MASINDE MULIRO UNIVERSITY

OF SCIENCE AND TECHNOLOGY.

DEPARTMENT OF BUSINESS ADMINISTRATION.
CODE; BCA 422 DATE; 8TH APRIL 2022
TITTLE; TAXATION THEORY LECTURER; DR. MAINGI
TASK: GROUP ASSINGMENT
GROUP MEMBERS
NAME REG NO. SIGNATURE

OGWANG BRIAN BCM/B/01-00359/2018

IAN SAIDI BCM/B/01-00334/2018

VERAH INDASI BCM/B/01-00318/2018

ALEX WAVINYA BCM/B/01-00227/2018

SHARON WASWA BCM/B/01-00332/2018

LABAN DAUDI MUASA BCM/B/01-00240/2018

GEOFREY IMBATI BCM/B/01-00368/2018

PAMELA OMUGAH BCM/B/01-00413/2018

EUGENE AFUBWA BCM/B/01-00296/2018

NICHOLAS OYAVO BCM/B/01-54245/2018

Introduction
Tax is the amount paid directly through cash or indirectly through purchase of goods and
services.
An optimal tax system is one which derives the desired revenue and income distribution with the
least inefficiency.
The largest source of revenue in Kenya is taxation.
A good tax management system guarantees a stable revenue for the country over time.
The Kenya Revenue Authority has beaten its revenue target for the fiscal year ending June 2022
by Ksh 25 billion after an eight year struggle.

A good tax system must fulfill certain tenets if it is to raise adequate revenue and fulfill certain
social objectives.
Kenya's taxation system covers income tax, value-added tax, customs and excise duty. Kenya
uses a progressive tax system where it applies higher tax rates to higher levels of income. The
philosophy behind progressive tax system is that higher income people can afford and should be
expected to provide a bigger share of public services than those who are less able to pay. A
maximum corporate rate of 30% will be charged on income in excess of KES 388,000 for
residents and non-residents while value added tax is levied at 16%. Kenya's progressive tax
system is said to be designed to be efficient, fair and portrays equity. Kenya Revenue authority,
the tax regulating body in Kenya adopts progressive tax system because there is a proper
distribution of the tax burden. Those with broader financial shoulders carry the heaviest burden.
There is a reduction in tax amounts for the less fortunate in society to ensure their tax burden is
not crippling. The government collects more tax revenue. However, some argue that the tax
system is not optimal because by taxing the rich disproportionately more than those on lower
incomes, a disincentive is created where people will be disincentivized to work hard and move
into higher tax brackets. Progressive taxes, particularly on income and capital can lead to
individuals moving capital abroad and investing in other nations and there are also concerns the
high graduated scale tax rates may be discouraging foreign investors. Others argue that, the
progressive tax system is optimal as taxing the rich more will in fact increase government's
revenue used to fund important social services such as healthcare and education. Current Kenya's
progressive tax regime is flawed like any other tax system as it is found to have pros and cons
However, it is found to meet key principles of a good tax system namely; equitably, efficiency,
simplicity as it is easy to comply, flexible to adapt easily to rapidly changing economy and
productivity as it should raise substantial amount of revenue to the government. The tenets are
explained below:

Canon of equity
The canon of equity requires that taxpayers be treated equally and fairly, the word equity here
does not mean that everyone should pay the exact, equal amount of tax. What equity really
means here is that the rich people should pay more taxes and the poor pay less. This is because
the amount of tax should be in proportion to the abilities of the taxpayer. It is one of the
fundamental concepts to bring social equality in Kenya. it is also one of the primary means for
reaching the equal distribution of wealth in an economy. Kenya's tax regime contains progressive
tax rates based on the tax-payer’s ability to pay and sacrifice. Kenya has adopted progressive tax
system because it satisfies this canon of taxation.
Canon of certainty
The tax which an individual has to pay should be certain and not arbitrary. The time of payment,
the manner of payment, the quantity to be paid, i.e., tax liability, ought all to be clear and plain to
the contributor and to everyone. Not only taxpayers should know when, where and how much
taxes are to be paid. In other words, the certainty of liability must be known beforehand.
Similarly, there must also be certainty of revenue that the government intends to collect over the
given time period. Kenyan tax regime is certain because taxpayers know what their tax liability
will be however they do not know the amount of tax they should pay especially on income from
agriculture due to some exemptions that agricultural are entitled.

Canon of economy
In this context, economy refers to the idea that the cost of collecting taxes should be minimized
and should not exceed the tax collected. That means the government has to ensure that the
collection of taxes only requires the least possible expenditure. The reasoning behind this is that
most of the money collected through taxes should be used to fund projects that, in turn, benefit
the taxpayers. If the collection costs of a tax are more than the total revenue yielded by it, it is
not worthwhile to levy it. For instance, with the increasing Kenyan debt levels, the government
can raise more revenue by increasing taxes on incomes and capital gains to help improve the
countries fiscal position.

Canon of convenience
According to these canon, the sum, time and manner of payment of a tax should not only be
certain but the time and manner of its payment should also be convenient to the contributor. In
Kenya, the tax system is convenient, as taxpayers can easily pay their taxes, a good example is a
VAT and custom duty which is charged on the purchase of goods and services and at time she
has the means to buy. Kenyan tax regime also designed to allow people to quickly file and pay
their taxes when they are due.

Canon of productivity
According to this canon, taxes must be productive or cost-effective in that, it should be able to
raise substantial amount of revenue to government. This implies that the revenue yield from any
tax must be a sizable one. Kenya tax regime is considered to impose the only taxes that are able
to produce substantial amount of revenue to the government.

Canon of flexibility
An ideal system of taxation should consist of those types of taxes that can easily be adjusted.
Taxes, which can be increased or decreased, according to the demand of the revenue, are
considered ideal for the system. An example of such a tax can be the income tax, which is
considered very much ideal in accordance with the canon of flexibility. Kenyan progressive tax
system is not that rigid as tax provisions, rules and regulations can easily be amended to meet the
revenue requirement of the government and the tax payer.
Canon of simplicity
Every tax must be simple and understandable to the people so that the taxpayer is able to
calculate it without taking the help of tax consultants. A complex as well as a complicated tax is
bound to yield undesirable side-effects. It may encourage taxpayers to evade taxes if the tax
system is found to be complicated. In Kenya, the tax regime requires majority of the taxpayers
to visit cybers or KRA to pay their taxes since they find it difficult to navigate the KRA website.

Canon of diversity
Taxation must be dynamic. This means that a country’s tax structure ought to be dynamic or
diverse in nature rather than having a single or two taxes. A dynamic or a diversified tax
structure will result in the allocation of burden of taxes among the vast population resulting in a
low degree of incidence of a tax in the aggregate. Kenyan tax system has a variety of graduated
scale rates for different types of taxes that exist.

Canon of Elasticity
This canon requires that the government should be capable of varying (increasing or
decreasing), rate if taxations in accordance to the circumstances in the economy. For example, if
the government require additional revenue, it should be able to increase the rate of taxation.In
kenya, excise duty, for instance, is imposed on number of commodities locally manufactured and
their rates can be increased in order to raise more revenue. However, care must be taken not to
charge increased Rate of excise duty as it will discourage citizen for local, investment.

Conclusion
Kenyan tax system partially fulfills the tenets of an optimal tax regime. It meets the tenets of
taxation such as canon of equity, canon of convenience, canon of productivity, canon of
economy among others. Despite the fact it meets most of the canons of an optimal tax system,
there is still room for more reforms in the system. For instance, in the case of canon of economy,
Kenya has high debt levels and can reduce them by increasing taxes on income and capital gains
to improve the countries fiscal position. There is still room for reforms in the case of canon of
flexibility as the system does not respond to rapid changes in economy as quickly as it should.
The government should adjust rates to reflect to changes in the economy thus making the system
more flexible. Now, the Kenyan government are expected to maintain economic stability at full
employment level, they are to reduce inequalities in the income distribution, and they are also to
perform the functions of a Welfare State. Thus, in order to devise a good tax system, these
objectives and functions of Government’s economic policy must be kept in view.
References
1. https://www.kra.go.ke
2. https://www.businssdailyafrica.com
3. Strathmore university press, Taxation, 2019
4. Njoki, M.L Taxation and revenue stability in Kenya, Economic Journal115 (500)1-27
5. Coursework notes, Taxation (Dr.Maingi)