Name:MUHUDIN DAHIR

Student No: 234 175 060

 TABLE OF CONTENTS

1)Direct Tax………………………………………. …………………………………………………………………..Slide 3

2)Indirect Tax…………………………………………………………………………………………………………..Slide 4
3)The tax system in
Kenya…………………………….............................................................................................................Slide 5
3.1)Income Tax…………………………………………………………………………………………………...Slide 6
3.1.1)Personal Income Tax………………………………………………………………………………..Slide7
3.1.2)Corporate Income Tax……………………………………………………………………………..Slide 10
3.2) Value Added Tax (VAT)……………………………………………………………………………………...Slide15
3.3)Excise Duty……………………………………………………………………………………………….....Slide 19
3.4)Taxes on Imports……………………………………………………………………………………………Slide 22
4)Impacts of Taxation………………………………………………………………………………………………….Slide 26
 Direct Taxes
A direct tax is one that the taxpayer pays directly to the government.
These taxes cannot be shifted to any other person or group.
Types of Direct Tax
• Income Tax is the most important direct tax in many developed
countries. It is based on the income of taxpayers. A certain amount
of money is taken from the wages of the individuals. When this
type of tax is applied to corporations and firms, it is called
corporate income tax.
DIRECT AND • Transfer Taxes- The most frequent form of transfer tax is the
estate tax. Such a tax is levied on the taxable portion of the
INDIRECT property of a deceased individual.
TAXES • A gift tax is another form of transfer tax when a certain amount is
collected from people transferring properties to another individual.
• Entitlement Tax/Payroll Taxes- this type of direct tax serves to
finance social security and health services. The entitlement tax is
collected through payroll deductions.
• Property Tax- property tax is charged on properties such as land
and buildings.
• Capital gains Tax- This tax is collected when an individual earns
gains from the sale of capital, for example when an individual sells
stocks, real estate, or a business.
 Indirect Taxes
An indirect tax is a tax that is levied upon goods and services
before they reach the customer who ultimately pays the
indirect tax as a part of market price of the good or service
purchased.
Types of Indirect Taxes
• VAT (Value Added Tax) is a type of indirect tax
levied on a product sold directly to a consumer. This
DIRECT AND indirect tax is under the purview of the Central Sales
INDIRECT Tax which is paid to the ‘Government of India - State
Central Sales Tax’ and paid to the respective state
TAXES governments.
• Excise Duty is a type of tax charged on goods
produced within the country (as opposed to customs
duties, charged on goods from outside the country).
• Sales tax is a tax paid to a governing body for the sales of
certain goods and services. Usually, laws allow the seller to
collect funds for the tax from the consumer at the point of
purchase.
 TAX SYSTEM IN KENYA

Kenya has a well-established

tax system managed by the
Kenya Revenue Authority
(KRA) under the guidance of
the National Treasury. Taxes
in Kenya are categorized into
direct taxes (paid directly to
the government by individuals
or entities) and indirect taxes
(levied on goods and services).
 INCOME TAX
Overview
Income tax in Kenya is charged on different sources of income. It is charged upon all
the income of a person for each year of income whether resident or non-resident,
which is accrued in or derived from Kenya.
Under the Kenyan tax system, the sources of income are:
• Gains or profits from a business, employment, or services rendered and a right granted to
another person for use or occupation of property;
• Dividends or interest;
• Income accruing through a digital marketplace;
• An amount deemed to be the income of a person under the
• Act or by rules made under the Act;
• Any gain as determined under the Act, which accrues to a company or an individual on the
transfer of property situated in Kenya;
• The net gain derived on the disposal of an interest of a person that derives 20% or more of its
value, directly or indirectly, from immovable property in Kenya; and
• A natural resource income.
 Pe rso n a l in c o m e t a x

Personal Income Tax is charged on all the

income of a person, whether resident or non-
resident, which accrues or was derived from
Kenya. Tax on personal income is on a
graduated scale known as Pay As You Earn
(PAYE) and applies to all persons at the time
of employment and to non-resident persons
employed by an employer who is a resident
of Kenya.
The base of taxation of personal income tax
includes wages, casual wages, salary, leave
pay, sick pay, payment in place of leave,
fees, commission, bonus, gratuity, and
allowances such as subsistence, traveling,
and entertainment which are received in
respect of employment or services rendered.
Taxation of PIT is graduated based on the
income of an individual’s pay. The personal
income tax comprises of a tax band and the
respective rate as shown in Table 1 and 2.
 PIT Expenditure
The PIT tax expenditure
comprises of reliefs to taxpayers
to encourage savings, home
ownership and reduce the tax
burden, among other reasons.
These reliefs include; insurance
relief, relief related to persons
with disability (PWD), and
mortgage relief among others.
Tax expenditure related to
personal income tax stood at Ksh
5.2 billion in 2022, a decrease
from Ksh 5.3 billion in 2021
(See Table 3).
 Corporate Income Tax

Corporate Income Tax (CIT) is a tax charged on corporate entities

such as limited liability companies and Cooperative societies
among others on their annual income that is derived in Kenya. The
base unit of taxation for corporate income tax is the corporate
entity.
Corporate Income Tax expenditure takes the form of deductions
such as farm work deductions, plant and machinery investment
deductions, building investment deductions, and wear and tear.
These deductions are designed to encourage companies to invest
in productive fixed assets.
The rate of these deductions varies depending on the type of
asset (Table 4).
Note: In this Tax Expenditure Report,
a 10 percent rate of deduction was
considered as the benchmark and
since most of the investment
deductions
have a deduction rate of 25 percent
after the first year of use, the
difference
between 25 percent and 10 percent;
that is, 15 percent was considered as
tax expenditure.
Corporate tax expenditure as a percentage of GDP has been on a fluctuating trend since 2019. In
2022, the expenditure increased to Ksh 41.6 billion (0.31 percent of GDP) from Ksh. 21.6 billion
(0.18 percent of GDP) in 2021. This represents an increase of 0.13 percent (Figure 2).
The data indicates that investment in plant and machinery increased significantly in 2022
compared to 2021 from Ksh 118 billion to Ksh 206 billion. Out of these new investments 99
percent were in the manufacturing sector. Some of these new investments in the
manufacturing sector were allowed deductions of 150 percent which has significantly
contributed to the increase in plant and machinery expenditure.
In 2022 compared to 2021, five companies out of more than 127,000 CIT-obligated companies
made considerable investments in plant and machinery, accounting for 45 percent of the total
investments.
Further, the increase in CIT expenditure can be partly attributed to the amendments contained in
the Finance Act, 2021 which:
• Changed the method of deduction from reducing balance to equal installments which
accelerates the deductions;
• Removed restrictions for allowable deductions for power generation to only those distributed to
the national grid; and
• Allowed deductions for expenditure on; roads and parking areas; railway lines and related
structures; water, industrial effluent, and sewerage works; communications and electrical posts
and pylons and other electrical supply works; and security walls and fencing.
 Value Added Tax (VAT)

Value Added Tax (VAT) is a consumption tax charged on taxable goods and
services made or provided in Kenya and supplied or imported into Kenya.
The tax is charged at designated stages in the supply chain where value is
added. Any individual, company, or partnership supplying or who expects to
supply taxable goods worth Ksh 5.0 million or more in a year is required to
register for VAT. Nonetheless, a trader whose annual turnover is less than
Ksh 5.0 million is allowed to register for VAT on a voluntary basis.
VAT Expenditure
The VAT Act, 2013 provides for exemption and zero rating on taxable
supplies.
a) VAT exemption: This involves remission or waiver of VAT on vatable
supplies of goods and services.
b) Zero rating: This involves charging vatable supplies at the rate of zero
In 2022, the overall tax
expenditure in relation to domestic
VAT increased to Kshs 248.29
billion from Ksh 211.09 billion in
2021 (See Table 6). Tax
expenditure on exempt items
increased from Ksh 112.7 billion in
2021 to Ksh 128.3 billion in 2022.
Similarly, tax expenditure on zero-
rated goods and services increased
from Ksh 98.4 billion in 2021 to Ksh
119.9 billion in 2022. The increase
in the overall tax expenditure
relates to the overall growth of the
economy as reflected in the
nominal GDP growth, expansion in
the VAT base, and introduction of
VAT expenditure as a percentage of GDP declined from 2.05 percent in 2019 to
1.61 percent in 2020. However, there was an upward trend in the domestic
VAT expenditure from 2020 to 2022, increasing from 1.61 percent in 2020 to
1.76 percent in 2021 and 1.86 percent in 2022 (Figure 3).
Overall VAT Base Analysis
Zero-rated: Zero-rated sales proportion to the total sales increased from 11.8 percent in 2021 to 18.4
percent in 2022 which partly explains the increase in zero-rated tax expenditures. In addition, zero-rated
supplies proportion to the final private consumption increased to 18.1 percent from 10.5 percent in 2021.
This category contributed 11 percent of the 24 percent growth in sales. This is based on returns data. Final
private consumption data is obtained from the Economic survey of 2023.
Exempt supplies: The exempt sales as a proportion to the total sales marginally increased to 18.1 percent in
2022 from 16.6 percent in 2021. In respect to the final private consumption, exempt sales proportion to the
consumption increased to 17.8
15 percent in 2022 from 14.7 percent in 2021. This contributed 6 percent to the total growth in sales in VAT
returns for 2022.
 EXCISE DUTY

Excise Duty is a tax charged on locally manufactured and imported

goods or supply of certain services. Major excisable goods include
beer, wines and spirits, other alcoholic beverages, bottled water,
fruit juices, filtered and non-filtered cigarettes, cosmetics, fuels,
motor vehicles, other manufactured tobacco, and its substitutes.
Excisable services include telephone and internet data services, fees
charged for money transfer services, other fees charged by financial
institutions, gaming, and lottery. Rules governing the imposition of
excise duty are confined in the Excise Duty Act, 2015, and its
Regulations. Excise Duty is imposed by the Government to
discourage consumption of goods and services that have negative
externalities as well as to raise revenue to finance government
priorities.
Tax Expenditure on Excise Duty (Domestic)
Tax Expenditure in respect of Excise Duty
(Domestic) is considered as an exemption on goods
and services listed under the Second Schedule to
the Excise Duty Act, 2015 with the exception of
those listed above that are regarded as
benchmarks. In addition, exemption from Excise
Duty granted to beer or wine made from sorghum,
cassava, millet, or any other agricultural products
(excluding barley) grown in Kenya pursuant to
Section 7 (2) of Excise Duty Act is also considered as
Tax Expenditure. However, there are some items
provided in the First Schedule as exclusions that are
regarded as Tax Expenditure on grounds of
deviating from the standard treatment. In view of
the above, this report has considered exemptions
granted to the following items as Domestic Excise
Duty Tax Expenditure:
• Exemption of alcoholic and non-alcoholic
beverages supplied to Kenya Defence Forces
Canteen Organization (DEFCO); and
• Excise Duty remission in respect of beer or wine
made from sorghum, millet or cassava, or any
other agricultural products, (excluding barley),
grown in Kenya.
Excise Duty (Domestic) tax expenditure as a percentage of
Nominal GDP has steadily been decreasing from 0.067 percent
in 2019 to 0.063 percent in 2021. However, the 0.004 percent
decline in tax expenditure as a percentage of GDP realized in
2022 from 2021 was as a result of the new tax measures that
were introduced in the Finance Act, 2022.
 Taxes On Imports

The East African Community has achieved full implementation of the Customs
Union Protocol and currently operates as a single customs territory. The East
African Community Customs Management Act (EACCMA), 2004, the East
African Community Customs Management Regulations, 2010, and the East
African Community Customs Union Protocol govern the charging of import
duty in the East African Community (EAC). The primary basis of determination
of the taxable customs value for purposes of levying ad valorem tax is the
Cost, Insurance, and Freight (CIF) value of imported goods.
Import Excise Duty is levied on excisable goods imported into the country.
Laws and Regulations governing the imposition of Excise Duty are contained
in the Excise Duty Act, of 2015. The excisable taxable value for charging
Excise Duty on imported products is the CIF value plus the applicable Import
Duty.
Import VAT is charged on imported goods. The VAT Act, 2013, governs the
application and imposition of Value Added Tax (VAT). Imported goods are
Further, the rise in tax expenditure in regard
to VAT on oils was as a result of an increase
in international prices of petroleum products
amid the weakening of the Kenyan shilling
against the US dollar.
Other reasons attributable to this increase
include:
The general increase in the number of
exemptions in 2022 compared to 2021 as a
result of increase in economic activities;
• The general growth of imports post Covid
period;
• Increase in imports of petroleum products
(especially diesel) and industrial
machinery;
• Inclusion of the Treasury undertakings as
part of tax expenditures; and
• Extensive capital expenditure by various
companies in the year 2022.
 IMPACTS OF TAXATION

Behavioral effects Organizational effects

• Corporations versus unincorporated
• Work, education, retirement enterprises
• Savings, investment, risk • Intertwined with financial effects
taking (banks versus insurance versus other
forms of fi nance)
• Energies devoted to General equilibrium effects
avoiding taxes instead of • Often important indirect effects,
creating wealth especially with broad-based taxes,
such as on wages or interest
• Marriage and divorce
Announcement effects and
Financial effects capitalization
• Fringe benefits • Future taxes on an asset refl ected
(“capitalized”) in the price of the
• Financial structure of firms asset at the time the tax is
announced
Reference.
• Stiglitz, J. E., & Rosengard, J. K. (2015).
Economics of the public sector. WW Norton &
Company.
• Republic of Kenya, the National Treasury and
Economic planning, 2023 Tax Expenditure Report.
• Wikipedia (Direct & Indirect Taxes).