to have a source;
1. Income Tax: the tax base is income
2. Property Tax: the tax base is property
3. Sales tax: the tax base is the sale price of the goods sold
4. Export tax: the tax base is the value of goods exported
5. Import tax: is the value of goods imported

Agriculture is our main source of income but it is very heavily taxed. In the early stages
of our development the tax structure was in itself a reflection of a tax base. If there
was no basis for direct taxation there was more indirect taxation. At an advanced stage
(when we become rich) the problems of revenue collections shift from looking for tax
bases to devising means of collecting and yielding tax more effectively. Tax is not
increased but concentration is on collection.
The income tax lays down certain rules.
(a) Ascertainment of income – the qualifying conditions for personal allowances
rules are laid down,
(b) The same rules decide which allowances qualify, whether singles relief,
medical, personal etc.
(c) The rules provide for the Procedure of assessment such as self assessment –
this is one way where people can avoid tax by assessing themselves on the
lower side, avoidance is not illegal evasion is illegal. When one leaves the
procedure of assessment to the tax collector they pay more and so the rules
must provide for assessments.
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(d) The rules provide for penalties. Income tax penalties can be demobilizing.
Under the Income Tax Act the High Court and the Magistrate courts have
no original jurisdiction on tax issues, the original jurisdiction is with the tax
department and only facts of law are appealable. The tax department has
denied the courts original jurisdiction on tax matters.

In addition to being revenue device taxation can be used for more, today we use it
as a revenue device. We use tax to encourage or discourage certain kinds of
behaviour, we might tax cigarettes more to discourage people from smoking, and
taxes are also used to distribute income. In Kenya we tax because we need the
revenue. In the long run tax can be used not only for tax collection but also for
other activities e.g. to encourage education, to encourage investments and so on.
IMPACT OF TAXES
(a) Impact of Tax

This means the person who the tax is imposed on has to put up with the burden of the
tax. Taxes here are divided into
(1)Direct Tax
(2) Indirect Tax
Direct Tax
Direct tax is tax payable by the person on whom it is legally imposed; John Stuart Mill
defines direct tax as tax that is demanded from the very person who is intended or
desired as one which is demanded from one person in the exception and intention that
he shall indemnify himself at the expense of the other. Taxes such as income tax,
corporate tax, wealth tax, gift tax, death duties are direct taxes.
MERITS AND DEMERITS OF DIRECT TAXES
Equitable
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Direct taxes operate on the principle of equity. This direct tax is progressive in nature.
In such that the rate of tax taxable on an individual is based on the income of the
person, Such that with the increase in ones income, the rate of the amount to be taxable
increases. For example A earns 20,000 on a monthly basis and B earns Kshs 50,000 on
a monthly basis, this means that B will be taxed more as he earns more. So direct income
tends to tax the rich in a society more than the poor, consequently the poor are not
affected by such taxes.
Certainty
Direct tax mirrors the canon of certainty where taxpayers should not be subject to the
unpredictability and discretion of the tax officials as this breeds a corrupt tax
administration. The tax payer is equipped with the knowledge and know -how of the
time and manner of tax payment; in addition the government knows the amount of
money that will be remitted during tax payment.
Economical
Direct tax collection satisfies the canon of economy, as this cannon recommends that
the cost of collection tax should be the minimum possible both to the government and
the taxpayer. The cost of collecting direct tax is low, for example salary that is collected
from salaried persons, is deducted directly from the salaried persons.
Simple
Direct tax is easy to understand taxation can be made complex by inefficiency so
simplicity and efficiency go hand in hand. It should be clear and understandable to the
taxpayer. Therefore; the tax system should not be too complicated. It should be easy to
understand, administer and not breed problems of interpretation and legal disputes.
Desirable
Direct tax are payable by persons or firms who come under the jurisdiction of income
or corporate tax.
Reduces inequalities
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This tax tends to reduce the gap between the rich and the poor, as the rich are taxed
heavily through wealth tax, expenditure tax, access profit tax, gift tax.
Civic consciousness
Direct taxes are conscious about tax remitters. Thus checks are put in place to prevent
the wastage of public expenditure

Demerits of Direct Tax

 Tax payers have to pay them directly from their salaries
 Inconvenient a bit complicated so many procedures need to be followed and
complied with. At times some of the details left incomplete cause of failure to
understand.
 Arbitrary the taxation authority are the ones to fix the rates of taxation
 Not imposed to all, low income earners are not affected by this tax, do not
contribute
 Discourage saving and investment, as if the income increases they have to pay
more taxes
 Discourage production. Corporate tax discourage firms that produce essential
goods

INDIRECT TAX

Indirect tax is that tax under which the impact of the tax is one person e.g. VAT,
Custom duty, sales taxes. VAT is a consumption tax (indirect Tax) charged on:--Local
Sales and Importation of goods and services that is taxable. Indirect tax is imposed on
one person, but pair partly or wholly to another.

Advantages

Convenient
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Indirect taxes are less burdensome they are paid only when a commodity or a service is
bought, they are paid in small amounts and not lump some. They are included in prices
of commodities; buyers do not feel the burden of these taxes.
Wide coverage
Indirect tax is levied on peoples of all walks of life. They are generally levied on
necessities or luxuries. These taxes are levied on the commodities that people buy
Elastic
The government can reduce the rate of excise duty or custom duty according to the
requirements. But care should be taken not to impose high taxes on goods that are
frequently used by the poor.
Economical
Indirect taxes actually cost less when it comes to the collection of these taxes. This is
because its producers and sellers who actually pay these taxes to the government.
Diversity
Indirect taxes are actually levied on a variety of commodities. This actually means even
if the demand of a commodity decrease the government is guaranteed on this tax as its
taxable on the goods on demand.
Less evasion
Less evasion in the sense that they are included in the prices of the commodities The
only way a consumer can evade this tax or avoid this tax is through refusing to purchase
a good or commodity.
Check consumption of harmful goods
Indirect tax actually checks on the consumption of harmful commodities in such as
those items such as alcohol, cigarettes are highly taxed. Heavy duties are imposed on
such commodities. This actually deters people from the purchase of these commodities.
This is also substantial revenue to the government.
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Demerits of Indirect Taxes

Uncertain revenue
That means the revenue cannot be accurately calculated by the government cause its
based on the willingness of the consumer actually to purchase the commodity. So when
a price of a commodity is high due to heavy levies it actually deters the consumer form
purchasing the commodity.
Regressive in Nature
Indirect taxes are imposed on necessities, this actually affect the poor as they have to
purchase this goods. Such that the poor have to pay indirect taxes whether they like it
or not
Uneconomical
The cost of collection is high, state has to check the accounts of st ocks of producers,
wholesales to see if they are paying taxes
More expensive as staff required; to check whether sellers and producers are remitting
their taxes through going through their books of account
Bad effect on production and employment
Indirect taxes affect the production of a commodity and even employment. When
prices of goods rise with the levy of tax that means demand falls and if demand falls.
Employment fall where the producer is supposed to attain profit from the commodity
that he sells so if you have less people demanding for the commodity that means the
market is less for it consequently you will employ less people if demand of the good is
not much....where will you get the money to pay your workers from?
Where a price of commodity rises with levy of tax demand reduces
Feed inflation
They tend to raise the price of the commodity, when goods are levied highly that means
the cost of survival for a person increase there is that tendency of you demanding
increase of wages to fit in the high costs of life.
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Lack of civic consciousness

People buy commodities without being informed that they are paying taxes to the
government

In Kenya the Income Tax Department administers various direct taxes, which
have different rates: Tax is collected in the following methods:

a) Pay As You Earn (PAYE) SYTEM

PAYE is a method of collecting tax at source from individuals in gainful

employment. The employer deduct a certain amount of tax from his / her employee's
salary or wages on each payday then remit the tax to the Authority. This relieves the
employee from paying taxes at the end of the year and shifts the responsibility to the
employers.

Every individual who receives income is granted a tax credit or a tax relief from the
Authority; this is known as Personal Relief. Insurance relief and mortgage relief are
also available for eligible persons. The total tax credit is spread evenly during the
charge year. At the end of the year, an individual will submit his self-assessment on
total income received from various sources. Should the tax credit be lower than
actual tax charged during the year, the balance of tax due will be payable.

b) Corporation Tax

Corporation tax is a form of income tax that is levied on companies. Resident

companies are taxable at a rate of 30% w.e.f year of income 2000 while non - resident
companies are taxable at a rate of 37.5%.w.e.f year of income 2000.
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b) Withholding Tax

Withholding taxes are deducted at source from the following sources of

income: Interest, dividends, royalties, management or professional fees,
commissions, pension or retirement annuity, rent, appearance or performance
fees for entertaining, sporting or diverting an audience.

d) Advance Tax

Advance tax is applicable to Matatus and other Public Service Vehicles. It is not a
final tax, but a tax partly paid in advance before a public service vehicle or a
commercial vehicle is registered or licensed.

The current rates are:

 For vans, pickups, trucks and lorries Kshs.1, 500 per ton of load capacity per
year or Kshs.2, 400 whichever is higher.
 For saloons, station wagons, mini-buses, buses and coaches, Kshs.60 per
passenger capacity per month or Kshs.2, 400 whichever is higher

OTHER TAXES
CUSTOMS AND EXCISE DUTY
These duties are levied on goods at the boundaries of any country. Before are allowed
to progress in any country this taxes must be paid.
Customs duty may be import duty or export duty. The main purposes of customs
duties are as follows:
1. To raise revenue for the goverment
2. To discourage the import or export of some specific commodities.
3. To give the protection to the domestic industries.
4. To restrict the import of those goods which are harmful for human health.
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EXCISE DUTY
This is imposed on the production of various commodities in the country. For
example the taxes charged on the production of wines, cigarettes, clothes etc.
Are known as excise duties
The main purpose of excise duty is the following:-
I. To raise revenue for the government
II. To discourage the harmful production and use of those goods which are
harmful for human health
III. To control the production of some specific commodities.

Excise goods on necessities give the government a lot of revenue. Such duties are
regressive on low income earners.
Value Added Tax
VAT is imposed is in accordance to the Value Added Tax Act of 1989. The
commissioner of value added tax is responsible for the effective administration of the
VAT department.
Value added tax is charged at a flat low rate. The main advantage of VAT is that it has
an extremely broad base. Therefore it is able to yield substantial revenue at low costs.
Value added tax is calculated form the gross income of the business less purchase from
other firms.
EFFECT OF TAXATION
Taxation has effect on production; Taxation on production is divided into three where
the effects are felt on-
1. The ability to work and save
2. On the desire to work and save
3. On the composition and pattern of production.
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CANON/PRINCIPLES OF TAXATION
Cost of complying with the tax laws should be minimal. Administrative simplicity,
the tax should be easy and inexpensive to administer the cost is not very high in Kenya
although it could be lower. Communication system should be simplest to lower the
cost of tax collection.
Canon of Equality or Equity ( Fairness)
This canon upholds economic justice. fairness, the tax system should be fair in its
treatment of different individuals. It affirms that the richer should pay more taxes
because state protection and allowed for the earning and enjoying of extra income.
Cannon of certainty
Taxpayers should not be subjects to the unpredictability and discretion of the tax
officials is that breeds a corrupt tax administration.
Cannon of convenience
The mode and timings of tax payment should be, as far as possible, expedient to the
‘taxpayer’.
Cannon of economy
This cannon recommends that the cost of collection tax should be the minimum
possible both to the government and the taxpayer.

Cannon of productivity
Also called the cannon of fiscal adequacy, the tax system should be able to gain enough
revenue for the Treasury and government is such that there should be no need to resort
to deficit financing.

Cannon of buoyancy
The tax revenue should have an inbuilt tendency increased along with the increasing
national income even if the rates and coverage taxes are not revised.
Cannon of flexibility
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The tax system should respond easily to changes in economic conditions. It should be
possible for authorities without undue delay, to revise the tax structure, both with
respect to its coverage and rates, to suit the changing requirements of the economy and
of the Treasury.
Simplicity and efficiency
Are principles of taxation, taxpayers should be able to understand taxation. It is meant
to be governed by simplicity so that people can understand it. Taxation can be made
complex by inefficiency so simplicity and efficiency go hand in hand. It should be clear
and understandable to the taxpayer. Therefore; the tax system should not be too
complicated. It should be easy to understand, administer and not breed problems of
interpretation and legal disputes.
Cannon of diversity
Tax revenue should not depend upon too few sources of public income thus the tax
should allow for efficient allocation of resources

Accountability: - the tax burden should be easily ascertainable and be politically

tailored to what society considers desirable. The collector should be accountable to the
people for the tax they have collected. The collector should be accountable to the
taxpayer. In Kenya the government has never been accountable to the taxpayer and
this is because of the corruption. This is one of the principles that is furthest from
reality in this country. May be in future when the people are informed on how their
money is being mismanaged, then they will do something about it.

PRINCIPLE OF CERTAINTY:
There has to be certainty, it has to be understood to be the same by every taxpayer
and every Minister. Taxpayer must know what they are entitled to pay. It is
supposed to be extensively and adequately publicised and every Finance Act
should be publicised in simple language, clearly visible and nothing should be hidden
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from the taxpayer. Complicated tax rules make the tax system difficult for citizens to
understand. Complexity also makes it harder for governments to monitor and enforce
tax collection.
PRINCIPLE OF EQUITY:
All taxes should treat all taxpayers the same. People in similar situations should be
treated the same in terms of rate, the amount, collection etc. The interpretation of who
is a taxpayer should be the same. They should be charged in accordance with their
economic status and their ability to pay. Being treated equally, the terms of tax paid
and the achievement from those taxes should be equal. No one should be allowed to
avoid tax while enjoying the benefits that are being taxed for those services.
PRINCIPLE OF NEUTRALITY:
The market economy should not be interfered with. There should be no practical
interference with the market economy. Taxes should not interfere with market forces.
Business communities are supposed to bear minimum impact on the spending of tax.
The lower the tax the better for the business community In the Kenya situation our tax
system interferes a lot with the business community and is therefore not neutral. In
Africa, Botswana and South Africa may be the only countries following the principle of
neutrality. VAT is not a neutral tax because it interferes with business; it has been
likened to an expenditure tax.
In Kenya payment of tax is compulsory, where all persons are required by law to submit
their returns, penalties is chargeable by the due date, interest is chargeable on unpaid
tax.

THE KENYA REVENUE AUTHORITY

The Kenya Revenue Authority was established by an Act of parliament on July 1
1995 Cap 469 for the purpose of enhancing the mobilisation of government
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revenue, while providing effective tax administration and sustainability in revenue

collection. The board and management of KRA have since its inception spent time
and resources setting up systems, procedures and the adoption of new strategies
aimed at enhancing the operational efficiency of the Authority’s’ process.
In particular the functions of the authority are:-
 To asses, collect and account for all revenue in accordance with the written
laws and specified provisions of the written laws.
 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

To perform such functions in relation to revenue as the minister may direct.

INCOME TAX IN KENYA
The Kenya income tax was enacted in 1973, and its date of commencement was
January 1974. It replaced the East African Income Tax Management Act, which had
served the countries of the East African community, and which became outdated
following the break up of the community.
Is a direct tax and is imposed on Business income, Employment income, including
benefits, Rent income, Pensions, and investment income among others.
What is tax the income tax act of Kenya has no definition of the term Tax, however
Tax is defined as
Income tax is chargeable on a yearly basis on all persons, whether a Kenyan
resident or a non resident. 1Income tax is charged also on business, where a
business is carried by a resident person partly within and partly outside Kenya,
the whole of the profit from that business is deemed to have accrued or derived
form Kenya.2

1 Section 3(1) of the Income Tax

2 Section 4(a)
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Kenyan residents are taxed on their worldwide employment income while non -
residents are taxed on income from employment with a Kenyan resident employer or
a non resident employer with a permanent establishment in Kenya. 3
So under the income Act of Kenya, persons liable to tax are the following:-
1. Persons who are residents in Kenya- whether they are Kenyan Citizens or not.
2. All persons not resident in Kenya but derive income from any property, trade,
profession, vocation or employment in Kenya.

 Neverthless,Income tax is a direct tax.

 It is direct because both its impact and incidences mainly fall on the same person.
 The impact is on the person who pays the tax to the income tax people or to the
authorities while the incidence is on the one who bears the burden. When one
is an employee he is the one who pays the income tax to the income tax person
although the employer sends it there. The burden of any direct tax falls on any
person who makes that income.
 Gifts are not income and therefore not taxable. Gift is not a recognised source
and is not even defined.
 Income tax is generally progressive to a certain level at least in Kenya it is up to
30%. The marginal rule increases with the income. If one earns an income of
300,000/- or 300,000,000/- you still pay 30%. It ought to be progressive all the
way but it is not certain that we can afford that. This progressiveness is not
necessarily good as the higher the income, the less tax one pays.
 The base of our income tax is what we call income. Income for the purposes of
our law is not clear; it’s not defined in the Income Tax Act.

3 Section 5(1)(a) &(b) income tax Act

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 Section 3 of the Income Tax Act is the definition section but does not define
income. If there is a dispute between what is income between one and the
income tax, it would be because income tax is payable on income. They don’t
define income because sources of income keep on increasing.
 The Act however defines total income – “total income in relation to a person
is the aggregate amount of his income. Other than income exempt from
tax under Part III of the Act.”
 Part III of the Act deals with exemption of taxes. The law imposes a tax
under Part II of the Act Section 3 of the Act creates a Section Charge of Tax and
it says that “subject to and in accordance with this Act a tax to be known as the
Income Tax shall be taxed on all income of a resident…Total income is
chargeable to tax under the law if it is not exempt under Part III.
 Part IV deals with ascertainment of total income. The law presumes that we
know what income is. It is also a legal assumption that one is supposed to know
the law is and this is an irrebutable presumption of the law.
 Subject to income, income tax is income of a person. According to Section 3 it
is income of a person and it uses the term sources of income, it does not
define income. Income is not necessarily source and therefore not necessarily
taxable. Income must be recognised as a source before it can be taxed
 Section 3 definitions – it is based on sources of income state;
 3 (2) Gains of profits from business, employment, services rendered and rent or rights granted
to other persons for rent, dividends and interest, pension, annuity any amount which is deemed
to be income of a person under this Act or under any other Act. Gains from petroleum
companies and petroleum service sub-contractors
 3(2)(f) gains arising out of disposal of depreciable assets it is assumed that any shares can
depreciate in prices so that is why all shares are classified as depreciable interest, so when one
sells that stock, that is considered income from which 30% income tax is payable. The tax is
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chargeable on a person, not every person pays income tax, and there are specific persons who pay
income tax they are considered on the basis of residency not citizenship.
 Any income which is earned locally or outside the country by a resident is taxable. Therefore
to be taxed one has to be a person and a resident.

THOSE CHARGEABLE FOR TAX

Individuals
Kenya resident individuals are liable to Income on their total income form Kenya and
their employment income abroad.
Non –residents are liable to income tax form their income in Kenya
Companies
Kenya resident companies are liable to pay income Tax on their profits at specific a
rate which is slower than the rate of tax fixed in the case of non- resident companies.
Non –resident companies with branches in Kenya are liable to pay income tax
comparatively at a higher rate.
Income chargeable to tax
1. Business profits
2. Income from employment or services rendered
3. Income from use or occupation of any property
4. Dividends or interest
5. A pension , charge or annuity
6. Any amount deemed to be income of any person under this Act

RESIDENTS
Persons-persons actually embrace individuals and artificial persons. Artificial persons
are incorporated and incorporates companies, clubs estates etc
Income tax is liable to persons
1. All persons residents in Kenya whether or not they are not Kenyan citizens
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2. All persons not resident in Kenya but derive income form any property, trade,
profession, vocation or employment in Kenya.
 Residence is a matter of physical presence. A person can only can have only
one domicile but he may be a resident in several countries at the same time.
 An individual is considered resident if:
a) He has a permanent home in Kenya and was present in Kenya in any particular
year.
b) He has no permanent home in Kenya but he was present in Kenya
1. For 183 days in the year of income
2. For an average of 122 days or more in the year of income
 A company is considered to be resident for any year of income if
I. It is incorporated in Kenya
II. The management and control was exercised in Kenya
III. It has been declared resident by notice in the Gazette by the minister
 Resident helps us determine who is reliable for tax payment.

Business Income Taxed

 Generally expenses are allowed only if incurred wholly and exclusively in
the production of income.
 Example of expenses specifically allowed by the Income Act include:-
1. Bad debts written off
2. Capital allowance
3. Legal expenses and stamp duties in connection with acquisition of a lease not
exceeding 99 years.
4. Capital allowance
5. Legal expenses and stamp duties in connection with acquisition of a lease not
exceeding 99 years
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6. Expense incurred prior to the commencement of business where these would

have been deductible if incurred after the date of commencement.
7. Capital expenditure incurred in the prevention of soil erosion by a farmer
8. Cost of structural alterations to maintain rent
9. Loss value of tools and utensils
10. Agricultural and land development
11. Scientific research
 Interest paid on borrowing made to generate investment income but not
exceeding the amount of investment income earned. Investment income means
dividends and interest but excludes qualifying dividends and qualifying interest.
 Mortgage interest not exceeding Kshs 150,000on borrowing in respect of
owner- occupied houses
 Legal and other costs incurred in issuing shares or debentures on a securities
exchange
 Club subscription paid by an employer on behalf of an employee, with effect
form 1st January 2006
 Cash donations to charitable organisation subject to the income( Charitable
Donations) Regulations 2007
 Expenditure on the construction of a public school hospital road of social
infrastructure upon approval of the minister 4

Disallowable Expenses
 Capital costs and losses
 Personal expenses- entertainment, hotel and restaurant expenses except for
specified exclusions, vacation expenses except for air fares on home leave

4 Section 15(2), 15(3)(b)

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expatriates, employees’ dependants or relatives or relatives’ educational fees. If

not taxes on the employee
 Income Tax of a similar nature paid on income
 Pension payments, annuity premiums and contribution to pensions and
provident schemes and funds for those allowed under Section 52
 Expenses of non-resident persons relating to certain types of income
 Interests payments by a non- resident controlled company to the extent that
loans made to that company exceed the greater of three times the sum of paid
up capital and revenue reserve or the sum of all loans acquired prior to 1988 and
still out standing

 Foreign exchange gains and lossesRealised foreign exchange gains or losses

resulting form Kenyan business will be treated as trading receipts or deductible
expenses. Such gains or losses will be calculated by reference to the exchange
rate ruling or date on which the foreign asset or liability is established.

 Taxation of petroleum companies and subcontractors The ninth schedules

make provisions for the taxation of companies involved in petroleum
exploration and production in Kenya. Non residents subcontractors will be
deemed to have made a taxable profit of 15% of the sums paid to them by a
petroleum company. The tax is deducted at the non- resident ate when payment
is made

In general payment of the following by a resident person or a person having

permanent establishment in Kenya is deemed to constitute income accrued in or
derived form Kenya
 Management, professional or training fees
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 Royalties
 Interest
 Rents
 Payments to sports men or entertainers. 5

SUBMISSION OF RETURNS
Returns are required of a person’s total income. Where a person makes up annual
accounts, then income for the year ending on the accounting date will constitute the
income for the year in which the accounting date falls.
The commissioner has power to make adjustments in respect of accounting period for
other twelve months. The year of income for income which is not subject of accounts
is the calendar year.
Two types of returns are used
- Self assessment
- Compensation Tax

SELF ASSEMENT RETURNS

Every person is chargeable to tax must submit returns of income incorporating self
assessment of tax on such income
Persons other than individuals are required for accounting periods commencing on or
after 1 January 1992, to submit a self assessment return not later than the last day for
the six months following the end of their accounting period
Individual chargeable to tax for income commencing with the year 1992 are required
by the act to submit a self assessment return not later than 30 June of the following year
A married woman may opt to file separate self assessment from the husband; whatever
her source of income with effect from 1 January 2006

5 Section 10 of income tax Act

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The commissioner may respond to the self assessment return in one of the following
ways:
a) Accepting the return
B) Connecting computational errors in the return
c) Instituting an in-depth examination

COMPENSATION TAX RETURN

Every company liable to tax shall submit a return of any compensation tax payable by
it.
The return will be submitted with he company’s self assessment return, and will also
constitute an assessment of compensation tax payable.
What is taxable income in Employment
Taxable income from employment is widely defined and includes wages, salary
commission, bonus and allowances. Travelling, entertainment and other similar
allowances are taxable unless they are purely a reimbursement of expenses incurred in
the production of income.
The first 2, 000 per day received by an employee as reimbursement of subsistence,
travelling, entertainment or to her allowances whilst on official duties outside the
work place is not taxable as a benefit of employment. 6
Benefits in kind form employment income are taxable where their aggregate value
exceeds Kshs 36, 000 p.a 7
NON-RESIDENTS
 The income Tax Act includes provisions requiring the profits of business
carried in Kenya by non- resident persons, which derived form sales made
outside Kenya, to be calculated for the tax purpose. 8

6 Section 5(2)(a) of the income tax Act.

7 Section 5(2)(b) income tax Act
8 Section 18(1) Income Act
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 Income derived from deposits, assets or property acquired outside Kenya from
the operations in Kenya by the permanent establishment of a non- resident
bank is deemed to be income derived in accrued form Kenya. 9
 In assessing the profits of a permanent establishment in Kenya of a non-
resident, no deduction will be allowed for tax purpose in respect of Interest;
royalties and management of professional fees
 In addition foreign exchange losses or gains arising between the Kenya
permanent establishment and the overseas offices of a non- resident person
will disregard for Kenyan tax purposes. 10
 Non-residents are also liable to tax but only for income derived in Kenya.
 Diplomats are residents but they are exempt from tax.
 For the purposes of imposing tax, the basis is residence. What is residence,
who is resident?
WHO IS A RESIDENT?

Section 2 of Income Tax Act – when it is applied in relation to an individual these

are the categories
1. if you have a permanent home in Kenya and you are present in Kenya for
any period of time in the year in question.
2. If you have no permanent home in Kenya but you are present in Kenya for
a period or periods
(i) A period amounting in aggregate to 183 days during the year of
income; or

9 Section 18(2)
10 Section 14(4) income Tax Act.
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(ii) Present in Kenya in that year of income and in each of the two
preceding years and aggregate the number of days to 122 days in each
year. E.g. 2001 = 122, 2002 = 122 and 2003 = 122

When this is applied to a body corporate, which is not a natural person the
management and control of the affairs of that body is supposed to be exercised in
Kenya in that particular year of income.

(iii) The body has been declared by the Minister by a notice in the Kenya
Gazette to be a resident; what if the company is not registered under
the laws of Kenya but its exercise and management are in Kenya?
That is how the Minister comes in. Local branches of non-resident
firms are classified as resident. But only for income derived in
Kenya; any income derived out of Kenya is not taxable.

A parent company that is based in Kenya is treated as a resident for purposes of

income tax and all its income derived from Kenya and outside is taxable.
So in order to pay tax one has to be a resident and people have raised issues at who is
a resident.
In the case of Sir George Arnautoglu V Commissioner of Income Tax
[1967] EA 312
The Appellant disputed his assessment of his income tax in 1962 on the ground that he
was not a resident in the territory in 1962. The facts were that in 1960 he had a home
in Dar-es salaam and was there for a total of 249 days and in 1961 he sold that ho use
but was still present there for a total of 124 days and in 1962 he had no home but was
present for 62 days. On average he was there for 4 months in each of the 3 years. He
argued that in relation to the definition of residence, according to Income Ta x
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Management 1958 he argued that firstly it was not permissible to aggregate the periods
of residence with periods of mere presence and secondly that averaging in accordance
with (1) paragraph (b) (ii) of that Act it meant in effect that four months presence was
required in each of the relevant years. The definition of residence under that Act for
which the construction depended they said that it was permissible for purposes of
income tax 1958 to aggregate periods of residence with periods of presence. The court
went on and said that first “an individual is defined as residing in the territory if he in
fact does so.” And secondly an individual is deemed to reside in the territory if the facts
are such that he would not normally be regarded as residing in t he territory or there
would be doubt as having done so.
The deeming provisions in Income Tax (deemed to be) according to Justice Charles
Newsbold that the deeming provision only come into play if … (it is like a presumption,
you are presumed to be) deemed to be is presumed to be, to bring the presumption into
play is by bringing the aggregate period

BASIC CONCEPTS OF INCOME TAX

Income Tax will be on income only, it is not on assets
The only income which is provided that is taxable is that income which is from sources
that are taxable, the income has to come from a classified source, there is no simple and
comprehensible definition of income tax but it may be put in 3 broad categories
1. Income from personal services that are rendered by one person to another;
contractual service generally, as long as it earns money it is income and the
assumption is that the services have to be legal;

2. Income from property this is income, which generally when one sells
property, one pays various types of tax but when the seller receives the money
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when declaring income at the end of the year, the proceeds from property
must be declared.

3. Income from profits of a trade, profession or vocation.

Income tax is different from capital but for purposes only of paying tax but it is no t
always easy to distinguish between capital and income, if you cannot classify any receipt
as income, it is generally classified as capital. Patent Rights in England is charged under
income tax, it is capital until one sells it, then it becomes capital.

The only law that operates retrospectively is

The basic approach is that capital is considered as the tree while income is the
fruit.

Liability to Income Tax arises out of:-

1. An assessment, to be liable there has to be an assessment as a notice to one
as a taxpayer that there is a tax that is due from one. There can be a self-
assessment or the assessment, which is done by the income tax. Basically all of us
except for employment which is assessed in advance, the rest is basically self-
assessment as in when one files returns they are assessing themselves.
2. Amended assessment provided by the Commissioner of yourself
3. Instalment assessment is only applicable to corporate tax not individual tax.
4. Deduction: once you are assessed you will be deducted and the deduction is
from the receipt you have already received, e.g. an employee’s PAYE is
deduction. Every employer is termed as an agent of the commissioner for
purposes of deducting the taxes.

Income tax is basically one tax and this was declared in 1901 by Lord
Macnaghten in the case of :-
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The London County Council V. Attorney General (1901) AC 26 at 36

He defined income tax as “Income Tax if I may say so is a tax on income, it is not
meant to be a tax on anything else. It is one tax not a collection of taxes in every case
the tax is a tax on income whatever may be the standard by which the income is
measured.” It means it does not matter how you measure income but it has to be
income and if it is not classified as income then one cannot pay income tax on it. Profit
is basically income for purposes of tax, the gross turnover is not income for
purposes of tax but once you get your net income, it is income for purposes of tax. In
Kenya it is an annual tax. It is not possible to make an assessment in the current year,
as one has to wait until the year is over and then audit their accounts. Although the returns
are filed the following year, we still call it current year of income. It is based on the source from
which it comes.
One can reduce their tax as a payer either legally by an allowance or by a tax relief or by
an exemption like the church gets. Or one can actually avoid tax.

Tax avoidance involves one of the following things:

1. One can claim that certain receipts do not constitute income;
2. Arguing that you were not resident in that year of income;
3. You can claim that you have deductible costs, when they agree, you increase
the costs;
4. Increase the number of personal reliefs that one is claiming , if they are
accepted the tax is reduced
5. Transfer income to another person, you for example transfer income to your
spouse who earns less and thereby reducing the tax burden.
6. Transfer deductions from one year to the other year,
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All these are ways of tax avoidance, which is not illegal, if not genuine one may
pay penalties but it is not illegal. The difficulty of assessing any one individual
income is also very difficult in developing countries, even fixing rates in countries
where people are already overtaxed is difficult.
Tax falls under income which excludes by general rule gains and losses, losses only
for purposes of business not for purposes of employment and it is expected to be progressive
until it reaches a certain level except corporate tax where all are taxed at the same
rate. Tax falling on income is what is called a definitive principle, when we say
progressive that will be the equitable principle, the one upon whom the income falls
is not equitable.

The second principle is based on a current social consideration of justice.

Corporate tax do not have this principle as they all pay a fixed amount but we assume
that since everyone pays a fixed amount there is no progression but lets remember
corporate pay dividends to individuals that are tax and are progressive. The
progression ends at 30% where after everyone pays the same amount.
People have a heavier burden to carry when it comes to income tax if they are rich.
The first aspect is the ability to arrange the income tax arrangement. You pay a
professional to arrange them in such a way that you pay the least, sometimes you
pay only on your ability to arrange, when you have a better arrangement to arrange
tax, you pay less although your income could be the same as with someone who
earns the same.
INTERNATIONAL ASPECTS OF INCOME TAX
1. Competitiveness
International competition in business does pressurize our policy makers in the way
they organise their tax systems. We grant tax rebates, give exemptions so that we
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are able to compete in the international market because taxes are an expense. Both
direct and indirect taxes are used. The Export Processing Zone is a good example
where tax exemptions are offered to encourage exports.

2. Reliability
The taxation and revenue should be reliable. Rules should be reliable and
adequate. Income tax or taxation in general is the State diet without which the
State would starve. It is vital to the economy and therefore the flow should be
reliable, we should be able to know when it flows and how it flows and how much
of it is there since we rely on it for services. Government expenditure ought to be
anticipated so that we can hinge our tax assessment on the anticipation.

3. Interpretation
When we interpret law, the interpretation is required to be very strict. Where there
are two interpretations, we take the interpretation that is most favourable to the
taxpayer. You can only go to court on a question of law or on a question of
mixed facts and law, on a question of fact you cannot go.
In the case of T M Bell V Commissioner of Income Tax (1960) EA 224

Income Tax V Holdings Limited

(1972) EA 128
The general rule is that a taxpayers business or other ventures are considered
together as one (your income is your income does not matter from what
source) chargeable income should be arrived at by aggregating all the
taxpayers income and then deducting all expenditure incurred from the
production of this income.
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In interpreting the Section (58) or any section the whole Act must be considered
in relation to the particular section and especially with reference to the
interpretation section and the methods set out in the Act in this case our Income
Tax Act Cap 470 to arrive at what is chargeable income. One must consider the
provisions of the Act and if the Act provides on what to consider as chargeab le
income, then you consider that if not, you look elsewhere. It does not matter how
harsh the Act is, it must be followed. This is the theory, assuming that the taxpayer
goes to court. The theory is that the law is pro-taxpayer but in reality, the law is pro
commissioner of income tax.
ADMINISTRATION AND JUDICIAL ORGANIZATION OF INCOME TAX

Income Tax Collection falls in two levels

1. Administrative level or main level where the bulk of the calculation is done
2. Judicial Level wherever there is a dispute one is supposed to go to court

Administration aspect falls into 3 categories

1. General Administrative Management. They have to establish who ought

to pay income tax and where they are. There is a legal definition of who is
supposed to pay tax i.e. who falls within that definition; they also trace to find
out where the taxpayers are. Where are the taxpayers? Administratively the
tax collectors are supposed to establish where the taxpayers are.
2. Ascertaining the amount payable by each taxpayer by assessing the income.
3. Collecting Data – they have assessed, ascertained how much then they go
ahead and collect it.
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Judicial Elements are brought about by the above 3 administrative elements where
disputes arise whether one is a taxpayer, whether what is being taxed is income and the
amount to be collected.
Assessing and collecting taxes is what brings most arguments, it is the most complex
because we have very few tax collectors.

TAX ASSESSORS
The Assessors are the people who identify one as a taxpayer and then pro ceed to send
one their tax returns so that they can file tax. The returns are sent to the taxpayer to
show that they have paid tax and also if there is any extra income that has not been paid
for under the PAYE then one has to pay for it. Normally the assessors do no assess
businesses and they will request that they be told what one has done, only after which
they will do their own assessment. Secondly they receive the returns and then they
assess the amount of tax due to one in accordance with the returns. It is the assessors
who receive the appeals where there are appeals (referred to as objections) and deal
with them and they are the ones who produce the Commissioner’s case to the
committee and also to the courts
TAX COLLECTOR
They receive the money that comes in and follow-up the defaulters. In the process of
doing this they issue one with notices and charge penalties and interests for non -
payment. They issue receipts for all the monies paid, if you have overpaid, they issue a
credit note or a cheque.

JUDICIAL PART
Anywhere there is a dispute that went beyond the tribunal and went to court, it becomes
official. It is not a criminal matter unless it is a matter of tax evasion but disputing is
not an offence.
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SOURCES OF TAX LAW IN KENYA

Tax law in Kenya is all based on statutes, it’s all statutory and not just income tax but
every tax is provided for by statutes. Wherever there is a dispute, then the courts come
in to interpret the statute. The courts interpret the statutes but do not establish the
taxes themselves. It is to be found in our law in Cap 470 Income Tax Act. There is no
general power to delegated legislations to create any taxes. They show how exemptions
are created.
There are certain areas where the law will grant the minister some powers to deal with
the income tax Sec. 41 deals with Double Taxation. Where the Act imposes tax to
exempt one by way of double taxation he can only do this under the power granted by
the financed

Income tax is imposed each year although once it gets here it is permanent. We have
provisional Acts that are created to increase rates. Section 3 of the Income Tax –
Imposition of Tax (1) Income Tax from businesses, exemption falls under Part III of
the Act which starts with Section 17, then we go to collection and objections. Local
committees and tribunals do not have judicial binding decisions although they are
followed.