UNIVERSITY EXAMINATIONS: 2011/2012

EXAMINATION FOR THE DEGREE IN BACHELOR OF COMMERCE

CFM 300 ADVANCED TAXATION (DAY & EVE)
DATE: JULY, 2012

TIME: 2 HOURS

INSTRUCTIONS: Answer ALL Questions

RATES OF TAX (Including wifes employment, self employment and professional income rates of tax).
Year of income 2011.
Monthly taxable pay
Annual taxable pay
Rates of tax
(Shillings)
(Shillings)
% in each shilling
1 - 10164
1 -121968
10%
10165 - 19740
121969 - 236880
15%
19741 - 29316
236881 - 351792
20%
29317 - 38892
351793 - 466704
25%
Excess over 38892
Excess over -466704
30%
Personal relief Ksh.1162 per month (Ksh.13,944 per annum)
Capital allowances:
(i) Wear and tear allowances:
Class I
Class I
Class I
Class I

Prescribed benefit rates of motor vehicles provided by employer

37.5%
30%
25%
12.5%

2.5%

(iii) Farm work allowances

Annual
Rates

Kshs.

Kshs.

3600
4200
5800
7200
8600
14400

43200
50400
69600
86400
103200
172800

(i) Saloons, Hatch Backs & Estates

(ii) Industrial building allowances:

Industrial buildings
Hotels
10%

Monthly
rates

100 %

Up to
1201150117512001Over

1200 cc
1500 cc
1750 cc
2000 cc
3000 cc
3000 cc

(iv) Shipping investment deduction 40%

(iv) Pick-ups, Panel Vans

(Unconverted)

(v) Mining allowance:

Year 1 - 40%
Year 2-7 - 10%

Up to 1750 cc

3,600

43,200

Over 1750 cc

4,200
50,400
7200
86400
(vi) Land Rovers/ Cruisers
OR 2% of the initial capital cost of the vehicle for each month.

Commissioners prescribed benefit rates

Services
(i) Electricity (common or from generator)

Monthly rates
Kshs.
1500
500

Annual rates
Kshs.
18000
6000

(ii) Water (Communal or from a borehole)

(iii) Provision of furniture (1% of cost to employer) If hired, the
cost of hire should be brought to charge
(iv) Telephone (Landline and mobile phones)

30% of bills

Agricultural employees
(i) Water

200

2,400

(ii) Electricity

900

10800

QUESTION ONE
a) Briefly explain with examples the meaning of the following terms:
i. Tax planning
ii. Tax avoidance
iii. Tax evasion

(2 Marks)
(2 Marks)
(2 Marks)

b) North Rift Ltd. is in the business of farming. The following income statement was obtained from
the books of the company for the year ended 31 December 2011:
Income:
Sales of horticultural products
Sale of livestock
Gain on sale of shares
Foreign exchange gain
Expenditure:
Insecticides
Veterinary services
Purchase of fertilizers
Packaging materials
Professional fees

Kshs.
3,600,000
2,840,960
14,180
36,400

Kshs.

6,491,540

250,000
284,600
562,000
246,400
274,000
2

Subscription paid
Repairs and maintenance
Motor vehicle running costs
Interest on loan
Salaries and wages
General expenses
Net profit

34,240
580,000
624, 900
249, 400
1,490,400
145,700

4,741,640
1, 749.900

Additional information:
1. Repairs and maintenance includes:
Freight charges in machinery
Provision for fencing expenditure
Purchase of furniture

Kshs.
98,000
120,000
78,000

2. General expenses include:

Directors Christmas party
Increase in provision for bad debts and doubtful debts
Defending a company driver in a traffic offence

Kshs.
36,000
14,000
10,000

3. Subscription paid include:

Donation to childrens home
Donation to registered political party
Membership fees to National Agricultural Society

Kshs.
8,000
4,600
4,400

Professional fee include:

Architects fees on proposed farm work
Farm valuation fees
Valuation of farm machinery for disposal purposes

Kshs.
48,400
27,400
24,600

4. The company constructed the following structures in 2011.

Kshs.
Livestock trough
90,000
Granary
20,000
Farm house
480,000
Labour line
240,000
Required:
i. A statement of adjusted taxable profit (or loss) for the year ended 31 December 2011.
(12 Marks)
ii. Tax payable (if any) by the company.

QUESTION TWO
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a) List three ways through which revenue authority may enforce the collection of overdue tax.
(3 Marks)
b) Matmax Suppliers Ltd. commenced operation on January 2010 after incurring the following
expenditure:
Kshs.
Factory building
5,600,000
Processing machinery
2,800,000
Delivery van
1,408,000
Tractor
948,000
Photocopier cum scanner
340,000
Generator
720,000
Go down
1,450,000
Workshop machinery
840,000
Computers
660,000
Saloon car
2,840,000
Fax machine
180,000
Additional information:
i. Processing machinery was imported from Japan, and the company received an import duty
waiver of 25% on the value of its machinery for the duty of the Ministry of Finance. The
VAT rate was 16%.
ii. Factory building includes the cost of dwelling house Kshs. 420,000, fire outlet Kshs. 140,000
and retail shop Kshs. 400,000.
iii. A perimeter wall was constructed at cost of Kshs. 640,000 and put into use on 1 October 2010.
iv. The go down was put into use on 1 September 2010 after installation of a ventilation system
and elevator a cost of Kshs. 480,000 and 960,000 respectively.
v. On 1 January 2011, the following assets were acquired:
Kshs.
Conveyer belts
680,000
Surveillance cameras
120,000
Water pump
360,000
Water tank
150,000
vi. A sport pavilion and staff canteen were constructed at a cost of Kshs. 1,280,000 and Kshs.
900,000 respectively and used with effect from 1 October 2011.
vii. The salon car was disposed of for 500,000 in November 2011.
Required:
Capital allowance due to the company for the years of income ended 31 December 2010 and 2011.
(12 Marks)

QUESTION THREE
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i. Charitable trusts are non-profit making organization formed with the objective of promoting the
social well being of the general public.
Required: With reference to section 25 and 26 of the Income Tax Act Cap. 470 explain the tax
treatment of charitable trusts.
(3 Marks)
ii. Explain the following:
a) Role of revenue authority in the country.
b) Concept of residence for the incorporated entities.
c) Deduction allowed against rental income.
d) Goods liable forfeiture under Customs and Excise Act.

(3 Marks)
(3 Marks)
(3 Marks)
(3 Marks)

QUESTION FOUR
a) Mr. Elias Hatari is a businessman dealing in both vatable and non-vatable goods.
registered for value added tax (VAT) purposes.
The following transactions relate to his business during the month of April 2011:
7
9
10
14
14
17

21
22
25
25
26

30

He is

Imported mens suits from Dubai (United Arab Emirates) for shs.3,600,000.
Purchases motor vehicle spare parts from a local dealer for Kshs.500,000.
Exported motor vehicle spare parts to Uganda and received Kshs.800,000.
Sold ten bales of second hand clothes to retail traders at a local market for
Kshs.80,000 per bale.
Purchased materials to construct a godown at Nairobis industrial area for
Kshs.960,000.
Paid the godown construction firm a deposit of Kshs.800,000 to commence the
construction. The contract price was agreed at Kshs.1,800,000 with the balance
being payable on completion of the godown construction.
Sold mens suits to a local trader for Kshs.4,800,000
Supplied motor vehicle spare parts worth Kshs.600,000 to the Armed Forces of
Kenya.
Purchased womens clothes from a local fashion designer for Kshs.1,200,000
Supplied non-vatable goods to a VAT registered trader for Kshs.900,000
Some of the mens suits imported from Dubai were found to be of poor quality and
returned to the exporter in Dubai. A credit note of Kshs.450,000 was issued by the
exporter to Mr. Hatari.
The companys hired godown was broken into and mens suits valued at
Kshs.720,000 were stolen.

Transactions are stated as VAT inclusive where applicable. The standard rate of VAT is 16%.
Required:
The VAT payable (or refundable) by Mr. Hatari for the month of April 2011 (ignore customs
duty and restrictions on deductible input tax).
(10 Marks)
b) Discuss the challenges faced by the tax authority in your country in the process of modernizing
tax collection and administration procedures.
(10 Marks)
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