Taxation All Notes

TAXABLE INCOME FROM BUSINESS:
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TAXABLE INCOME FROM BUSINESS:
 A business includes any trade, profession , vocation, every
manufacture, adventure and concern in the nature of trade,
but does not include employment- (S2).
 Trade- the art of buying and selling for gain
 Profession- a skill acquired after a long period of study
and training eg a doctor, lawyer, accountant etc.
 Vocation- a skill that is acquired after rigorous training e.g.
athletic
 Adventure - a non-organized trade e.g. smuggling and
poaching
 Concern -any commercial undertaking in the nature of
trade e.g. transportation.
Taxation of Business Income
 A business may be run in the un-incorporated form i.e a
sole trader or a partnership.
 Or in the incorporated form i.e. a registered company.
 For a registered company, the profits will be taxed at the

corporation tax rate.
 For a un-incorporated business, profits will be taxed on

the basis of individuals at individuals graduated scale rates.
Taxable business income:
 Gains from ordinary business of buying and selling.

 Gains or profits from a business currently owned by a resident
person partly in Kenya and partly outside Kenya.
 Insurance compensation received for loss of stocks or profits.
 Discount received from creditors.
 A deduction in specific provision for bad debts.
 Recoveries of bad debts which when previous written off and
were allowable.
 A realized foreign exchange gain.
 Trading receipts or a balancing charge when the assets of a class
of wear and tear allowance are disposed for a value which is
greater than their written down value.
Non-taxable business income
 Investment income from abroad i.e. dividends, rent or

interest received from abroad. Qualifying interests and
dividends.
 Dividends received by a resident company from a
subsidiary where it controls 12 ½ % or more of the share
capital.
 Unrealized foreign exchange gain.
 A reduction in general provision of bad debts.
 Recoveries of bad debts which when written off and were
non-allowable.
 Profit on disposal of an asset or an investment.
 Sales proceeds realized from disposal of an asset or
investment.
Adjustment of Business income
 To arrive at accounting operating profit from revenue
we are guided by International Financial Reporting
Standards (IFRS).
 To arrive at taxable profit we use the Income Tax Act.

Why Taxable profits are different from Accounting profits
 Certain items of expenditure charged to statement of
comprehensive income are not allowable for tax purposes
 Certain incomes credited to statement of comprehensive

income are not considered as income for tax purposes
 Certain capital allowances, which are allowable, are not

shown into final accounts.
Allowable deduction-sec 15
 Wholly and exclusively incurred in the production of
chargeable income -allowable business expenses
 Not wholly and exclusively incurred in the production
of income -non-business expense disallowed
 Revenue expenditure –allowable
 Capital expenditure –not allowable
 Bad and doubtful debts (specific)
 Capital deductions
 Advertisements
 losses carried forward for 10 years.
 Pre-trading expenses
 Repairs and maintenance
 Lease rentals
 Diminution in value of implement, utensil or similar
article employed in production of gains or profits
(plant and machinery not included)
 Legal costs & incidental expenses for purposes of
listing in NSE without raising additional capital
 Contributions to a registered pension or provident fund
 Legal and incidental costs relating to authorization & issue
of shares and securities to the public
 Legal costs and stamp duty relating to leases for premises if
the lease does not exceed 99 years
 Non-resident branch taxes where the income is taxable in
the hands of the Kenyan parent company
 Cash donations to registered charitable organizations
whose income is exempt from tax or any project approved
by the Cabinet
 Capital expenditure on the construction of public
schools, hospitals, roads or any similar social
infrastructure (CS’s prior approval required)
 Expenditure on sponsoring sporting activities with the
prior approval of the Cabinet Secretary responsible for
sports
 Manufacturers to be eligible to claim an additional
30% of their electricity bills subject to conditions set
by the Ministry of Energy.
 Tax rebate of 50% of the amount of salaries and wages
to employer who engages at least 10 university
graduates as apprentices for a period of 6 to 12 months
 Donations towards national disasters to be deductible

for tax purpose. The donation should be to Kenya Red
Cross, County Governments or any other organizations
that deal with national disasters.
Deductions not Allowed-sec 16
 Capital Expenditure
 Software
 Provisions
 Expenses of personal nature
 Depreciation and amortization
 Contributions to unregistered pension schemes or
funds
 Income taxes
Deductions not Allowed-sec 16
 Excess interest under thin capitalization (from 12 June 2010
includes deemed interest on interest free loans)
 Subsidiary or related entity costs
 Trade subscriptions made to trade associations that are not
taxed
 Staff medical insurance expenses paid to insurance
companies that are not registered with IRA
 Shareholders costs
 Bad debts that do not meet the commissioners guidelines
Deductions Allowed (Section 15)
 of the Income Tax Act allows the following deductions
to arrive at the taxable profits from business:
1) All expenditure which is wholly or exclusively
incurred in the production of the income
2) Capital allowances as specified in the second
schedule of the Income Tax Act. Eg.Investment
Allowance , Wear and Tear Allowances , Balancing
Allowance or Charge.
Cont ‘ Deductions Allowed
3) In the case of owner of the premises, expenditure
incurred for structural alterations to the premise
where such expense is necessary to maintain the
existing rent Income
4) The amount considered by the commissioner to be
just and reasonable regarding the wear and tear of
implements, utensils or similar articles
5) Any contributions to a national provident fund or
other retirement schemes for employees by the
provisions of any written law e.g. N.S.S.F.
6) Bad debts are allowable when they are actually incurred
i.e. actually written off (Subject to LN No. 37,2011).
 Doubtful debts are not allowable generally but only specific
provisions are allowable.
 Only those bad debts allowable are which result from
debts extended for the purpose of business
 Bad debts recovered are credited to the profit and loss
account.
 If any provision for bad debts is reduced, it must be
deducted to avoid double taxation, because it has already
been taxed.
7) Legal expenses of revenue nature e.g.
(a) Legal costs and stamp duties in connection with
acquisition of lease for not more than 99 years.
(b) Collecting book debts.
(c) Settling disputes with customers.
8) Any expenditure incurred in connection with any
business before the date of commencement of such
business where such expenditure would have been
deductible if incurred after the commencement of
the business
9) Any expenditure of a capital or revenue nature on
scientific research including amounts paid to
scientific research organizations or similar
institutions
10) Losses of business income brought forward from
previous years. This is related to losses incurred in
Kenya
11) Dividends paid or credited to resident persons by a
building society
12) Any advertising expenditure including sales
promotion expenditure which the commissioner
considers just and reasonable.
 Expenditure incurred on installation of permanent
signs is considered a capital expenditure and is not
allowable for the purpose of calculating the taxable
profit for a particular year.
13) Interest paid on borrowings made to generate
investment income (but not exceeding the investment
income earned).
14) Legal and other costs incurred in issuing shares or

debentures on a securities exchange.
15) Expenditure of capital nature incurred in any
particular year of income by a person on legal costs
and other incidental expenses relating to the issue of
shares, debentures or similar securities offered for
purchase by the general public
16) The incidental expenses incurred by a public
company in connection with authorization of
increased share capital.
17) Club subscriptions paid by an employer on behalf of
an employee with effect from 1st January 2006
18) Cash donations to charitable organizations subject to
the income Tax Act (charitable donations)
regulations 2007
19) Expenditure on the construction of a public school,
hospital, road or any kind of social infrastructure
upon approval by minister.
20) Scientific research
Deductions not allowed (Section 16)
1) Any expenditure which is not wholly or exclusively

incurred in the production of income from business.
2) Any capital expenditure including diminution of
capital
3) Any expenditure or loss which is recoverable under
any insurance.
4) Any income tax or tax of a similar nature paid on
income.
5) Any premium paid under any annuity contract.
Deductions not allowed Cont’
6) Any sums contributed to a registered or unregistered
pension, saving or provident scheme or fund unless
approved by the Commissioner
7) Any expenditure incurred in production of income
from management, professional fee, royalties, rents
and construction contracts incurred by a non-
resident person not having a permanent
establishment in Kenya
8) Legal expenses incurred in defending a breach of law
e.g., fines or penalties
GUIDELINES ON ALLOWABILITY OF BAD DEBTS: LN No. 37 (2011)
 A debt shall be considered to have become bad if it is

proved to the satisfaction of the Commissioner to have
become uncollectible after all reasonable steps have
been taken to collect it.
GUIDELINES ON ALLOWABILITY OF BAD DEBTS: LN No. 37 (2011)- Cont’
A debt shall be deemed to have become uncollectable where:
 the creditor loses the contractual right that comprises the

debt through a court order.
 no form of security or collateral is realizable whether

partially or in full.
 the securities or collateral have been realized but the

proceeds fail to cover the entire debt.
 the debtor is adjudged insolvent or bankrupt by a court of

law
GUIDELINES ON ALLOWABILITY OF BAD DEBTS: LN No. 37 (2011)- Cont’
A debt shall be deemed to have become uncollectable where:
 the costs of recovering the debt exceeds the debt itself

 efforts to collect the debt are abandoned for another
reasonable cause.
 NB:
 A bad debt shall be a deductible expense only if it is

wholly and exclusively incurred in the normal course
of business.
 a bad debt which is of a capital nature shall not be an
allowable expense.
Cash donations to charitable organizations/Public Benefit Organizations
S.15(2)(W): Cash donations to an income exempt

charitable organization or to a Minister’s approved
project are allowable deductions(wef 01 Jan 2007)
►Conditions:
►Organization should be of a public character and

established for purposes of poverty relief or education
advancement.
Cash Donations
►A proof of donation in form of a receipt and certified
by the donation recipient.
►Proof of donation to be accompanied by exemption

certificate and donee’s declaration.
►Not refundable or repayable to the donor.
►Should not confer any benefit to the donor (LN. No. 101 (2007)
Taxation of a sole Trader
 A sole trader is not a legal person and the profit from the
business is taxed on owner(s) through graduated scale.
Some allowable expense include:
 Owners medical expenses up to kes 1m. per annum.
 Owner occupier interest of up to Shs.300,000 per annum
 Contribution to a registered individual retirement scheme
of up to Sh. 20,000 per month.
 Contribution to a registered home ownership saving plan
of up to Sb. 4,000 per month.
 Any other allowable expenses as per section 15
Sole trade-some disallowable expenses
 Salary paid to the owner or relatives
 Drawings made by the owner ( cash or goods).
 Private expenses of the owner.
 Any other disallowable expenses as per section 16

Method of Adjusting Profit
 Take the net Accounting Profit as shown by

statement of comprehensive income.
 Add back any items debited in the account which are
not allowed for tax purposes.
 Deduct:
(i) Any items credited in the accounts which can be
eliminate e.g. incomes which are not business
incomes.
(ii) Any items which are not shown in the accounts
may be deducted for income tax purposes e.g. capital
deductions.
Business Income Tax Computation Format
Reported Profit xxx

Add Back: Disallowable Expenses
Depreciation, Private Expenses, business incomes omitted , xxx
General Bad debts, Loss on Disposal, xxx
Impairment loss, Adjustments: over/understatements xxx
LESS: Capital Allowances (xxx)

Non Business Income ( Investments, Farming) (xxx)
Allowable expenses omitted, Adjustments over/understatement (xxx)
Adjusted Taxable Income xxx

Example
Nadwa is the proprietor of a grocery shop. His statement of comprehensive income for the ending 31st
March 2018 was as under:-
£
 Gross profit
900,000
Less Expenses: £
Wages and salaries 15,000
Rent, and rates 30,000
Water and electricity 3,000
Depreciation of delivery van 2,000
Promation expenses 3,000
Donation to charity 3,000
Taxes 2,000
General Bad debts 5,000
Advertisement 20,000
Legal cost 2,000
85,000
Net Profit 815,000

Cont’
Additional Information:
 Mr. Nadwa lives in a flat above the shop and it has been agreed
that 30% of the rent and rates, water and electricity be charged
to him.
 Captial deductions were agreed at 17,500
 10% of advertising cost was for installing a bill board
 Legal cost were incurred to defend a breach of business contract
by Mr. Nadwa
 Included in the gross profit was 10,000 from dividend income
received by Mr Nadwa.
Required:
i)Calculate the taxable profit of Mr. Nadwa
ii) Nadwa tax payable from the business income
Answer
£
Net Profit as per question 815,000
Add back expenses not allowed: £
Rent and rates 9,000
Water and Electricity 900
Depreciation 2,000
Donation to charity 3,000
Taxes 2,000
General Baddebts 5,000
Bill Board 2,000
Legal Cost 2,000 25,900
Less:
Dividends Income (10,000)
Capital deductions (17,500 ) 27500
Taxable Profit 813,400

BANDS INCOME TAX RATE TAX ON BAND CUMMULA
% TIVE TAX
First 12,298 10 1,230 1,230
Next 11,587 15 1,738 2968
Next 11,587 20 2317 5285
Next 11,587 25 2,897 8182
Over 47,059 30
BANDS INCOME TAX RATE % TAX ON
BAND
First 147,580 10 14,758
Next 139,042 15 20,856
Next 139,042 20 27,808
Next 139,042 25 34,761

Over 564,709 30
Example 2 Wanyama
 The following comprehensive income statement relate

to Mr. Wanyama Dental clinic business for the year
ending 31/12/2016.
Example 2 Wanyama
Gross Professional fees received 1,000,000
Subscriptions to professional 20,000
association and publications
Subscriptions to a wildlife 2,000
magazine
Donations to a children’s home 10,000
Debt collection expenses (dental 6,000
patients)
Wages for dental assistant 120,000
Replacement of surgical 40,000
instruments
Rent for the clinic premises 140,000
Electricity and water – clinic 40,000
Other clinic expenses 70,000
Example 2 Wanyama
Hire of car for use in practice 50,000
Uniforms for staff 5,000
Payment of school fees for own 40,000
children
Contribution to provident fund – self 60,000
Payment of life insurance premium – 20,000
self
Terminal benefits paid to retired 50,000
receptionist
Depreciation on furniture – clinic 12,000
Rents received from sub-rentals 14,000
Rent collection expenses(sub-tenants) 2,000
Wages paid to cleaners and watchman 50,000
– clinic
Example 2 Wanyama
Furniture bought for clinic 1 64,000
January 2016
Tarmacking of Drive-way personal 80,000
residence
Additional servant quarters – 140,000
personal residence
Dividend income net of 34,000
withholding tax
Interest income from commercial 24,000
bank – gross
Directors fees received (deductions 120,000
at source shs 3,0000
Example 2 Wanyama
Required:
(a)Calculate the taxable income of Mr Wanyama for the year
ended 31/12/2016.
(b)Tax payable by Mr. Wanyama.
(c)Indicate when the tax, if any, is payable to the Income Tax

department.
Example 2 Wanyama-Answer
Sh. Sh.
Gross professional fees 1,000,000

received
Less allowable expenses
received
Subscriptions to professional 20,000
association
Debt collection expenses 6,000
(dental patients)
Wages for dental assistant 120,000
Rent for clinic premises 140,000

Water and electricity 40,000
Other clinic expenses 70,000
Hire of car for use 50,000
Uniforms for staff 5,000
Contributions to provident 60,000
fund (Note 1)
Wages to cleaners and 50,000
watchman
WTA on furniture 64,000 x 8,000
12.5%
Diminution on surgical 13,333 -582,333
instruments (Note 2)
Professional taxable 417,667
income
Add rent income 14,000
Less rent collection expenses (2,000) 12,000
Director’s fees received (gross) (120,000 + 3,000) 123,000
Total taxable income 552,667
Assumed that the provident fund was registered hence her contribution
would be allowable
Cost of surgical instruments treated as cost of tools and implements for
practice hence enjoy diminution at a rate 33% pa on cost
Example 2 (b)Wanyama-Answer
Tax payable on Ksh.552,667))
First Ksh.134,164 @ 10% 13,164.00

Next Ksh.126,403 @ (15% + 20% + 75,842.00
25%)
Surplus (552,667 – 513,373) @ 30% 11,788.00
Gross tax liability 100,794.00
Less personal relief (15,338.00)
Less withholding tax on director’s fees (3,000.00)
Net tax liability 82,456.00
Example 2 (C)Wanyama-Answer
 Wanyama shall file a self-assessment return.
 He should pay self-assessed tax by end of the fourth

month after the accounting year i.e. 30th April 2017.
 He should file the self-assessment return by 30th June

17 (end of the 6th month after the end of accounting
year.)
Taxation of Partnership
Taxation of Partnership Cont’
 Income of partnership is assessed/taxed on partners
 Each partner tax liability is computed separately
 The income from partnership will be added to the

partner’s assessable incomes from other sources and
tax calculated at graduated scale rate of tax.
Taxation of Partnership Cont’
 Where adjusted share of a partner is a loss, this can be
offset against any other income he/she may have that
year or carried forward and offset on any other income
in future.
 All provisions for sec.15 (allowable deductions)and
sec.16 (disallowable deductions) of income tax Act are
applicable.
Some parnerships disallowable deductions
 Interest on capital
 Salaries & commissions paid to partners
 Partners private expenses.
 Partners’ drawings
 Goodwill written off.
 Any other form of appropriation
 Any other expense as per section 16
Some partnerships allowable deductions
 Owner occupier interest of up to sh. 300,000 p.a.
Contribution to a registered individual retirement
scheme of up to Shs. 20,000 per month
 Medical expenses or medical cover of up to Shs.
1,000,000 per annum per partner.
 Contribution to a registered home ownership saving
plan of up to Shs. 4,000 per month .
 Any other expense as per section 15
NOTE
 Interest paid by partners on drawings is not taxable
 Drawings of commodities/goods dealt with in the

partnership are added back at cost.
 When allocating adjusted profit to partners first
segregate - salaries, Bonuses, commissions to
partners.
Partner’s Allocation Shedule
A B Total
Partners salaries Xx Xx Xx
Partners’ interest on capital Xx Xx Xx
Partners’ commission Xx Xx Xx
Partners, interest on drawings (Xx) (Xx) (Xx)
Share of profit/loss Xx Xx Xx
Business income Xx Xx Xx
Other incomes Xx Xx Xx
Farming income Xx Xx Xx
Employment income - - Xx
Rental income Xx Xx Xx
Taxable income xx xx xx
Example 1
Musyoka,Wamalwa and Kamau are partners running a
supermarket business together.
There profit /loss sharing ratio is 3:2:1.
They have provided you with the following for the year
2018.
Required:
a)Taxable income/loss for each partner as at Dec 2018
b)Tax paid by each partner for 2018
Example 1 CONT…
Trading profit 2,160,000
After deducting:
Depreciation 780,000.00
Rent 9,000.00
Legal,insurance&
Audit fee 150,000.00
Donations to Red
cross 90,000.00
Salaries &wages 300,000.00
Postage & Telephone 65,000.00
Example 1 CONT…
Electricity & water 55,000.00
Salary to Musyoka 288,000.00
Salary to Wamalwa 216,000.00
Salary to Kamau 144,000.00
Repairs 96,000.00
Business vehicles expenses 132,000.00
Giant cash machine 100,000.00
Wear &Tear allowance 685,000.00
Answer
Profit 2,160,000
Add back:
Depreciation 780,000
Donations 90,000
Partners salaries:
Musyoka 288,000
Wamalwa 216,000
Kamau 144,000
Giant cash machine 100,000 1,618,000
Adjusted profit 3,778,000
Answer cont …..
Division of profit
musyoka wamalwa Kamau
Salary 288,000 216,000 144,000
Profit share 1,565,000 1,043,333 521,667
Taxable income 1,853,000 1,259,333 665,667

Members’ clubs and trade associations
(Sec 21)
Members’ club are deemed to be carrying on a business
& the gross receipts (including entrance fees and
subscriptions) are considered to be income from a
business:
 But where ¾ or more of such income is derived from
members, the body will not be taken to be carrying on
business and no part of such non investment income
will be taxed.
 Gross investment receipts of the club like
interest,rent,royalties,capial gain dividends income
are excluded in the test of ¾ of income Sec21(1).
TAXATION OF CORPORATION/ COMPANIES
TAXATION OF COMPANIES
 A company/ corporation is a separate taxable entity
and its income is taxed on its own name and not on
the name if its owners.
 Companies are taxed on corporation tax rate ruling in

a certain year
 The corporation tax rate is a proportional tax levied at

a flat rate irrespective of the size of income
TAXATION of Companies cont
 Income tax is imposed on a company’s gross income
less allowable deductions.
 Business income, investment income, rental income

are assessed separately.
TAXATION of Companies cont’
The applicable rates in Kenya currently are
30% for resident companies and 37.5% for
non resident companies
The methods of arriving at an adjusted net

profit is the same for companies as that of
sole traders and partnerships.
Section 15 & 16 of income tax Act are
applicable.
TAXATION of Companies cont’
In addition to the list of allowable
deductions and disallowable deductions
covered earlier for sole traders and
partnership the following should be added:
Allowable expenses
 Payments between two associated companies

 book keeping fees
 Debenture interest
 Auditing expenses
 Directors fees and business expenses(note in
partnership partners salaries are not allowable).
 Costs of issuing shares or debentures to the public
 Cost of listing in the stock of exchange
 Any other allowable expenses as per section 15
Deductions not Allowable
Loans made to directors which became bad debts
Formation expenses
Impairment of goodwill.
Transfers to reserves
Dividends and other distributions from profits
Payment of corporation tax and interest in a
means on arrears of corporate tax
Director’s private expenses.
Any othe expense as per sect 16
Rate for Newly Listed Companies
 If the company lists at least 20% of its issued share

capital listed, the corporation tax rate applicable will
be 27% for the period of three years commencing
immediately after the year of income following the
date of such listing.”
be 25% for the period of five years commencing
date of listing.
Rate for Newly Listed Companies cont’

be 20% for the period of five years commencing
date of such listing
Companies pay tax in Instalment
as follows:
 1st installment 25% of tax due by 20 day of the 4th
month during the year of income.
 2nd installment 25% of tax due by 20 day of the 6th
 3rd installment 25% of tax due by 20 day of the 9th
 4th installment 25% of tax due by 20 day of the 12th
For Agriculture firms
 1st installment 75% of tax due by 20 day of the 9th
 2nd installment 25% of tax due by 20 day of the 12th
Instalment payment
The amount to be paid is based on the higher of:
 The budgeted profits of the year

 110% of the last year’s tax liability.
 At the end of the year actual tax payable is computed
and the balance paid (Actual less instalments) on or
before last day of the fourth month after the end of
the year of income.
Other Related Issues
 Shortfall Distribution of Dividends
 Thin Capitalization
 Loss carry forward & Carry Back
Avoidance of Tax liability by Non distribution of dividends
A company is required to distribute every

year a certain fixed proportion of its profits
as dividends to shareholders.
When these dividends are paid they became
taxable on shareholders.
Government is denied revenue if company

fails to pay dividends to shareholders.
Cont’
If profits are not distributed ITA empowers
commissioner to determine the amount of
distribution that could be made without
prejudice to the requirements of the
company’ financial needs.
Short Fall
 is the difference between the amount of dividends

determined by the commissioner and the actual
distribution made by the company.
Amounts the commissioner expect to be
distributed:
 40% of the net adjusted trading profit after
corporation tax
 100% of all other non trading types of income e.g.
interest, Dividends, rent etc of the company after
corporation tax.
Companies excluded from short Fall regulations
Companies that are subsidiaries to other(s)
Companies that are subsidiaries of foreign

companies and have no resident
shareholder
Companies which have 51% or more of the

shares held by non residents
Cont’
NOTE:
 From tax point of view the short fall is deemed to have
been distributed and the shareholders are liable to pay
tax.
 However the companies’ pay the tax in short fall but it
can recover this from the shareholders when the
dividends are paid later/ in future and the shareholder
will not be required to pay further income tax on these
dividends.
Circumstances when companies can retain more than
60% of its profit
The company does not have any liquid funds
The company authorized capital is fully listed
hence cannot obtain further funds from
shareholders and can only rely on its internal
reserves to finance its investment.
The company is expanding its business and
trading operations and requires additional
commitment in inventory
Any company controlled directly or indirectly by
the Government of Kenya.
Cont’
 The company does have liquid cash funds but it is
reserving them to clear maturing obligations e.g.
loans, mortgages or plans to purchase plant and
machinery, buildings etc.
 The company has committed itself to

purchase/acquire another business as long as the
company to be purchased is not a company that is a
source of raw material or a distribution company for its
products.
Cont’
To avoid complications that arise from keeping a

distinction between deemed and actual
distribution, a company before making any
distribution can inquire from the commissioner
whether the distribution it proposes to make is
sufficient.
Thin Capitalisation
 arises where a company incorporated in Kenya is

controlled by a non-resident person and the highest
amount of all interest bearing loans to that company at
any time during the year are more than three times the
sum of the revenue reserves (including accumulated
losses) and the issued and paid up capital
Thin capitalization cont’
 Where a company is thinly capitalized, the interest
expense is restricted (disallowed).
 In addition, any foreign exchange loss on such loans
is also deferred for tax purposes until the thin
capitalization conditions reverse.
 Branches, banks or financial institutions licensed
under the Banking Act are exempt from this provision.
Carry forward of tax losses
Business losses can be carried forward up to a

maximum of 9 succeeding years.
 but an extension may be granted where an
application is made to the National Treasury Cabinet
secretary giving reasons and evidence as to why the
losses could not be extinguished
Carry forward of tax losses cont’
 For companies in the mining, oil and gas industries,
any losses incurred in a year of income can be carried
forward indefinitely.
 These companies are also allowed to carry back tax

losses for a period of three years, from the year of
income in which the loss arose and operations ceased.
Approval from the commissioner is required for the
licensee or contractor to be allowed to carry back the tax
loss.
LOSSES
 Tax losses can be carried forward for a limit of 9 years
to be offset against future similar (source) taxable
income eg.
 Income from employment
 Income from rental
 Business income
 Income from withdraws from a registered pension
 Income from Agriculture
Example
Kondele ltd makes its accounts as at 31st December each year
and has prepared the following Statement of
comprehensive income 2018.
Required:
Computer corporation tax liability for 2018.
Ignore wear and tear deductions
Example –Kondole
General administrative
expenses 80,000
Director’s fees and expenses 10,000
Repairs and renewals 24,000
Subscriptions and donations 4,000
Bad debts 16,000
Preliminary expenses 6,000
Retirement benefits 100,000
Example-Kondele Cont….
Rent, rates and insurance 60,000
Patents written off 5,000
Legal and accountancy 83,000
Interest on overdue tax 5,000
Interest in lieu of dividends 10,000
Depreciation 20,000
Net profit before taxation 62,000
485,000
Example Kondele Cont….
Gross profit b/d 460,000.00
Dividends (Gross) 10,000.00
Bad debts previously Written
off 2,000.00
Post Office savings Bank
Interest 3,000.00
Gains on sale of plant and
Machinery 10,000.00
Total 485,000.00
Notes: Example - Kondele ltd
1)Repairs and renewals: Shs
Redecoration of an existing business 6,000
Renovation to new building 10,000
Partition and carpeting of old building to
create extra office for personnel manager 8,000
24,000
2) Subscriptions and donations:
National Chamber of commerce and Industry 2,000
Kenya Red Cross Society 1,000
Sporting facilities for staff 1,000
4,000
Notes: Example 1 Kondele ltd
3) Retirement
Benefits:
NSSF contribution 10,000
Pension to
management staff 80,000
Contribution to
approved provident
fund 10,000
100,000
Notes: Example 1 Kondele ltd
4) Legal and accountancy: Shs.
Staff service Agreement 4,000
Contract for purchase of a
new business 11,000
Audit fees 60,000
Income Tax- Appeal to Local
committee 4,000
Lease preparation (52year
lease) 4,000
83,000
Notes:Kondele ltd
5) Bad debts: This is on account of a loan given to a
supplier and who was adjudged a bankrupt during
the year
6) Preliminary expenses: Shs

Balance of stamp duty on issue of share capital 4,000
Secretarial services fees now written off 2,000
6,000
Notes:Kondele ltd
7) Dividends: These were from a subsidiary
company where Kondele ltd holds 75% of the
issued share capital
8) Interest in lieu of dividends :The company did

not pay dividends in 2018 but instead decided to
pay interest at 10% on the shares issued and fully
paid.
Notes:Kondele ltd
9) Gain on sale of Plant Machinery:
One line of business was discontinued in 2018 and all the
plant and machinery were sold.
Cost in 2016 160,000
Aggregate depreciation to 2012 65,520
Net bv 94,480
Sale proceeds 104,480
Gain 10,000
The written down value for tax purposes has been agreed
with principal Assessor at Sh. 93,790 for the year ending
31.12.2018
Kondele ltd Answer
Computation of Adjusted
profit: Shs Shs
Profit as per P&L a/c 62,000.00

Add back deductions not
allowed:
Bad debts 16,000.00
Preliminary expenses 4,000.00
Retirement benefits 80,000.00
Kondele ltd Answer
Interest on overdue tax 5,000.00

Patent w/o 5,000.00
Interest in lieu of
dividends 10,000.00
Depreciation 20,000.00
Kondele ltd Answer
Renovation to new building 10,000.00
Partition and carpeting 8,000.00
Donation to Kenya Red Cross Society 1,000.00

Kondele ltd Answer cont’
Legal &Accounting:
Staff service agreement 4,000.00
Cont. for new business 11,000.00
Income tax 4,000.00 178,000.00
240,000.00
Less:
Net business income:
Dividends (gross) 10,000.00
Post Of. Sav.Bank 3,000.00
Kondele ltd Answer cont’
Gain on sale of plant &

machinery 10,000.00 23,000.00
217,000.00
Add:
Balancing charge (w-1) 10,690.00
Adjusted profit 227,690.00

Notes:Kondele ltd Answer cont’
 Tax liability 30% of Sh 227,690 =68,307
WORKINGS
1.W.D.V (31.12.2017) 93790
Disposal 104480
Balancing charge 10,690
2.Bad debts are not allowable expense because these
were not incurred in normal business transaction.
3.Interest in lieu of unpaid dividends is not allowable
expense as per S.16.
Notes:Kondele ltd Answer
cont’Workings:
4. Balancing charge is a taxable gain as per second
schedule of the Act.
5.Dividends received are not taxable because recipient

company has more than 12.5% of voting power in the
subsidiary company.
6.Donations are not tax deductible except for those
made to registered charitable organizations, exempted
societies & political parties.
EMPLOYMENT/ PERSONAL TAXATION
overview
 The tax year for individuals runs from 1st January to
31st December.
 A resident is liable to tax on worldwide employment

income.
 A non-resident is taxable on income which accrued in

or is derived from Kenya.
Taxable employment income include: cont’
 Wages, salary, Leave pay, Sick pay, payment in lieu of

leave, Commissions, Housing allowance, Sitting
allowance, Medical allowance, Bonus Pay, Gratuity,
Subsistence Allowance, Traveling Allowance,
Entertainment allowance, Directors’ fees (whether the
director is resident or non-resident)
 Any amount or allowance received in respect of

employment or services rendered.S.5(2)
EMPLOYMENT TAXATION
Overview: Employee Vs Consultant
 An Employee is any holder of an appointment of office,

whether public or private for which remuneration is
payable.
 Where a person works from his own premises, in his

own and has no obligation to any one is considered to
be self employed or a consultant.
EMPLOYEE VS CONSULTANT
EMPLOYEE CONSULTANT
Has to work certain hours & work in a certain way Controlling the way in which the business is run
Is not allowed to sub-contract Suffering losses and enjoying profits
most or all facilities provided (e.g place of work, Dealing with tax matters (VAT, PAYE for
equipment) employees etc)
Is paid regardless of how well or poorly the work is Providing his own equipment
done.
Usually (but not always ) has only one employer Dealing with tax matters (VAT, PAYE for
employees etc)
EMPLOYMENT TAXATION
Overview: Annual Returns

 Individuals are required to file self-assessment returns
even where the only income is emoluments from
employment whose tax has been recovered through
PAYE.
Value of Benefits
 The chargeable value of a benefit, advantage or facility
granted or services rendered to a person by virtue of
employment should be charged to tax at the higher
of:
 cost to the employer or
 fair market value or
 the commissioner’s prescribed rate.
Employment Benefits
 Non Cash Benefits
 Meals
 Housing
 Car benefit
 Fringe benefit/low interest
 Pension
Employment Benefits
Medical benefits
School fees
Passages
Hosp
Owner occupied
Employment Benefits
Per-Diem
Personal relief
Insurance relief
Telephone
Furniture
Exemption of Bonuses , Overtime Allowance &
Retirement Benefits
Employment Benefits
Non Cash Benefits
The minimum taxable aggregate value of a Non

cash benefit, advantage or facility is Kshs.3,000
per month or Kshs. 36,000 per annum.
Meals provided by the employer with aggregate
value of less than Kshs 48,000 per annum per
employee are not taxable.
EMPLOYMENT TAXATION:
Benefits: Medical Expenses
 Where an employer provides free medical services to
his employees, the value of such medical services is a
non-taxable benefit of full time employees and whole
time service directors.
 This will include the following with an allowed
maximum limit of KShs 1 million:
 Directors holding more than 5% of company’s shares
 Partners in a partner ship
 Sole proprietors
Medical Expenses cont’
Medical benefits will be taxable on employee &
Directors:
 Where the medical Scheme is Discriminatory

 Where there is no written medical Scheme
 Where employees & Directors are paid in cash for the
medical services
Benefits: Medical Expenses
 Medical insurance provided by the insurance
provider approved by the Commissioner of
Insurance and paid by the employer on behalf of a
fulltime employee shall not be subject to tax.
(S.5(4)(b)).
 “Beneficiaries” means the full time employee’s
spouse and not more than 4 children whose age
shall not exceed 21 years.
Benefits: School Fees paid by the Employer
 Education fees” paid by the employer for employee’s
dependants are taxable on the employee. S.5 (4) (d)
 However, where the tax is borne by the employer,
through add-back in the computation(treat it it as a
disallowable expense), the benefit will not be taxable
on the employee.
 Free or subsidized education granted to “low income
employees” dependents by employers who are
educational institutions is a tax exempt benefit in the
employees’ hands. The employer is also not taxable on
the fees forgone.
Benefits: Passages
 Arises when an employer pays for or reimburses the cost of tickets for
passages, including leave passages for his employee and family.
 The value of the passages is a non-taxable benefit of the employee if
the employee is recruited outside Kenya, provided:
 He’s recruited solely for the purpose of serving his employer.
 He is not a citizen. S.5 (4) (a)
 Where, however, such employee receives a cash sum

either periodically or in one amount which he is free to
save or spend as he chooses or for any other purposes
and for the expenditure of which he does not have to
account to the employer, the amount received is a
taxable cash allowance
Benefits:
 Club subscription paid by an employer on behalf of an
employee are allowable expenses. (S.15(2)(v)).
Benefits: Housing Benefit-S. 5 (3)
 If the employer pays rent under an agreement at arm’s length value of the
benefit:-
 Higher of 15% of total employment income ( including allowances & other

benefits (excluding the value of the house) ) , or actual cost to the employer
for employee and whole time service directors. ( Benefits will exclude
housing benefits).
 For non executive directors the benefit is the higher of 15% of total income.
 If the employer pays rent under an agreement not at arm’s length value of
the benefit is the higher of the fair market value of the premises for that
year or rent paid by employer.
 Where premises are owned by the employer the value of the benefit is the
fair market rental value.
Benefits: Housing Benefit- S. 5 (3)
 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 gross emoluments minus any rent
charged to the employee.
Housing Benefit- S. 5 (3)
 In calculating the housing benefits employer is
required to deduct rental charges recovered from the
employee or director.
 The amount remaining is the chargeable value to be

included in the total taxable pay.
Housing Benefit- S. 5 (3).....
 If the premises are occupied for part of the year only,
the value is 15% of employment income relative to the
period of occupation less any rental charges paid by
employee/director (Chargeable value shall be reduced
by rent paid by an employee).
 Any employer who provides other than normal
housing to an employee should consult his local
Domestic Taxes office for advice regarding the value of
such housing.
Housing Benefit- S. 5 (3)
Example:
A Manager who earns basic salary of Kshs. 50,000
per month plus other benefits (e.g. Motor Car,
House Servants etc.) amount to Kshs. 25,000/ per
month is housed by the employer.
The employer pays to the Landlord rent of
Kshs.30,000 per month under an agreement made
at arm’s length with the third party.
Calculate the Housing Benefit.
.
Housing Benefit- S. 5 (3)....
Calculation for Value of Quarters
Basic Salary - Kshs. 50,000
Add: Benefits - Kshs. 25,000
Total - Kshs. 75,000
15% Value of quarters there of - Kshs. 75,000 x 15% = Kshs.
11,250.
Compare Kshs 11,250 with Kshs 30,000 being rent paid by
employer at arms length and pick the higher.
*Rent paid by the employer Kshs. 30,000/= per month is

the amount to be brought to charge and not 15% value
of quarters
Car benefit: S 5 (2B)
 Where an employee is provided with a motor vehicle

by employer, the chargeable benefit for private use
shall be the higher of the prescribed rate by the
commissioner or cost of hiring or leasing the
vehicle by the employer or 2% of the initial cost of
the vehicle
Car benefit: S 5 (2B)
Example:
X employee who is employed as a Financial Controller is

provided with a car –Toyota prado (cc rating 3,500)
which was bought in December 2017 for Kshs.
5,000,000.
Car benefit: S 5 (2B) cont’
Car benefit is calculated as follows:-
- 2% x Kshs. 5,000,000 = Kshs. 100,000 per month
- Commissioner’s fixed monthly rate cc. rating 3,500 =
Kshs. 14,400
- The chargeable car benefit is therefore Kshs. 100,000
per month.
Car benefit: S 5 (2B) cont’
 Where an employee has restricted use of the motor
vehicle, the Commissioner if satisfied of that fact, shall
determine a lower rate of the benefit depending on the
usage of the motor vehicle
Pooled Transport Service
 Where employer provide transport services to the
employee from home to office , the benefit is not
taxable.
 Where the Benefit exceeds Kshs. 3000 per month it
will be considered a taxable benefit.
Example
Eden is employed by lower kabete company ltd as a
Human resource manager at basic salary of Kshs
400,000/= per month.
The employer has provided housing on leased
premises at a monthly rent of Shs 70,000/=
In addition the employer has provided the
following benefits:
a)Night watchman Shs 2,000
b)House servant Shs 1,500
Example cont’
c) Toyota prado car 4500cc,the cost Shs 4,000,000
d) Water shs 500
e) Electricity Shs 1,500
f) Meals shs 3000
In the month of February 2018,the company paid him
Shs 50,000 as medical allowance, Shs 250,000 as
leave allowance & overtime allowance of Shs 50,000.He also
received a cash gift of ksh 3,000/=
Required:
i) Eden Car Benefit
ii) Eden Housing Benefit
Car Benefit
Higher of:
Initial cost of the car and Commissioner prescribed rate.
Commission rate for 4500cc=????
Car(cost ksh.400,000*2%)=8000
Hence car benefit is ksh.=?????
Prescribed Rates for various Utilities
 Telephone ( landline or mobile) -30% monthly or
annual of the bills.
 Furniture-Higher of amount paid per month/yearly if

hired or 1% of the actual cost.
 Electricity( communal or from generator)-1500
monthly.
 Water(Communal or borehole)- 500 monthly
Contributions to pension schemes
 Contributions to registered pension, provident and
individual retirement schemes –
 Lesser of:
 30% of pensionable pay
 Kshs 240,000 or proportion for the year
 Actual contribution
 The amount contributed is shared between the employer and the
employee..
 Employer ‘s pension contribution is a tax allowable expense.
 Employee rank first in claiming deductions & where employee

exhaust the amount (kes20,000 per month) the employer
contribution wont be a tax allowable expense.
Contributions to pension schemes cont…
 Contributions made by employers to registered or un-

registered funds are not chargeable to tax on the employee.
However, employees of tax exempt bodies will be taxed but
only on amounts exceeding Ksh 20,000 per month. S.5 (4) (c)
 An individual who is not a member of a registered fund and

who contributes to an individual retirement fund is
entailed to claim the contributions subject to the limits
prescribed above
Contributions to pension schemes cont…
 Investment income out of tax exempt portion of

pension contribution is tax free.
 The amounts paid employer on behalf of employee to a
registered pension Scheme is treated as a tax allowable
expense in the employer’s books of accounts.
 Insurance premiums paid by an employer to a
registered or unregistered pension fund or to
individual retirement fund, or for group life cover shall
not be taxable on the employee unless such cover
confers a benefit to the employee or his dependants.
NSSF
 NSSF contribution are at combined rate of 12% of the
pensionable earnings . Split equally between at (6%)
 The 2013 act set an upper of 2160/= for those earning
more than 18000 per month.
 Employee earning less than 6000 will contribute 720.
However there is a pending case on this act hence the
old rates of 10% of monthly income to a maximum of
400 per month are still applicable.(Half is paid by the
employer.)
Taxation of Pension Income (Sec 8)
 Upon attaining retirement age, retirement benefits
could be paid in either lump sum or Monthly pensions.
Lump Sum-The first Kshs 60,000 per year of pensionable
service to a maximum of ten years (or kshs 600,000) is
exempt from tax.
Monthly Pensions- The first Kshs 25,000 per month
(300,000 per annual) is exempted from tax.
Taxation of Pension IncomeCont’
 Monthly or Lumpsum pension granted to a person

who is sixty five (65) years or more is exempt from tax.
 Ksh 1.4million of deceased person’s withdrawal paid to

depedants is tax exempt
Per diem
 per diem refers to payments in respect of subsistence,
travelling, entertainment and other allowances made
by an employer to his employee while the employee is
on official duties outside his usual station of work and
which represent a reimbursement.
 The first Kshs.2,000 per day is considered a
reimbursement and is not taxable.
 Any amount in excess of Kshs.2,000 per day must be
supported with arms length vouchers S.5 (2) (a) (ii)
Per diem Cont……
 For the purposes of satisfying the Commissioner that
the amounts paid are reimbursements of costs
incurred by the employee, an employer shall maintain
a documented policy on the management of per diem
The policy shall include information relating to:

 The rates applicable for different cadres of employees
to whom per diem may be payable.
Per diem
 The rates applicable to different geographical zones or
localities within the country.
 The rates applicable where duties involve overseas
travel provided that where different rates apply, these
are to be clearly stated.
 A justification for the rates used in relation to among
other things, the cost of living.
 The procedure of accounting for per diem.
Per diem
The Commissioner may, at any time where he deems
appropriate, require an employer to furnish him with
documentary proof of travel outside the work station
by his employee and such proof may include:
-motor vehicle work tickets.
- bus or air tickets.
-passport and immigration entries.
-imprest accounting documentation.
PERDIEM…..
 Employers may if they deem it appropriate, seek the
Commissioner's opinion regarding the admissibility of
proposed per diem scales prior to or after payment.
 Tax due on per diem is to be recovered in the payroll

month relating to the payment and remitted in
accordance with PAYE procedures
Tax Free Remuneration
 There are certain instances when an employer wishes

to pay his employees salaries negotiated net of tax.
 In such circumstances the employer bears the burden

of tax on behalf of such employees.
 The tax so paid by the employer for the employee

becomes a benefit chargeable to tax
low interest loan/Fringe 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 is computed as the difference between the
interest charged by employer and prescribed rate of
interest.
Interest free or low interest loan
i) Low Interest Rate Benefit
 Employees are taxed on low interest rate benefit in
respect of loans provided by the employer on or before
11th June, 1998 .
 The low interest benefit chargeable on the employees
is calculated as the difference between interest
charged to the employee and the prescribed rate of
interest, or such interest rate based on the Market
Lending Rates prescribed by the Commissioner;
whichever is lower
Interest free or low interest loan
Example
- Loan provided by employer - KShs.1,500,000
- Employer's Loan Interest Rate - NIL (interest free)
- Prescribed Rate of Interest - 2 %
Calculation of Low Interest benefit:
- Low Interest Benefit is (2%-NIL=2%): Kshs 1,500,000 x
2%= Kshs.30,000 per annum i.e. Kshs.2,500 per month
Fringe Benefit
ii) Fringe Benefit Tax
 It is payable by the employers commencing on the 12th
June, 1998 in respect of loan provided to an employee,
director or their relatives at an interest rate lower than
the market interest rate for loans provided after 11th
June, 1998 or loan provided on or before 11th June, 1998
whose terms and conditions have changed after 11th
June, 1998.
Fringe Benefit
Example
Employer's loan amount - KShs.2,100,000
- Interest charged to employee - NIL
- Market Interest rate for the month - 2%
Calculation of Fringe Benefit Tax:-
-Fringe Benefit is (2% - NIL = 2%) Kshs.2,100,000 x

2%
= Kshs.42,000 per annum i.e. Kshs.3,500 per month.
Fringe Benefit tax payable by employer is Kshs. 3,500

x 30% = Kshs.1050/- (for the month)
Fringe Benefit
NOTE:
 Fringe benefit is taxable at corporation rate of tax of
30% of the determined value of the benefit.
 It is payable on or before the 10th day of the

following month ,employers will therefore pool
together all the Fringe benefits for the employees in
each month.
Fringe Benefit Cont…..
 Fringe benefit tax is payable even where corporation

tax is not due by the employer in question.
Person with Diasabilities
 First 150,000 pm is tax exempt
 Personal care & home care expenses up to 50,000 per
month are allowable
 Must apply to commissioner and must be registered
with council of persons with disability
 Commissioner gives exemption certificate varied for 5
years.
Home Ownership Savings Plan (HOSP)
 Employees are eligible for deducting upto a
maximum of Kshs. 4,000 /- per month or Kshs.
48,000/- per annum in respect of funds deposited in
“approved Institution” to a maximum of 10 years.
 An approved institution means a licensed financial

institution or insurance company.
 Interest earned on deposits to HOSP not exceeding

Kshs. 3 million shall be exempt from tax.
Conditions to qualify for HOSP
 HOSP is registered by the Commissioner of Domestic
Taxes
 Evidence that the approved institution is registered by
the commissioner.
 The Employer will be the one to deduct & remit the

amount to the registered financial institution on
behalf of the employee.
OWNER OCCUPIED INTEREST – SEC 15(3)(B)
 A Mortgage relief deduction of up to Kshs 300,000 is

available to residential house owners who occupy
them.
 It is available for either purchase or improvement of

the premises.
 No claim in respect of more than one residence.

Owner occupied interest S15(3) (b)
 This deduction is available when the mortgage interest
is from qualifying financial institutions which include:
Banks, Building societies, National housing
corporations and insurance companies.
 NB: Saccos are not among the qualifying institution
Personal Reliefs
Monthly Personal Relief – Kshs. 1,408
 A resident individual with taxable income is entitled to a
personal relief of Kshs. 1,408 per month (i.e. Kshs.16,896
per annum). (From 1st January 2018).
 Is applied as a credit against the tax liability.
 Its a uniform relief and employers are advised to
automatically grant personal relief to all employees.
 Individuals serving several employers qualify for personal

relief from only one employer (i.e., main employment).
Insurance Relief
 A resident individual is entitled to insurance relief 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).
 Only applicable to: life ,
 Education - a maturity period of at least 10 years.
 & health Policies.
 If the policy is surrendered before its maturity all the relief

granted to the policy holder is repayable to KRA. (S.31)
Insurance Relief
Example:
An employee X has furnished a Life Assurance Policy
Certificate showing annual premiums payable of Kshs.
48,000.
The insurance relief =
Kshs. 48,000 x 15% = 7,200 per annum.
i.e. 600 per month.

GROUP INSURANCE COVER
 Premiums paid by the employer for group life policy
are not taxable benefits on the employees unless such
a cover confers a benefit on an employee.
 An amount paid to an insurance company by an

employer for the cover of an employee where there is
no group insurance policy scheme is taxable.
GRATUITY
Gratuity paid into retirement schemes registered by the
Commissioner subject to limit of Kshs. 240,000 p.a is not
taxable
Domestic Servant Benefit
An amount paid for the servants of an employee by the
employer are chargeable to tax on the employee as a
benefit
Security Service Benefit
 An amount paid for security of an employee by an
employer are chargeable to tax on the employee as a
benefit accruing from office of employment
EXEMPTION OF BONUSES, OVERTIME ALLOWANCE & RETIREMENT
BENEFITS
Bonuses, overtime allowance and retirement benefits

paid are tax exempt where they are paid to an employee
whose salary before the bonus and overtime allowance
does no exceed Kshs. 12,298 pm.
lump sum payments (Gratity,Bonus,service payments)
 Employment income is assessable on accrual basis;
that is, over the period it has been earned and become
due for payment.
 The time the income is received is, therefore,
immaterial.
 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.
lump sum payments Cont…
 However Section 5(2)(a)(i)states that where the year of
accrual is earlier than 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.
EMPLOYMENT TAXATION :
lump sum payments (Gratity,Bonus,service payments)
 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.
Example:
 Mr. Peter Bakari left employment in 2006 after 30 years
of service and was paid service gratuity of KShs.
660,000. He was also paid KShs 25,000 relating to 2002
accrued leave days.
 The amounts due will be taxed as follows:
►2005 22,000
►2004 22,000
►2003 22,000
►2002 22,000 + 25,000
►2001 22,000 + 550,000
Compensation for Termination of Employment
i) Where the contract is for a specified term.
 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.
Example: specified term
A contract for five years is terminated on 31/12/2014 after
it has run for 3 years. Compensation of Kshs.1,100,000
is paid.
The amount will be spread evenly and assessed in the
remaining period of 2 years as follows:-
Year Taxable Amount (Kshs.)
2015 - 550,000
2016 - 550,000
Compensation for Termination of Employment
ii) contract for an unspecified term & provides for

terminal payment
In this case, the compensation is assumed to
accrue evenly over the period following
termination at the rate per annum as earned just
before termination until the amount is fully
exhausted.
unspecified term & provides for terminal payment
Example
Mr. Radiro was employed on a contract for unspecified period
providing for compensation. His services were terminated
in 2011 when his salary was Shs 88,000 per annum. He was
paid Shs 200,000 as compensation for loss of employment.
He will be assessed as follows:-

2012 - Shs 88,000
2013 -Shs 88,000
2014 - Shs 24,000
Total Incomes Shs 200,000
Assignment
 Gratuity vs Pension
Wife’s Income
 Under section 45 wife income is considered as the
income of the husband.
 Hence the wife income must be added to husband’s to

ascertain his total income.
Wife’s Income:Exceptions
 If wife’s income from employment or services rendered
is taxed separately at wife’s income tax rate
 If wife’s income is professional income eg from

medical,Dental,Legal,Accoutants,Engineers etc
 If her income not derived from partenership,or a

company owned by or voting power of 12.5% by the
husband.
When Married woman’s income is not deemed to
be Husband’s Income
 They are separated
 She is a resident person but her husband is non
resident
 She opts to file tax returns separately Wef from
1/1/2006
Monthly Pay slip
 Every employer should provide each employee on
payment of remuneration with a written statement
called payslip every month showing:
 Monthly Pay
 PAYE tax deducted.
Payment of tax
 Any tax liability other than PAYE is based on self-

assessment, and must be paid by 30 April following the
year of income to which the liability relates.
 An individual (other than one whose total taxable income
has been subjected to tax at source) whose tax liability
exceeds KES 40,000 per annum is required to pay four
instalment taxes by 20 April, 20 June, 20 September, and 20
December.
 The instalment tax payable on each due date is 25% of the
lower of 110% of tax assessed in the prior year or the
taxpayer's estimate of the current year's tax liability.
Tax Deduction Card (P.9)
 P. 9 form is form prepared by the employer to every
employee liable to tax. It shows gross pay and all the
benefits, chargeable monthly income,personal relief,
paye for every month throughout the calendar year.
EMPLOYMENT TAXATION
Audit Procedure
 KRA may send officers to employers’ paying points

during the year to check that they are operating the
scheme correctly and to give guidance to employers if
they are in difficulties
 Any such officer will produce a signed authority

Employers will be expected to make all records relating
to P.A.Y.E. operation available for inspection.
EMPLOYMENT TAXATION
Audit Procedure
The audit process will include, a check that:
 The employer has brought into the payroll all the
employee's emoluments, cash allowances and benefits.
 The employer has deducted correct amount of P.A.Y.E.
tax.
 The tax deducted has all been paid over to the bank.
 The pay shown in employer's salary records has
correctly been transferred to the Tax Deduction Cards.
 The Tax Deduction Card has been correctly
completed.
PAYE Penalties for Non -Compliance
 Failure to deduct & account for tax from employment
emoluments- :
-25% non compliance penalty
-1% interest per month
 Failure to pay a tax balance on an individual self

assessment return (SAR) by 30th April attracts a penalty of
20% and interest at 1% per month.
 Failure to file individual self assessment return by 30th June
of the following year attracts a penalty of 5% of the tax
balance subject to a maximum of Kshs.20,000-amended
PAYE Penalties for Non -Compliance
 Failure to apply for registration or degistration

Ksh 100,000 for every month subject to a maximum of
Kshs.one million.
OBJECTION BY EMPLOYERS AGAINST COMMISSIONER’S DECISION
 An employer may lodge an objection against

imposition of a penalty and any other decision taken
by the Commissioner within 30 days of being notified
of the penalty or the decision.
 If the employer is aggrieved by the Commissioner’s
decision on the objection, he may appeal to the Tax
Appeals Tribunal within 30 days of being notified of
that decision
END OF THE MONTH PROCEDURE
 The employer should at each month-end list the
names of employees from whose pay he has deducted
tax together with the respective amount of tax. The
total of this list should agree with amount remitted by
the employer as recorded in his payment slip.
 Any error made in the original return can be corrected

through amending the original return, which can only
be done once within a period of 12 months from the
date it was first submitted. Subsequent amendments
can only be done at your KRA station.
END OF YEAR PROCEDURE
 Immediately after 31st December each year the
employer should prepare a Tax Deduction Card
(P9A/P9A (HOSP)/P9B) for each employee from
whose salary P.A.Y.E. tax was deducted at any time
during the year.
 Certified copies of Forms P9 should be distributed to
the employees representing certificate of pay and tax
for the year.
Computation of Income Tax from Employment Income
 Ascertaining gross income from all sources
 Deducting from gross income such amounts that may

be allowable or such income that may not be taxable
 Ascertaining net income
 Calculating gross tax using tax rates as applicable to

the particular year of income.
Computation of Income Tax from Employment Income
 Deducting from gross tax such relief that may be allowable
 Ascertaining net income tax for the year
 In case of employed persons whose tax is deducted at

source by way of PAYE the amount of tax already deducted
should be subtracted from the net income tax.
 The balance if any will be the amount still payable at the

date of assessment
BANDS INCOME TAX RATE TAX ON BAND CUMMULA
% TIVE TAX
First 12,298 10 1,230 1,230
Next 11,587 15 1,738 2968
Next 11,587 20 2317 5285
Next 11,587 25 2,897 8182
Over 47,059 30
BANDS INCOME TAX RATE % TAX ON
BAND
First 147,580 10 14,758
Next 139,042 15 20,856
Next 139,042 20 27,808
Next 139,042 25 34,761

Over 564,709 30
Example 1
Wambora is employed by a human resource company as a
HR manager at basic salary of Kshs 60,000/= per month.
The company pays a commission of Shs 2,000 for recruiting
efficient staff.
The employer has provided housing on leased premises at a
monthly rent of Shs 25,000/=
In addition the employer has provided the following
benefits:
a)Night watchman Shs 2,000
b)House servant Shs 1,500
Example 1 cont…..
c) Toyota saloon car 1800cc,the cost Shs 800,000
d) Water shs 500
e) Electricity Shs 1,500
In the month of October 2017,the company paid him
Shs 2,500 as recruitment allowance, Shs 15,000 as
leave allowance & overtime allowance of Shs 7,500.
Reguired:
Compute tax liability of Wambora for the month of
October 2017. Take car Rate to be 2% and 1800cc
saloon car prescribed rate to be 86,400 per annum.
Solution to example 1
Basic pay 60,000
Benefits 21,500
Commission 2,000
Recruitment allowance 2,500
Leave allowance 15,000
Overtime 7,500
Gross pay 108,500
Housing 25,000
Taxable pay October 2014 133,500
Workings solution 1
A)Housing at 15% *108,500=16,275 (Actual rent paid Shs
25000 is charged cause its higher)
B)Computation of Benefits
Car(cost shs 800,000*2%) 16000
Water 500
Watchman 2000
House servant 1,500
Electricity 1,500
Total 21,500
Example 2
 Mr Marwa is an accountant employed by Devic
Company ltd. The following are his employment
details for the year ended 31/12/2017.
 He earns a monthly salary of Kes 200,000.
 He is paid a monthly house allowance of Kes 20,000
monthly and monthly transport allowance of Ksh5000
 He is a member of the company’s pension scheme
which is registered with the Commissioner for Income
Tax ,where he contributes 10,000 per month and his
employer contributes an equal amount.
Example 2 cont’
 He has a cheque sacco loan which he repays at the rate
of sh.12,000 per month.
 The company bought for him a car on loan and repays
Sh.15,000 per month towards the loan.
 Statutory deductions –NSSF & NHIF
Required.
i) Marwa taxable amount month of December 2017
ii) A statement showing the income & other
deductions; and net pay (payslip) for Mr.Marwa
Tax Computation
Basic salary 200,000
House Allowance 20,000
Transport Allowance 5,000
Gross pay 225,000
Deduct contribution to pension scheme (10,000)
Less NSSF Contribution (200)

Taxable pay 214,800
Gross Tax- (1st 47,059=8182) +(214800-47052)x.30 58,504
Less: Personal Relief (1408)

Net Tax 57,096
Basic Pay
Payslip 200,000
Housing Allowance 20,000
Transport Allowance 5,000
Gross pay 225,000
Deductions:
NSSF 200
NHIF 1,700
PAYE 57,096
Car Loan 15,000
Sacco Loan 12,000
Pension Contribution 10,000
Net Pay 129,004
NOTE
 Contribution by the employer on behalf of Mr. Marwa
to pension scheme is a non-taxable benefit.
Q3) Mrs Lucy
Mrs Lucy works with Unga Ltd. and has provided you with the
following information for the year ended 31 December 2016.
1) Pension from previous employment Sh.20,000 per month.
2) Salary sh.120,000 per month (P.A.Y.E Sh.42,000 per month)
3) Mrs. Lucy and her husband own a company whose taxable

income was agreed at Sh.500,000 after charging husband’s salary of
sh.250,000 per month (P.A.Y.E sh.60,000 per month).
Q3)Mrs Lucy cont…..
4) Unga Ltd. provided a company house to Mrs. Lucy in
South B where rent of similar houses was Sh.20, 000 per
month.
5)Mrs. Lucy works over-time and her over-time income

averages Sh.10, 000 per month.
6) Mrs. Lucy enjoyed medical benefit of Sh.160, 000

during the year. She is a senior manager and the
company has medical cover for all its employees.
Q3)Mrs Lucy cont…..
7) She obtained free consumables from the company as a
Christmas gift worth Sh.30, 000 during the year.
8) Mrs. Lucy owns rental property at Komarock Estate and

receives Sh.50,000 as rental income per month. During the
year, She incurred Sh.60,000 in renovations, repairs and
painting before letting the property. She had obtained a
mortgage loan from Housing Finance Company amounting
to sh.3,000,000. She paid sh.900,000 during the year of
which sh.500,000 was principal.
Q3 Mrs Lucy cont…..
9) Mrs. Lucy owns 20% of the shares of Unga Ltd.
Required:
(i) The taxable income for Mrs Lucy and her husband
for the year of income 2016.
(ii) Tax payable on the income computed above.
Lucy &Husband Taxable Income for 2013
Salary (120,000 x 12) 1,440,000
Overtime (10,000 x 12) 120,000
Christmas gifts 30,000
Rent income: Gross 50,000 x 12) 600,000
Less: Rental interest (400,000)
Repairs & Renovations (60000) 140,000
Lucy total income 1,730,000
Less: Christmas Gifts (30000)
Add housing benefit: 15% x 1,730,000 259,500
Or 20,000 x 12 240,000 259,500
Lucy taxable income for the year 1,959,500
Add husbands income = 250,000 p.a x 12 3,000,000
Lucy & Husband taxable income for year 4,959,500
Mrs. Lucy owns 20% of the shares of unga Ltd.

Thus she is other director and housing benefit is based on 15% of the total income
Q 4) Mr. mbotela
Mr. Mbotela is employed by Jamii Bank Ltd. as an
accountant. He has presented the following details to
be used in the computation of his taxable income for
the year ended 31 December 2015:
1) He received a basic salary of Sh. 60,000 per month
(PAYE Sh. 7,000). He also received an overtime
allowance equivalent to 10% of his monthly pay.
2) His employer paid his hospital bills averaging Sh.
4,000 per month.
.
Mr.Mbotela cont’
3) His employer provided him with the following
 A car which was acquired at a cost of Sh. 300,000. This car has an
engine capacity of 2000c.c.
 A house. The employer deducted Sh. 2,500 from Mr. Marwa
salary every month to cover rent for the house.
 A gardener and a night watchman- Sh- 21,600
4) He contributes Sh. 8,000 per month to a registered

pension scheme while the employer contributes an
equal amount.
5) For the year ended 31 December 2015, the employer
provided Mr. Mbotela with tea and snacks valued at
Sh. 3,000
Mr.Mbotela Cont….
6) Mr. Mbotela attended a one-day seminar and received
Sh. 2,500 from his employer as allowances. He
donated 10% of this amount to a local childrens’ home.
7) He was nominated the employee of the year on 31
December 2015. This award carried a cash gift of Sh.
45,000.
8) Mr. Mbotela operates a savings account with Post
Bank Ltd. During the year ended 31 December 2015,
the bank credited his account with Sh. 2,000 being
interest on the balance in his account.
Mr.Mbotela Cont….
9) In the month of November 2015, he received
compensation from an insurance company amounting
to Sh. 80,000. This was in relation to household
furniture destroyed by fire.
10) On 5 November 2015, he started offering part-time
tax consultancy services. He made a profit of Sh.
70,000 from the consultancy before deducting
operating expenses of Sh. 18,000 and Sh. 4,000
relating to the acquisition of furniture.
Mr.Mbotela Cont….
His wife, Mrs. Mbotela, operates a grocery. She made a net-profit
of Sh. 50,000 after deducting the following:
Sh.
Rent of stall 10,000

Hire of van 22,000
School fees for children 108,000
Advertisement expenses 6,000
Required:
(i)Mr. Mbotela ’s taxable income for the year ended 31 December
2015
(ii)Tax payable on the taxable income computed in (i) above.
I) Mbotela- Answer
Salary 720,000
Overtime 10% x 720,000 72,000
Medical bills 48,000
Car benefit: Higher of:
(i) 2% x 300,000 x 12 = 72,000
(ii) Fixed benefit on 2000cc = 86,400
86,400
Gardener – fixed benefit 21,600
Seminar allowance 2,500
Cash gift 45,000
Taxable pay before housing benefit 995,500
Housing benefit 15% x 995,500 149,325
Less rent paid 2500 x 12 -30,000 119,325
Total Taxable pay 1,114,825
Pension : ( i)Actual amount 16,000 x 12 = 192,000
( ii) Set limit = 240,000 (192,000)
922,825
Mbotela- Answer
Business Income
Consultancy profits 70,000
Less operating expenses -18,000
52,000
974,825
Mrs. Mbotela
Net profit 50,000
Add back
School fees for children 108,800 158,000
Notes:
Tax and snacks not taxable since the value is less than Sh.36,000 p.a.
Assumed medical scheme is discriminatory hence medical benefit taxable.
Interest from POSB is tax exempt
Insurance compensation not taxable
Q 5 ANS :Fofo ltd
Employment Kshs.P.a
Salaries 805,000
Bonus 265,000
Life insurance 68,000

premium
House servant 2000*12 24000
Motor car: Higher i) Fixed benefit =69,600 600,000

of ii) 2% p *2.5m*12 =600,000
Dividends -society 45000/.85 =52,940 52,940
Interest on HFCK (1,300,000-300,000) 1,000,000 2,814,940

H.Benefit: Higher 2,0000*12 =240,000 422,241
15%*2814940 =422,241
Fofo cont’
3,237,181
Wifes Income
Salary 360,000
Sick leave 48,000
Employer med 250,000 658,000
Taxable Income 3,895,181
Less rent paid= 5%*805,000 (40,250)
Taxable Income 3,854,931
Fofo ltd
Not Current Rates
st
1 Ksh.121,968 @ 10% 12,196.80
Next Ksh.114,912 @ (15% 68,947.20 81,144
+ 20% + 25%)
Surplus=(3,854,931- 1,016,468
466,704) * 30%=
Gross tax 1,097,612
Less personal relief (13,944)
Payee-(185,000+85,000) (270,000)
W/T on non qialifying dividends 15% *52,940 (7,941)
Nex tax 805,727
Notes
 Mr. Joab is not a whole time service director. His housing benefit is based on
total income from all sources. He owns 13.3% which is greater than 12.5% of
shares of the firm. The wife holds 28% of shares of Alex hence her income is
assessed on husbands income.
 Interest from HFCK – the 1st Sh.300,000 suffers 10% W/T which is final and any
surplus is taxed on graduated scale.
 Dividend from home-based co-op society is non-qualifying dividends hence
W/T is 15%. The gross income = 45000/.85=52,940

b)
i) The loss from retail shop of 22,000 + 48,000 = 70,000 will be carried forward to be
offset against income from same source.
(ii) Interest from POSB - exempt
(iii) Interest from bank – W/T is final
(iv) Lottery and sweepstake – non-taxable income
(v)Pension contribution to approved and unapproved schemes – non-taxable benefit.
(vi) Dividend from KCB – 5% W/T final
(vii) Pension from previous employer – the 1st lumpsum income of Ksh.480,000.
Capital Gain Tax
Capital Gain Tax
• Capital Gains Tax is a tax chargeable on the
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 or not the property was acquired
before 1st January, 2015.
Capital Gain Tax
The Laws governing CGT
-Section 3(2)(f) of the income tax act

-Section 15(3)(f)
-Section 34(1)(j)
• Eighth schedule to the income tax act
• Paragraph 36 of 1st Schedule

Capital Gain Tax cont’
• CGT is paid by the transferor meaning the
seller of the property.
• It is charge on the net gains made from the

property being transferred.
Properties attracting CGT
Land
Buildings
Shares
Rate of Tax
• The rate of tax is 5% of the net gain.
• It is a final tax meaning Capital Gains is not

subject to further taxation.
• Net Gain is Sales Proceeds minus the

Acquisition and Incidental cost
CGT in other countries
South Africa- 40%
Uganda - 30%
Botswana- 25%
Tanzania- 20%
Senegal- 15%
Ghana- 10%
Nigeria- 10%
Transfers in the extractive industry
• Transfers in the extractive industry (mining
and petroleum industry) also attracts the tax
at the rate of 30 % for residents and 37.5 % for
non- residents with permanent
establishments in Kenya.
• The transferor has the responsibility of making
the tax payments.
When is CGT Payable?
CGT is payable on transferred of property.
A transfer will have occurred when?

Where a property is sold,exchanged,conveyed
Or disposed off in any manner (including by
way of gift).
A transfer will have occurred when cont’
On the occasion of loss, destruction Or

extinction of property.
On the abandonment, surrender, cancellation

or forfeiture of, or the expiration of rights to
property.
Exempted transfers from CGT
• Transfer of property for securing a debt/loan
• Transfer of securities traded at NSE.
• Sale or transfer of a deceased person’s
properties for purposes of estate
administration.
• Transfer of an asset between spouses or
former spouses or their immediate family
Exempted transfers from CGT Cont’
• Transfer of less than 50 acres of agricultural land.
• Transfer of land sales of less than kshs 3 million.
• Transfer of personal residence occupied for 3
years preceding transfer.
• Consigning a property to an official receiver or
liquidator.
• Sale of deceased person’s properties during
administration.
• Transfer of recognized retirement benefits
scheme’s securities.
• Transfer by tax exempted organizations
(according to Income Tax Act Cap 470).
• Public interest transfers authorized by
Treasury during restructuring or
reorganizations.
• Income from transfer of property taxed
elsewhere.
• Machinery transfers (e.g. motor vehicles).
• Issuing a company’s debentures or shares.

Method of computing CGT
• Net gain is the excess of the transfer value over the
adjusted cost of the property that has been
transferred.
• Transfer value is the amount/value of consideration or
compensation for property transferred less incidental
costs.
• Adjusted cost is the cost of acquisition/construction,
expenditure for enhancement of value/preservation of
the property ; cost of defending title/right over
property, and the incidental costs of acquiring the
property.
Example
Mr. Muli sold his one acre piece of land at Kamulu for Kshs. 3,000,000.
Before making the sale he had incurred the following incidental costs :
-Legal fees Kshs. 100,000
-Advertisement Kshs. 150,000
-Agent’s commission Kshs. 100,000
-Valuation fees –Kshs. 250,000.
The cost of acquisition of the land was Kshs. 1,700,000 after incurring incidental
costs as follows:
-Legal cost on acquisition Kshs. 93,000
Example cont’
-Valuation Kshs. 85,000
-Legal cost to defend title Kshs. 130,000
-Costs of fencing the land Kshs. 313,000
Required:
i) Compute gain on transfer
ii) The capital gain tax payable by Mr.Muli
Computation of Transfer Value
Description Kshs Kshs
Sales proceeds 3,000,000.00
Less Incidental Costs:
Legal fees 100,000
Advertisement 150,000
Agents commission 100,000
Valuation fees 250,000 (600,000.00)
Transfer Value 2,400,000.00

Computation adjusted cost
Description Kshs Kshs

Acquisition cost 1,700,000.00
Add:
Legal cost on acquisition 93,000
Valuation 85,000
Legal cost to defend title 130,000
Fencing cost 313,000 621,000.00
Adjusted Cost
2,321,000.00
Cont.’
Transfer Value Kshs. 2,400,000

Less:
Adjusted Cost Kshs. (2,331,000)
Gain on transfer Kshs. 69,000
Tax payable 5% x Kshs. 69,000)= Kshs.3450

Payment of CGT
 CGT is paid by the 20th day of the month after
the transfer.
 The person transferring the property completes
the necessary forms, generates the payment slip
through i-tax and makes the payments.
 Prove of payment must be produced at the point
of paying duty.
 Capital gains tax is payable after the sales
transaction is complete.
CGT Declaration Forms
• CGT1 – Transfer of land and buildings by individuals &
corporate bodies
• CGT1P – Transfer of land and buildings by partnerships
• CGT2 – Transfer of marketable securities by individuals
& corporate bodies
• CGT2P–Transfer of marketable securities by
partnerships
• CGT3– Declaration for transactions that are exempt
from CGT
NB: Can be downloaded from the KRA website

Development in other countries with
regards to capital gains
Indexation
• The Adjusted Cost is increased by the multiplying with a
factor based on the Consumer Price Index or the Retail
Price Index.
Taper Relief
• Tapering relief works by discounting the amount of
chargeable gains that are subject to CGT.
• The longer the property is held the higher the discount
applied to the chargeable gains.
TAXATION OF FARMING INCOME
• Computation of taxable income from Farming t is informed by the

way the business of farming is being carried out- Corporation,
partnership or sole trade
• The taxable income of a farm constitute sale proceeds from the
following:
• Sale of crops
• Sale of animals
• Sale of animals produce
• Sale of trees (sale of standing timber)
Allowable expenses for farming income
• Cost of operating the farm e.g. cost of water, electricity

• Cost of clearing land to plant permanent or semi-permanent crops.
• Cost of ploughing and preparing land to plant permanent or semi-
permanent crops.
• Cost of purchasing animals or livestock.
• Cost of purchasing seeds or seedlings
• Cost of purchasing fertilizers, pesticides etc.
• Cost incurred in prevention of soil erosion e.g. cost of constructing
terraces and gabions.
Allowable expenses for farming income cont’
• Cost of standing timber sold.
• Subscriptions paid by the fanner to a farmer association.
• Cost of acquiring farm lease and stamp duty paid provided the lease
does not exceed 99 years.
• Farm works deductions (FWD) on capital expenditure incurred on
construction of farm house.
• Wear and tear allowances of farm machinery.
• Diminution in value (DIV) at the rate of 33 1/3% on cost for farm
implements e.g. machetes, hoes, spades, shovels etc.
Farming works deduction (FWD)
• This is a capital allowance granted to the farmer on capital

expenditure incurred on construction of farm works at the following
rates tip to 3 l’ December 2006-33 1/3 % on cost for the first three
years, Is’ January December
• From 1st 2007 to 2011-50% on cost for the first 2 years
• From 1st January 2012-100% for the first one year
•
Meaning of farm works
• This is any structure necessary for proper operation of the farm e.g.
• Farm quarters
• Labour quarters
• Stores or granaries
• Irrigation channels or drains
• Cowshed, cattle dips
• Fence excluding a line fence
• Chicken pens, rabbit hatches, pig stys, dog kennels, feeding troughs
• Water supply works.
farm work deductions cont’
• Farm work deduction is computed on straight line basis irrespective

of time the structure was constructed.
• If the farm is sold before the farm works deduction have been
claimed in full, the new owner will claim farm work deduction based
on old cost of construction i.e the purchase price is NOT considered
when calculating FWD.
farm work deductions cont’
• If the farm is sold during the year, the farm work deduction will be
split among the seller and buyer based on the period of ownership.
• If the farm is a sole proprietorship or partnership, the qualifying cost

of farm house is restricted to 1/3rd of the cost of farm house. This
restriction does not apply for limited company.
Standing trees/timber
• These are trees growing on farm ranch. The cost of purchasing the
trees is allowable expenses where no price was paid, an amount the
commissioner may consider as reasonable. The sales proceeds from
sale of trees are considered as taxable income.
Hobby farming
• Where more than 25% of farm produce is consumed by farmer this is

called hobby farming. Income derived is non-taxable income. Any
losses of cost incurred on hobby farming are non-allowable expenses.
INVESTMENT INCOME
• This is income derived from an investment vehicle.
• It includes:
Dividends income
Interest payments
capital gains
Taxation of Dividends
• Dividend paid by resident companies to the individual shareholders is

taxable income.
• Dividends are taxed on withholding tax basis.
• A resident company controlling more than 12.5% shareholding is exempt
from tax for dividend received from such a co.
• In comparison to employment income which is brought to tax in the year it

is earned, dividend income is taxable in the year it was paid out.
Dividends:
For tax purposes, the following amounts are taken to be dividend
income
• Cash dividends
• The distribution of profits in case of voluntary winding up ( whether cash or non-

cash)
• The issue of debentures or redeemable preference shares without any payment.

Dividend in this case shall be higher of the nominal value or Redeemable value.
• The issue of debentures without any payment
• Issuance of Debentures or redeemable Preference shares for part payment i.e. at

a discount.
Classification of Dividends
Qualifying dividends
Non-qualifying dividends
Exempt
Qualifying dividends
• These are dividends subject to withholding tax only-meaning the

withholding tax charged on them is final.
• Resident WHT is 5% on gross amount & 10% for non residents.

• These are dividends paid by:
Private companies
Public Companies
SACCOs
Non-Qualifying Dividends
For non qualifying dividends the withholding tax of 15% is not final.
The non qualifying dividends will be aggregated with other incomes

and taxed further.
Non qualifying dividends are dividends paid by cooperative societies

other than Sacco’s. e.g Kakamega farmers cooperative
society.((Taxed under section 19A) - S2)
Exempt dividends
• Exempt dividends – Paid to exempt persons listed on 1st Schedule or

those received by a resident co. controlling >12.5% - S7(2)
Interest
Interest incurred wholly & exclusively in generation of income is tax
allowable
But where a company is controlled by non resident person together
with four or fewer resident persons the interest deductibility is
restricted only to the extent that the total indebtedness of the
company does not exceed three times the paid up share capital and
revenue reserves(thin capitalization-debt to equity ratio of 3:1)
Thin capitalization ratio from extractive industry is 2:1
(e.g.petroleum, mining, geothermal companies e.t.c)
Interest Classification
• Qualifying interest
• Non qualifying interest

Qualifying Interest
Is interest receivable by an individual in any year of income from

financial institutions e.g. Banks, insurance companies, treasury Bills
and bonds.
Interest is subject to Withholding tax as final tax at a rate of 15%
Non-Qualifying Interest
• This the interest that is taxed further.
• Eg. All income accruing to a person other than individual
• Interest in excess of shs 300,000 of housing development bonds
• Interest accruing to individuals other than from financial institutions
• If the amount is stated as net ,it should be converted to gross .
• Gross= Net Interest * 100%
• 85%
Exempt Interest
• Interest from Abroad
• Interest fro saving account with post bank
• Interest received from pension
• Interest received from gvt infrastructure bonds
• Home ownership plan interest up to 3m
• Interest by non resident from govt treasury bonds
• Interest from a tax reserve certificate
Deemed Interest
• A company excluding banks & financial institutions ,that has an
interest free loan from a related non-resident entity is required to
compute deemed interest and add it back to tax computation.(wef
june 2010).
• The deemed interst attract 15% WHT
• From 2011 the deemed interest is based on the commissioners

prescribed rates.
Rental income
Residential rental income tax (Sec 6A)
• Residential Rental income exceeding Ksh 144,000 per annum (12,000
per month) and not exceeding Kshs 10m per annum (833,333 per
month) will be taxed at 10% of gross revenue from rental income.
• Failure to file returns for rental income by 20th of the following month
attract a Penalty of 5% of principal amount due or Ksh 20,000 which
ever is higher.
• Amount not paid by due date shall attract 20% of the tax payable and
interest of 1% per month.
Commercial Rental Income
• can arise from:
• Land,
• Buildings –office blocks,
• Open spaces for selling vehicles,
• residential houses converted to offices.
Taxation of rent income from non-resident
• Rent income for non-residents is subject to withholding tax at the rate

of 30% of the gross income. Withholding tax is final. A non-resident
landlord is therefore not allowed to deduct any expenses incurred in
the generation of the rental income.
Taxation of commercial rental income for resident persons.
• The rent chargeable to tax is the net rent.
• Net rent = Gross Rent - Allowable rental expenses
Deposits are not taxed but key money is taxable

Resident Commercial rental income taxation
• Only revenue expenses are allowed which taxes are incurred to

generate rental income e.g. caretakers salary, repairs and
maintenance, advert expenses, agents fees, rates etc.
• Expenses must be matched with related revenues and hence
expenses incurred before letting period are not allowed against rental
income. The only expenses allowed which are incurred before letting
includes; advertising, recruitment and staffing and stationary.
• If a property has been let for a period of less than 12 months,
expenses relating to the whole year must be apportioned accordingly
e.g. land, rent and rates, insurance expenses, interest on loans etc.
cont’
• Capital expenditure isn’t allowed against rental income unless specifically
stated as allowable under the Act. The following capital expenditures are
specifically allowed under the Act;
• a) Structural alterations to maintain the existing rent e, g. demolition to
create more space.
• b) Construction of drive ways.
• c) Capital allowances e.g. WTA.
• d) Tarmacking of drive ways.
• Interest on mortgage is allowable expenditure deduction in full against the
rental income provided the property had been let for 12 months.
cont’
• Private expenses incurred by the owner aren’t allowed against rental

income e.g. travelling and entertainment expenses.
• Expenses incurred for the whole year in respect of holiday cottages

are allowed in full even if the cottage had not been occupied for 12
months
Allowable rental expenses for a resident person
• Land, rent and rates

• Regular repairs and maintenance
• Cost of structural alterations necessary to maintain existing rent i.e.
renovation cost.
• Insurance premiums paid to insure the property.
• Revaluation expenses incurred in insuring the property.
• Mortgage interest paid on loan borrowed to buy the rent property.
• Bad debts written off (rent in arrears).
Allowable rental expenses for a resident
person cont’
• Legal expenses incurred in debt collection while defending property rights.
• Legal costs incurred in the acquisition of a lease which is not more than 99
years.
• Reasonable advertising cost to attract tenants
• Commissions and fees paid to agents to manage the property.
• Salaries and wages paid to caretakers and other workers taking care of
property.
• Wear and tear allowance on furniture where the property is let out fully
furnished.
• Cost of water, electricity and telephone where paid by the land lord under
lease agreement.
Non-allowable expenses
• Cost of extending the premises

• Cost of structural alterations where the rent increases.
• Expenses incurred by renting the property.
• Private expenses of the landlord.
•
ROYALTIES
• This is income arising from intellectual properties i.e. copyrights,

trademarks, patents, cinematography, films, tapes e.tc.
Taxation of royalty income for non-residents
• Royalty income from non-resident is subject to withholding tax at the

rate of 20% of gross income.
•
• Withholding tax is final. A non-resident person is not allowed to
deduct any expenses from the taxable income.
Taxation of royalty income for residents
• Royalty income for resident persons is subject to withholding tax at

the rate of 5% of gross income.
• Withholding tax is not final tax. The net royalty income is added back
to other income of tax payer and taxed. A resident person is therefore
allowed to deduct expenses incurred in generation of income.
Taxation of royalty income for residents cont’
• Expenses are allowed against gross royalty income to arrive at the taxable
royalty.
• Expenses incurred prior to the period of production of royalty income are not
allowed e.g. expenses in the nature of researching, testing, development
before commencement of generation of the royalty income.
• The net royalty income will be aggregated with other incomes of that resident
individual and assessed on him using graduated scale rates in the case of an
individual and corporation tax rate in the case of a body corporate.
• There is a withholding tax at source at 5% to be set off against gross tax
liability of the person.
Value Added Tax (VAT)
`
Value Added Tax (VAT)
 It was introduced in Kenya on 1st January 1990 to replace

sales tax
 is a tax on spending (consumption).

 It is collected by businesses as agents of the govt & passes it
on to the government.
 It is chargeable to all commercial activities - imports &

supply of goods and services in Kenya
VAT cont’
 It is a multi stage tax deducted at every stage of
handling goods or service & passed on to the govt.
 The end user bears the incidence of VAT tax.
 The consumer who acquires the goods or services for

private use is not allowed to deduct VAT.
VAT cont’
 There are only Three VAT rates in Kenyan currently
0% ,8% & 16% rate.
 Exempt category
 All exports are zero-rate and some goods
 Some goods and services are exempted esp.

unprocessed agriculture products & financial services
KEY TERMS IN VAT
Value Added:
It is the increase in worth of a supply when it changes hands
in the line of manufacture and distribution.
Output Tax
This is the VAT charged by a registered person when he
makes a supply of taxable supplies in the course of his
business.
Input Tax
This is the VAT charged on a taxable person when he acquires
taxable supplies for use in the furtherance of his business.
KEY TERMS IN VAT CONT…
Taxable goods/services
Goods/services on which VAT is chargeable.
Exempt goods/services
Goods/services on which no VAT is chargeable.
Zero Rated Goods/services
Goods/services on which VAT is chargeable at 0%
Tax period
It means one calendar month & VAT is accounted for on
a monthly basis
KEY TERMS IN VAT CONT…
Taxable person:
 a person who is liable to apply for registration under
the VAT Act.
VAT payable/refundable
 difference between input and output tax.
If output tax is more than the input tax the difference is
the VAT payable.
If input tax is higher than output tax the difference is the

VAT refundable.
Cannons to be satisfied for VAT to be applicable.
 There must be a supply. VAT is charged on supply not

income whether a profit is made or not is immaterial.
 The supply must be Taxable. Some supplies are exempt
hence not subject to VAT.
 The goods or services must be supplied by a VAT
taxable person.
 The supply must be made in Kenya. A person trading
in a foreign country is not required to account for VAT
in Kenya.
Supply
It means transacting in taxable goods or services.
Includes the following:

 The sale or provision of taxable services to another
person.
 The appropriation by a registered person of taxable

goods or services for his own use outside the business.
Supply CONT…
 The making of a gift of any taxable goods or services;
 Letting of taxable goods on hire, leasing or other

transfers.
 The receipt of a sum of money by a registered person

for loss of taxable goods or services.
Supply CONT…
 Provision of taxable services by a contractor to himself
in constructing a building and related civil
engineering works for his own use, sale or renting to
other persons.
 Any other disposal of taxable goods or provision of

taxable services.
TAXABLE VALUE
 It is the value of a supply on which VAT is due.
 It is the consideration given in exchange for a supply

and it may be payment in money or in any other form.
The taxable value is important because it is on this
value that we calculate VAT.
Rules for determining the Taxable Value.
 If a discount is offered on a supply the taxable value is

the value of such a supply, less the discount offered.
 For imported services the taxable value shall be the

price at which the services are provided.
 For imported goods the taxable value shall be the cost

of such goods plus customs duty payable on such
goods & excise duty if payable
Rules for determining the Taxable Value.Cont..
 If the consideration is not in money (Barter

Transaction) the taxable value will be the
consideration which would have been paid if money
was the only consideration (open market value).
 To determine the taxable value, any amount charged

on: packaging, advertising, financing, servicing ,
warrants, commission and any other liability that the
purchaser has to pay in addition to the price, is added
to the price of the commodity.
Tax Point
 This is the point in time at which the tax (VAT)

becomes due and payable.
 For VAT to become due and payable a supply must

have taken place.
 VAT should be accounted for in the month in which

the tax point occurred using the VAT rate that was in
force at that time.
Determined of Tax Point
Whichever of the four occurs earliest:
 When the goods are supplied or the services provided
to the purchaser
 An Invoice is issued to the purchaser in respect of the

supply
 Payment is received for all or part of the supply
 When 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.
Tax Point
 For VAT purposes, the tax becomes due and payable at

the tax point
 However, the registered traders have been given an

allowance of up to 20th of the following month to make
the payment to the commissioner of VAT.
 For example the VAT charged in the month of January

2014 is payable by 20th February 2014.
Example -Tax Point
X, who is a registered trader delivered goods to Y on 21st

January 2017.
He issued an Invoice for the goods on 10th February 2017.
Y paid for the goods on 3rd March 2017.
When should X pay the VAT on those goods to the

commissioner?
Answer
 The tax point on such goods is 21st January 2017.
 The VAT should be paid by 20th February 2017.
Note
VAT is payable whether payment has been received or
not as long as the tax point has occurred
VAT registration
Compulsory registration
 Any person shall be registered compulsory for VAT if:
 In the course of business has manufactured and

supplied or expect top manufacture and supply taxable
goods or has supplied or expects to supply taxable
services or both the value of which is Ksh 5,000,000 or
more in a period of twelve months.
Compulsory registration Cont’
 The person is a designated dealer dealing in

designated goods other than designated jewellery, pre
recorded music and timber and has supplied or
expects to supply taxable goods or services or both he
value of which exceed in any other limits in those
periods as given in (a) above
 The person is a saw miller

 Any person who in any one year sell 4 or more motor

vehicles
 Provides accountancy services including book
keeping, or similar services
 Provides services supplier by auctioneers, estate agents
and valuers
 Provide legal and arbitration services
 Provides reports, advice, information or similar
technical services
 provides computer services
 Offers services of survey and assessors

 Supplies services or architects, draughtsmen and
interior designers
 Offers consulting engineering services
 Is an agent excluding insurance brokers, stock
exchange, brokers tea and coffee brokers
 Provides security and investigation services
 Provides advertising services
Compulsory registration Cont
 Offers telecommunication services
 Offers services supplied by contractors
 Provides clearing and forwarding services
 Provides company secretarial services

Voluntary registration
 It is permissible under the law that is granted at the

discretion of the commissioner
DEREGISTRATION:
 It is the process of removing a registered trader from the VAT register.

 Any trader wishing to be de-registered for any reason may apply to the
commissioner of VAT.
De-registration may be requested on the following grounds
 Closure of business
 Sale/transfer of business
 Death of a trader
 legal incapacitation (Bankruptcy)
 Insolvency
 Change of business status eg. Partnership to limited company
 If the turnover falls below the prescribed limits.
Tax invoice
 Is a document which gives the description of goods

supplied, their VAT rate, amount of Vat and total value
of goods supplied by a supplier
 Every registered person must keep invoices and supply

tax invoice at the time the goods/ services are supplied
Offences under VAT Act
 Failure to registered when eligible
 Make or produce false document
 Collect VAT without registration with VAT department

 Non compliance of rules and regulations made under
VAT Act
 Evade the tax.
Advantages of VAT
 It is based on value and therefore adjust automatically

to the effects of inflation
 It is collected in stages and paid monthly and tends to
reduce tax evasion
 Is charged to expenditure and as such spreads tax

burden
 East to compute since is levied at a flat rate of 16%
 Its applicable to many centers of economy-both goods
& services
Disadvantages of VAT
 Many statutory records involved e.g. tax invoice, cash

book, debit note etc
 Most tax payers are illiterate and they are not able to
follow the required procedure
 Where there is no price control, traders will increase

prices in unreasonably citing VAT as a reason
 Enforcement of VAT require high calibre staff for

continuous audit
Changes in business particulars for VAT
A registered person must notify details to the

commissioner within fourteen days off a change
in:
 Physical address of the business
 Additional –places of business or new branches
 Closing or any place of business
 Name or trading name of the business
 If more than 30% of the share capital is acquired by a
person or a group of persons
Changes in business particulars for VAT Cont’
 The person authorized to sign return and other
document is changed
 The partners in a partnership are changed
 A change occurs in the trade classification of the goods
or services being supplied
Value of supply
 The price which taxable goods and services are
provided.
 The value of supply amount is multiplied by the rate
of VAT to arrive at VAT payable.
VAT= 16% * price

Where price is VAT inclusive: VAT=t/1+t *price=16/116
Partial Exemptions
 Where a registered trader sells both taxable & exempt

supplies
Withholding VAT
 Withholding VAT is deducted at 6% on any taxable
goods or services supplied agents appointed by the
commissioner.
 Some agents are like: County govt., Parastatals,

Ministries etc.
Adjustments of VAT Invoice
 No more than one vat invoice can be issued per single
transaction.
 Where adjustment on vat invoice is necessary it can
only be effected through a vat credit note or vat debit
note.
VAT Credit Note
 Is a document issued by a supplier to a customer when
there is reduction or discount on the price after an
invoice has already been issued.
 Should be issued within six months.
 The supplier who issues a VAT credit note reflect the
adjustment by reducing the output tax reported.
 The VAT registered business which receives a VAT
credit note reflect the adjustment by reducing the
input tax reported.
VAT DEBIT Note
 Is a document issued by a VAT registered person
indicating that the vat charged on the invoice to
which it relates is less than the vat that was supposed
to be charged.
 The vat registered supplier who issues VAT debit
note reflect the adjustment by increasing the output
tax reported.
 The VAT registered business that receives a VAT debit
note reflect the adjustment by increasing the input tax
reported.
Circumstances when vat credit
/debit note is issued
 Cancellation of a supply
 Good returned to the registered supplier
 The registered supplier charged an incorrect price on
the vat invoice
Vat on Imported Service /Reverse Charge
 These are services provided by a person who is
normally not resident in Kenya and who is not
required to register for tax in Kenya whether the
services are provided from outside of Kenya or from
Kenya or from both in and outside of Kenya.
 If a supply of imported taxable services is made to a

registered person, the registered person shall be
deemed to have made a taxable supply to himself.
Vat on Imported Service /Reverse Charge cont’
 Any importer of a service irrespective of his VAT

registration status is required by law to pay vat on the
service imported (reverse vat).
 NB. in the case of normal trade, the supplier of the goods
or services charges the VAT and pays it over to the KRA.).
 In the following month, the importer of the service utilizes

the VAT as input tax for that month.
VAT on Exported Services
 An export of service does not include taxable services
provided in Kenya but paid for by a person who is not a
resident in Kenya as per VAT 2017 regulations.
 This provision contradict section 2 of VAT Act & international

best practice on taxation of exports of services .
 Section 2 states that- Services shall be deemed to have been
exported where they are provided to a recipient outside
Kenya for use, consumption, or enjoyment outside Kenya.
NB. There is an ongoing dispute between KRA and tax payers on

what constitute Exported services.
VAT on Exported Services cont”
 According to 2017 VAT regulations KRA has ignored
the issue of service exportation. Unless the provider of
the service physically leaves Kenya and provide the
service to a recipient outside Kenya.
 The implication of this is that if an entity resident in

Kenya provides a service outside Kenya it will be
charged vat at 16%. (i.e. not zero rated).
VAT REFUND
How do VAT refunds arise?
 Where a registered person makes zero-rated supplies
 Where VAT is paid in error (or overpaid) to the tax authority
 In the case of bad debts
 Timelines for VAT refund claims
VAT refund claims now to be lodged within 12 months from the

date when the tax became due and payable.
No timelines on the part of KRA and the National Treasury to audit

and settle refund claims.
Record Keeping
 Registered persons required to keep a full and true
written record of all their transactions in Kenya for a
period of 5 years.
 Such record may be kept in electronic form or

otherwise and in Swahili or English.
Records to be kept include:
 Tax invoices issued in serial order

 Credit and debit notes issued in chronological order
 Purchase invoices
 customs entries and receipts
 Details of imported services
 Tax account
 Periodical stock records
 Such other records as may be specified
VAT PENALTIES
 Failure to file return – Kshs. 10,000
 Late payment of VAT shown on a VAT return – the higher

of KShs 10,000 or 5% of the tax due
 Additional penalties for late payment – 2% per month or

part thereof
 Failure to comply with ETR regulation – Kshs. 500,000 or 3

years’ imprisonment
 General penalty - Kshs. 500,000 or 3 years’ imprisonment

Non-deductible input tax
a) VAT not incurred in the furtherance of taxable business

 VAT incurred in transactions that are not in the
furtherance of the taxable business. For example, if a
lawyer with a legal business has a chicken business on
the side, the input VAT that may be incurred in the
chicken business cannot be utilized in the legal
business.
 b) Prohibited input tax
This is input tax though it was incurred in the
furtherance of the taxable business; the VAT Act does
not allow its deduction. For example, the VAT incurred
in the purchase, repair and maintenance of marketing
vehicles in a company is not allowed input tax.
 c) No tax invoices
 Transactions that do not have tax invoices are not
recognized under the tax laws for input tax deduction.
The VAT Act has regulations on what constitutes a tax
invoice. The critical things are that the taxpayer is
registered for VAT and the tax invoice has electronic
tax registers (ETR) receipts or electronic signature
device (ESD) details.
 6 months rule
 All input tax must be reported within six month of
being incurred. In cases where this does not happen,
the taxpayer forfeits the input tax. Therefore, input tax
that is incurred more than 6 months earlier cannot be
claimed and hence it is non-deductible.
 e) Exempt supplies
 For VAT purposes, a business has taxable and exempt
supplies (goods and services). Taxable supplies are
taxed at the rates of 16 % and 0 % in Kenya. All input
tax that is attributable to the taxable supplies is
deductible with exemptions. However, all input tax
that is directly attributable to exempt supplies is not
deductible.
 f) Portion of VAT attributable to exempt supplies
 The portion of VAT that is attributable to exempt
supplies after the application of partial exemption
formula to determine the deductible input tax in cases
where the taxpayer has both taxable and exempt
supplies is not deductible
 g) Unclaimed input tax on registration
 On registration, a taxpayer has a right to claim input
tax incurred prior to the registration. This is only input
tax that is intended for use in the production of
taxable supplies.
 The input tax must be claimed within 3 month of
registration. It must be input tax that was incurred
within the last 24 months
 h) Input tax beyond 24 month on registration
 If the taxpayer has input tax that was incurred beyond
24 month on registration, that input tax cannot be
claimed.
 The claim for input tax claimed under (g) and (h) is a
claim for relief – the taxpayer is not refunded the
money but is allowed to utilize the input amounts
against output tax in subsequent months.
Deducting non-deductible input tax
 In cases where non-deductible input tax is deducted,

the taxpayer will have committed an offence. The input
tax will be added back. If the month tax balance is a
debit balance, late payment interests will be levied.
First Schedule-Exemption
PART I
 SECTION A- GOODS EXEMPT SUPPLIES
 SECTION B - EXEMPT GOODS ON TRANSITION
PART II
SERVICES
Second Schedule
ZERO-RATING
PART A
Zero Rated Supplies.
PART B
Zero Rated Supplies to Public Bodies, Privileged Persons
& Institutions.
VAT Account
Input Tax Sh Output Tax Sh
VAT on purchases XX VAT on sales XX
VAT on purchases return (xx) VAT on sales returns (XX)
VAT on Debit notes Received XX VAT on credit notes issued (XX)
VAT on payment of expenses XX VAT on debit issued XX
VAT on purchase of business XX VAT on exports (Zero-rated) -
assets
VAT on imported goods XX
VAT on Paid bad debts XX
Balance c/d ( VAT payable) XX -
XX XX
Example one
Mr. Ombati is a registered VAT consultant. He
made the following transactions in the
month of October 2017.
1.Gave a gift to his local church inform of a
free service valued at Sh.250,000/=
2.Purchased a business car at Shs 1.5million
vat inclusive
3.Raised an invoice amounting to Sh.one
million
Example one
4.Issued a credit note sh.25,000
5. Incurred input tax(20% related to
non taxable supplies) of Shs
250,000.
Required: Using a rate of 16% of VAT,
determine the VAT payable.
Solution
Input Tax SH Output tAX SH
Taxable Supplies(80% *250000) 200,000 Free services 40,000

16%*250000
Vat on Car 206,897 Invoice raised 160,000
16%*1,000,000
Credit note (4000)
16%*250,000
Vat Refundable 210,897
406,897 406,897
Solution…
 Input tax on exempt supplies is non-refundable
 The car is assumed to be for personal use. Input tax is

non-deductible
Example Two
A manufacturer pays Shs 100,000 to purchase raw
materials. He incurs another 25% on cost of converting
raw materials into marketable commodity. Further he
includes a mark up of 40% on cost.
Required: If the VAT applicable is 18% calculate the

VAT payable by the manufacturer.
Answer
VALUE VAT
Raw material 100,000
Input vat 18% 18000 18,000
Buying price 100,000
Conversion cost 25% 25,000
125,000
Markup 40% 50,000
Selling price 175,000
Output Vat 18% 31,500 31,500
Less Input Vat on material (18,000)
VAT PAYABLE 13,500
Example THREE
Assume a manufacturer acquires raw materials for
Kshs.100,000 on which VAT is levied at 16%.
At each stage of the chain 25% conversion costs are
incurred and a 30% mark up is made.
Required:
The Total VAT paid to KRA
Answer Cont….
Value VAT
Kshs. Kshs.
Stage 1 Supplier of raw material 100,000
VAT @ 16% 16,000 16,000A
16,000
Stage 2 Manufacturer
Conversion cost @ 25% 25,000
125,000
Mark up @ 30% 37,500
VAT @ 16% 26,000 26,000
188,500
Input tax (VAT on
materials -16,000
VAT Payable 10,000B
Answer Cont…
Stage 3 Wholesaler Value VAT
Additional cost @
25% 40,625
203,125
Mark up @ 30% 60,938
VAT @ 16% 42,250 42,250
306,313
Input tax -26,000
VAT payable 16,250C
Answer Cont…
Stage 4 Retailer
Additional cost @ 25% 66,016
330,079
Mark up @ 30% 99,023
VAT @ 16% 68,656 68,656
Retail price 497,758
-
Input tax 42,250
VAT Payable 26,406 D
Answer cont….
VAT COLLECTION
Supplier of raw material 16,000A
Manufacturer 10,000B
Wholesaler 16,250C
Retailer 26,406D
68,656
Customs
It is about international trade in goods
2
EVOLUTION OF CUSTOMS
The origin Customs Duties
 Customs is one of the oldest professions (after ruling

class, clergy and military).
 Taxation started with members of communities giving

their chiefs or leaders gifts in return for his/her leadership
EVOLUTION OF CUSTOMS cont’
 With expanding trade between communities, rulers made

it mandatory that traders passing through their land pay a
small portion of their goods as gifts.
 Traders returning to their respective communities also

paid a portion of their merchandise into the Ruler’s
treasury.
EVOLUTION OF CUSTOMS cont’
The origin Customs Entry/Exit Points
 With time, specified points - bridges and gates in
towns were arranged where duty collectors were
stationed to collect customs duties from passing
traders.
 Customs duties, then, became a common

requirement to fund the kings’ coffers.
 Customs duties were easy to collect and thus became

the most reliable sources of public revenue for many
centuries.
REGIONAL ECONOMIC INTEGRATION-(regionalism)
Process whereby countries in a geographic region

cooperate with one another to reduce or eliminate
barriers to the international flow of products,
people, or capital.
Levels of Regional Integration
 Free- Trade Area

 Customs Union
 Common Market
 Economic Union
 Political Union
 Free- Trade Area: Economic integration whereby
countries seek to remove all barriers to trade
between themselves , but each country determines
its own barriers against nonmembers
8
 Customs Union : Economic integration whereby
country remove all barriers to trade between
themselves but erect a common trade policy against
nonmembers
9
 Common Market
Economic integration whereby countries

remove all barriers to trade and the movement
of labor and capital between themselves but
erect a common trade policy against
nonmembers.
10
 Economic Union
Economic integration whereby countries remove

barriers to trade and the movement of labor and
capital, erect a common trade policy against
nonmembers, and coordinate their economic
policies.
11
 Political Union
Economic and political integration whereby

countries coordinate aspects of their economic and
political systems.
12
Free-Trade Area
Customs Union
Common Market
Economic Union
Political Union
13
Benefits of Regional Integration
 Trade Creation
 Greater Consensus
 Political Cooperation
 Employment Opportunities
14
 Trade Creation
Increase in the level of trade between nations that
results from regional economic integration.
15
 Greater Consensus
 The Benefits of trying to eliminate trade barriers in
smaller groups of countries.
 It can be easier to gain consensus from fewer members as
opposed to.
16
 Political Cooperation
 Be political benefits from efforts toward regional
economic Integration.
 A group of nations can have significantly greater political
weight than each nation has individually.
17
 Employment Opportunities
 Expand employment opportunities by enabling people to
move from one country to another.
 Simply to earn a higher wage.
18
Drawbacks of Regional Integration
 Trade diversion
 Shifts in Employment
 Loss of National Sovereignty
19
 Trade diversion
Diversion of trade away from nations not belonging
to a trading bloc and toward member nations
20
 Shifts in Employment
Industries requiring mostly unskilled labor
21
 Loss of National Sovereignty
Successive levels of integration require that nations

surrender more of their national sovereignty
22
INTEGRATION IN EAC
HISTORY OF CUSTOMS IN EAST AFRICA
A Customs Union between Kenya and Uganda was formed in

1917 under colonial rule, with a single customs territory.
 The Single Customs territory had a Common External Tariff

and internal free trade which began in 1923.
 Tanganyika joined the Common Customs Administration in

1927.
FEATURES OF EARLY EAC CUSTOMS UNION
East Africa in earlier days

 Single collection centre of import duty at the point of entry
 Free movement of goods capital an labour in East Africa
 Allocation of customs revenue among members on the

basis of ‘derivation’ (per country of ultimate destination)
 Free trade in products of East African origin
 1949, a common Customs Administration & currency
 Common administration of transport & communication
REASONS FOR COLLAPSE OF EAC 1977
The dissolution of the Treaty
Treaty for EA Co-operation officially dissolved in 1977:
 Lack of strong political will
 lack of strong participation of the private sector and civil

society in the co-operation activities
 The continued disproportionate sharing of benefits of the

Community among the Partner States
 Lack of adequate policies to address grievances

EAC Today
 Free Trade Area
 Custom Union
 Common Market
STRUCTURE AND ADMINISTRATION OF THE EAC
CUSTOMS
Organs of the EAC

 The Summit
 The Council of Ministers
 The Coordinating Committee
 Sectoral Committees
Functions/Roles of Customs
The Customs function has evolved from one of pure

collection of duties and taxes to the following:-
 Assessment & collection of taxes
 Trade facilitation
 Economic Security
 Statistical gathering
 Safety & Security

Functions/Roles of Customs
 Enforcement of international treaties and conventions
 Observation of quotas
 Exchange of information between Customs administrations

and other stakeholders such as: World Custom
Organization.
Roles of customs cont
Assessment & collection of taxes
•Assessment, collection and accounting of Taxes due to the fiscus
through:
• Valuation of goods
• Verification of trading documents.
• Classification Of Goods
• Computation Of Taxes
• Checking declarations
• Monitoring exemptions
31
Roles of customs cont’
Trade Facilitation:
• High levels of transparency and predictability of policy, legislation and supply chain impact.
• Systematic rationalization of procedures and documents used in International Trade in line with
Kyoto convention.
• Preferential treatment of compliant and trusted traders.
• Training – Customs officers and Customs agents
• Development of a mature organisation with high skill levels and efficient, effective systems and
processes.
• Adopting of technology
• Facilitate Regional Economic Integration.
• Facilitation incentives such EPZ, AGOA, & COMESA
ROLE OF CUSTOMS
Protection Of Society & Industry
 Assure consumer and trade protection from illicit and dangerous
goods.
 Protect domestic industry through application of trade tariffs.
By Enforcing Of Laws Relating To:
 Import and Export Prohibitions
 Import and Export Restrictions
 Environmental Conservations
 Counterfeits and contrabands
 Import and Export quotas
 Money laundering
 Human trafficking
33
Stastical Gathering
•Creation of a data rich environment with mandatory advanced information
to facilitate effective targeting.
•Collection of Statistics by taking records of imports and exports:

• Statistics on international trade
• Statistics on regional Trade
• Statistics on money movements
• statistics for internal planning
• Statistics for computation balance of trade

Safety & Security
 Enforcement of national security as well as cooperating
in the fight against terrorism
ROLE OF CUSTOMS
Prevention of smuggling by:
• Requiring conveyances to dock or depart.
• Patrol of customs entry and exit points.
• Stopping any conveyance suspected of carrying un-customed

goods.
• Boarding and searching any conveyance
• Questioning any person coming into or leaving a partner state.
• Enforcing power to Arrest (S156/S7)
36
Sources of customs law
 International Conventions
 WTO agreements
 Kyoto convention on harmonization and simplification of
customs procedures
 COMESA protocol
 EAC Treaty and Customs Union Protocol
 Northern Corridor agreement
 Bilateral agreements with other states
Sources of customs law
38
Local sources
 EAC customs management Act (EACCMA)
 The Constitution
 Case law
 Commissioners rulings
 National practice
EACCMA,2004
 East Africa Community Customs Management Act
2004 (EACCMA) is the relevant law on matters related
to the Customs and import duty in East Africa
Community partner States.
Section 2 of EACMA, 2004 defines ‘Customs’ as
the Customs Departments of the Partner States.
Other Definitions
 bonded warehouse
 cargo
 countervailing duty
 duty drawback
 dutiable goods
 green channel
 manufacturing under bond
 prohibited goods
 red channel
Definitions
 restricted goods
 Smuggling
 Subsidy
 sufferance wharf
 Transire
 uncustomed goods”
Customs Documents
 Clean Report of Findings (CRF)
 Bill of Lading- ownership certificate
 Import Declaration form (IDF)
 Customs entry- Form C63
 Purchase invoice
 Customs receipts
 Port release order
42
Clean report of findings
 A document issued by a pre-shipment inspection
agency engaged by importer´s country, indicating that
the relative shipment conforms to the criteria
established by the government. Typically, pre-
shipments inspections cover price verification and
physical inspection of the goods to determine that
they conform in quantity, quality, and kind to
importation approval. See also certificate of
inspection; pre-shipment inspection.
 Assignment Define the other documents in the
previous slide..
Requirements for importation
 Pre-shipment inspection
 Production of Clean Report Findings (CRF)
 Declaration to customs
 Payment of duty and VAT or execution of guarantees
(bonds)
44
Significance of pre-inspection
 Curb duty evasion
 Ensures legality of imported goods
 Goods are imported as per the orders
45
Categories of imports in kenya
 For direct home use
 For warehousing
 For use in a bonded factory
 For transit
 For temporary importation
 For use in an EPZ facility
46
Goods subject to Customs control
(a) imported goods, including goods imported through the
Post Office, from the time of importation until
delivery for home consumption or until exportation,
whichever first happens;
(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 which are with the permission of the proper
officer 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

Bonded Warehouse
 This is a warehouse licensed by CCE for deposit of dutiable

goods on which duty has not been paid and they have been
entered to be warehoused.
 A bonded warehouse includes duty free shops i.e. a room
or premises situated in a port and licensed by CCE for
deposits of goods chargeable with duty in which:
 Duty has not been paid

 Goods have been entered to the warehouse for use as ship
stores
 The goods on for sale to passengers departing to places
outside Kenya
Bonded Warehouse
 purposes /importance of a bonded warehouse
 Storage of uncustomed goods (dutable goods)
 To facilitate domestic/local production of goods for
exports
 Ensure proper handling of transit goods
 Reduces clogging of good s in the ports
DUMPING
Imported goods are deemed to have been dumped in

Kenya if:
 Goods are sold in Kenya at price lower than the cost of
importing i.e. cost of insurance, freight, duties taxes,
cost of goods, e.t.c. In the country exporting the goods.
 The export price in the country, which is exporting the
goods is less the fair market value of price of goods in
that country.
Goods are deemed to have been
dumped in Kenya if: cont’
 If the country exporting the goods to Kenya had
imported the goods and the export price of goods in the
original country of export is less than fair market price
in that country
 The export price of goods in the country, which is

exporting is less than fair market price in that country
ANTI-DUMPING MEASURES IMPOSED BY THE GOVERNMENT
Imposing high dumping duty

Imposing a quota (limiting the amount
of imports)
Having a pre-shipment inspection at the
ports to ensure no evasion of duty/tax,
right goods have been shipped as per the
orders
ANTI-DUMPING MEASURES IMPOSED BY THE
GOVERNMENT
 Getting a clean report of funding. This is a report
issued by international transporters e.g. Bureau de
verities to certify that:
 The importer legally owns the goods,
 Those goods have been legally acquired ,
 Goods are of the correct value ,
 the imported goods are as per the specifications as
indicated at the time of importation
 Filling in of import declaration forms (IDF):These are

forms supplied by the customs department to
the importer to ensure that:He declares the goods
he is importing, Indicate the correct value of such
imported goods ,To enable the government to determine
the value and amount of foreign currency flowing out of
the country.
 The transporting lorries or vessels may be escorted
upcountry to borders to ensure that the goods transported
to another country e.g. Burundi through the Kenyan port
are not dumped in Kenya
 Having the importers code number to restrict the imports
by the importers. This is the identification number for an
importer given by the customs and excise department.
 Intensify customs audits
 Adequate remuneration of KRA staff to avoid incidences of
corrupt practices
BONDED SECURITY
 A bond is a commitment to honour certain terms and

conditions and fulfill obligations relating to an
agreement.
 A taxpayer delivers a document as prove of legal
ownership of an asset and enters into a binding
agreement to fulfill his obligations with regard to
compliance and payment of tax.
 The failure to honour the commitment leads to

consequences, which include forfeiting of an asset that
may have been given out as a security.
Forms of security
 Cash deposits. A taxpayer can deposit cash with

customs department to ensure compliance with a
payment of tax.
 Bond security. A taxpayer may be required to deliver a
document indicating legal ownership of an asset. He
will therefore enter into a binding commitment to fulfil
his obligation with regard to compliance, failure to
which he will loose the asset.
 Use of guarantors or sureties: This is where a 3rd party
gives his guarantee that a taxpayer will comply with
terms and conditions of the act.
 Partly by bond and partly by cash deposits.
REFUND OF DUTY
 The duty paid on imported goods may be refunded

under the following circumstances:
 Where the goods are returned to the seller
 Where goods are lost or destroyed by accident
 Where the goods are damaged, destroyed, pillaged
during voyage or while under customs control
 Where duty has been paid in error or overpaid or there is
a cancellation of a bond given as a security
REFUND OF DUTY
 Where goods have been abandoned to the custom
department by the importer who had paid the duty
 Where the imports are used in the production of
exports or specified duty exempt goods
 Duty paid by privileged persons and institutions e.g.
UN, Ahmed Forces, ILO, UNDP, WB, FAO e.t.c.
What is the difference between prohibited and restricted goods?
Customs Valuation
Introduction
• Definition: Customs valuation is a

procedure applied in determining the
customs value of imported goods.
• Customs valuation is essential as it

determines the import taxes to be paid.
Customs Valuation Method
The common customs valuation method include:

• Transaction value
• Transaction value of identical goods
• Transaction value of similar goods
• Deductive method
• Computed method
• Fall –back method
Method 1:Transaction Value
The customs value is established based on the total payment

made by the person importing the goods. In order to carry out
the valuation the following documents should be in place.
• Commercial invoice
• Contracts
• Purchase orders
Method 2: Transaction Value of Identical Goods
The transaction value is calculated in the same manner on

identical goods if goods are:
 Same in all aspects including physical characteristics;
• Produces in the same country as the goods being valued;
• Produced by the same producer
• The goods must be exported at the same time as the goods

being valued.
Method 3: Transaction Value of similar Goods
The transaction value is calculated in the same manner on similar goods if :
• Goods are closely resembling in terms of component material and

characteristics;
• Goods are capable of performing the same function and are

commercially interchangeable
• Goods are produced in the same as and by the producer of the goods
being valued.
Method 4: Deductive Value
This method is used when custom value cannot be determined on the basis
of the transactions methods.
The custom value is determined on the basis of unit price at which the
imported goods are sold to unrelated buyer.
The buyer and seller must not be related and sale must take place at about
the same time of importation of the goods.
Method 5: Computed Value
• This is the most difficult and rarely used method.
• It determines customs value on the basis of the cost of production of the

goods being valued plus margin and the general expensed of the goods
Method 6: Fall-back Method
• When customs value cannot be determined under any of the methods, it can
be determined using reasonable means consistent with the principles and
general provisions available.
Importance of Custom Valuation Methods
• •Basis for ad valorem Taxes

• •Impact on VAT
• •Assess Profitability
• •Determination of prices
• •Basis for Tax planning
The operating environment of Customs today
Some challenges to modern Customs Administration
 Proliferation of regional trading agreements that increases
complexity of administering border formality and controls.
 Increased realization of the importance of Customs as a key
vehicle for economic growth.
 Increased awareness of the importance of good governance
and sound integrity within Customs administration.
 A new approach to the “border”: End-to-end management
of the movement of goods across borders
 Increase in revenue fraud: There is an increase in threats
related to duty and tax evasion and avoidance.
Challenges in Developing countries
Challenges in Developing countries

 Lack of awareness by traders of procedures & processes
 Excessive manual process& Outdated legislation
 Lack of an integrated ICT environment & efficient logistics
 Disparity in applying valuation methods
 Lack of an integrated approach to risk management for
border clearance across border agencies
 Duplicate checking of documents
Challenges facing regional
economic blocks in Africa
 the overlapping REC‘s membership by partner states
 Weak institutions that lack capacity to enforce
sanctions against members states who fail to
implement agreements.
 Non- Trade barriers (NTBs)
 poor infrastructure
 limited private sector engagement

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TAXABLE INCOME FROM BUSINESS:

 Or in the incorporated form i.e. a registered company.

 For a registered company, the profits will be taxed at the

 For a un-incorporated business, profits will be taxed on

 Gains from ordinary business of buying and selling.

 Investment income from abroad i.e. dividends, rent or

 To arrive at taxable profit we use the Income Tax Act.

 Certain incomes credited to statement of comprehensive

 Certain capital allowances, which are allowable, are not

 Donations towards national disasters to be deductible

14) Legal and other costs incurred in issuing shares or

1) Any expenditure which is not wholly or exclusively

 A debt shall be considered to have become bad if it is

A debt shall be deemed to have become uncollectable where:

 the creditor loses the contractual right that comprises the

 no form of security or collateral is realizable whether

 the securities or collateral have been realized but the

 the debtor is adjudged insolvent or bankrupt by a court of

A debt shall be deemed to have become uncollectable where:

 the costs of recovering the debt exceeds the debt itself

 A bad debt shall be a deductible expense only if it is

S.15(2)(W): Cash donations to an income exempt

►Organization should be of a public character and

►Proof of donation to be accompanied by exemption

►Not refundable or repayable to the donor.

 Salary paid to the owner or relatives

 Drawings made by the owner ( cash or goods).

 Private expenses of the owner.

 Any other disallowable expenses as per section 16

 Take the net Accounting Profit as shown by

Reported Profit xxx

General Bad debts, Loss on Disposal, xxx

Impairment loss, Adjustments: over/understatements xxx

LESS: Capital Allowances (xxx)

Adjusted Taxable Income xxx

Net Profit 815,000

Taxable Profit 813,400

First 12,298 10 1,230 1,230

Next 11,587 15 1,738 2968

Next 11,587 20 2317 5285

Next 11,587 25 2,897 8182

First 147,580 10 14,758

Next 139,042 15 20,856

Next 139,042 20 27,808

Next 139,042 25 34,761

 The following comprehensive income statement relate

(c)Indicate when the tax, if any, is payable to the Income Tax

Gross professional fees 1,000,000

Rent for clinic premises 140,000

First Ksh.134,164 @ 10% 13,164.00

 He should pay self-assessed tax by end of the fourth

 He should file the self-assessment return by 30th June

 Each partner tax liability is computed separately

 The income from partnership will be added to the

 Drawings of commodities/goods dealt with in the

musyoka wamalwa Kamau

Salary 288,000 216,000 144,000

Profit share 1,565,000 1,043,333 521,667

Taxable income 1,853,000 1,259,333 665,667

 Companies are taxed on corporation tax rate ruling in