PFT - Notes

PUBLIC FINANCE AND TAXATION
STUDY TEXT
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CONTENT
1. Introductions to public financial management

- Nature and Scope of Public Finance
- General overview of public financial management as envisaged by the constitution
- Responsibility of National and County Treasuries
- Overview of the public financial management Act
- Financial regulations
- Treasury circulars; meaning and application
- Process of developing county government finance bills
- Role of budget officers in budget preparation and execution
- Responsibilities of the national and county treasuries in relation to budget preparation
- Budget process for both national, county and public entities
2. Establishment of public funds in the public sector

- Provision of establishing public funds
- Rationale of creation of public funds
- The consolidated fund
- The establishment and administration of contingency funds
- The establishment and administration of equalization funds
- County revenue sources
4. Supply chain management in public entities

- Definition and terminologies
- General overview of Public Procurement and Disposal (PPD) Act
- Procurement guidelines as envisaged by PPD Act
- Committees responsible for procurement
- Procurement process by National, County and other Public entities
- Tendering process and selection of suppliers in public sector
- Concept of E-procurement
5. Oversight function in public finance management

- The role of National Assembly
- The role of senate
- The role of county assembly
- The role of auditor general
- The role of Internal Audit
- Role of controller of budget in relation to disbursement of public funds as envisaged
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by the constitution and PFM Act, 2012
6. Introduction to taxation
- History of taxation
- Principles of an optimal tax system
- Single versus multiple tax systems
- Classification of taxes and tax rates
- Impact incidence and tax shifting, Lax shifting theories
- Taxable capacity
- Budgetary and fiscal policy tools.: General definition of budgets terms ,Budget surplus
and deficits
- Role of budget officers in budget preparation and execution
- Responsibilities of the national and county treasury in relation to budget preparation
- Budget process for both national, county and Public entities
- Revenue Authority — History, structure and mandate
7. Taxation of income of persons Taxable and non taxable persons

- Sources of taxable incomes
- Employment income;
 Taxable and non taxable benefits
 Allowable and non allowable deductions
 Tax credits (Withholding tax, personal and insurance relief etc)
 Pension Income
- Business income:
 Sole proprietorship
 Partnerships (excluding conversions)
 incorporated entities (excluding specialised institutions)
 Turnover tax
- Income from use of property- rent and royalties
- Farming income
- Investment income
- Capital gains tax
8. Capital deductions
- Rationale for capital deductions
- Investment deductions: ordinary manufacturers
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- Industrial building deductions
- Wear and tear allowances
- Farm works deductions
- Mining allowance
- Shipping investment deduction
- Other deductions
9. Administration of income tax
- Overview of the income tax act
- Identification of new tax payers
- Assessments and returns
- Operations of PAYE systems: Preparation of PAYE returns, categories of employees
- Notices, objections, appeals and relief of mistake A
- Appellant bodies
- Collection, recovery and refund of taxes
- Offences, fines, penalties and interest
- Application of ICT in taxation: iTaxi Simba system
10. Administration of value added tax

- Introduction and development of VAT
- Registration and deregistration of businesses for VAT
- Taxable and non taxable supplies Privileged persons and institutions
- VAT rates
- VAT records
- Value for VAT, tax point
- Accounting for VAT
- VAT returns
- Remission, rebate and refund of VAT
- Rights and obligations of VAT registered person
- Offences fines, penalties and interest
- Enforcement
- Objection and appeals: Requirements and procedure
- Challenges in administration of VAT
11. Customs taxes and excise taxes

- Customs procedure
- import and export duties
- Prohibitions and restriction measures
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- Transit goods and bond securities
- Excisable goods and services
- Purposes of customs and excise duties
- Goods subject to customs control
- Import declaration form, pre-shipment inspection, clean report of findings
- Other revenue sources
6.12 Emerging issues and trends
TOPIC PAGE
Topic 1: Introduction to public financial management ……………….………............6

Topic 2: Establishment of public funds in the public sector……………………….….…..30
Topic 3: Supply chain management in public entities………………………….….……...46
Topic 4: Oversight function in public finance management…………………..….……….65
Topic 5: Introduction to taxation….……………………………………………..…….….71
Topic 6: Taxation of income of persons………………..……………………………..….109
Topic 7: Capital deductions………………………….…….………………….…..…..….168
Topic 8: Administration of income tax………………..………………………..…..…….195
Topic 9: Administration of value added………………….……………………….……...221
Topic 10: Customs taxes and excise taxes…………………………….……….………….255
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CPA | PART I | SECTION 2
CA23: Public Finance and Taxation
Chapter One: Introduction to Public Financial Management
Table of Contents
Chapter One
1. INTRODUCTION TO PUBLIC FINANCIAL MANAGEMENT ..........................2
1.1. Nature and Scope of Public Finance ........................................................................ 2
1.2. General Overview of Public Financial Management as Envisaged by the

Constitution ............................................................................................................................. 5
1.3. Role of the National and County Treasuries ........................................................ 15
1.4. Overview of the Public Financial Management Act ........................................... 18
1.5. Financial Regulations ............................................................................................... 25
1.6. Treasury Circulars; Meaning and Application .................................................... 26
1.7. Process of Developing National and County Government Finance Bills ........ 28
1.8. Role of Budget Officers in Budget Preparation and Execution ......................... 28
1.9. Responsibilities of the National and County Treasuries in Relation to Budget

Preparation ............................................................................................................................ 30
1.10. Budget Process for Both National, County and Public Entities......................... 32
| Strathmore University | Strathmore Institute | 1

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1. INTRODUCTION TO PUBLIC FINANCIAL

MANAGEMENT
1.1. Nature and Scope of Public Finance

What is Public Finance?
The word public refers to general people and the word finance means resources. So
public finance means resources of the masses, how they are collected and utilized.
Different economists have defined public finance differently. Some of the definitions
are given below.
1. According to prof. Dalton public finance is one of those subjects that lie on the
border lie between economics and politics. He says, “Public finance is
concerned with the income and expenditure of public authorities, and with the
adjustment of the one to the other.“
2. According to Adam Smith “public finance is an investigation into the nature
and principles of the state revenue and expenditure”
3. According to Findlay Shirras “Public finance is the study of principles
underlying the spending and raising of funds by public authorities”.
4. According to H.L Lutz “Public finance deals with the provision, custody and
disbursement of resources needed for conduct of public or government
function.”
Thus, Public Finance is seen as a branch of economics which studies

income and expenditure of government.
The discipline of public finance describes and analyses government services, subsidies
and welfare payments, and the methods by which the expenditures to these ends are
covered through taxation, borrowing, foreign aid and the creation of money.

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Nature of Public Finance

Public finance is a science as well as an art. Science is the systematic study of any
subject which studies relationship between facts while, In the words of J.N. Keynes,
”Art is the application of knowledge for achieving definite objectives.”
It is a science because we study in it the various principles, problems and policies
underlying the spending and raising of funds by the public authorities. It teaches how
to collect taxes in the best way and how to maintain them economically and how to
spend them properly.
Carl Copping Plehn (January 20, 1867 – July 21, 1945) an American economist and a
professor of public finance at the University of California, Berkeley, from 1893 to 1937
advanced the following arguments in favour of public finance being science:
One. Public finance is not a complete knowledge about human rather it is
concerned with definite and limited field of human knowledge.
Two. Public finance is a systematic study of the facts and principles relating
to government revenue and expenditure.
Three. Scientific methods are used to study public finance.
Four. Principles of public finance are empirical.
As an art, public finance enables the concerned personnel to adopt the principles and
policies in solving the financial problems of the Government in the best possible way
to the maximum benefit of the society. The way to be adopted should be logical,
suitable and proper according to the time. Application of various principles and
policies depends much on the ability of the personnel in the Government how best he
can extract from it in the public interest.
Public finance is therefore, both a science and an art. This can either be;
1) Positive science, as well as
2) Normative science.

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It is a positive science as by the study of public finance factual information about the
problems of government’s revenue and expenditure can be known. It also offers
suggestions in this respect.
It is also normative science as study of public finance presents norms or standards of
the government’s financial operations . It reveals what should be the quantum of
taxes, kind of taxes and on what items less of public expenditure can be incurred.
Scope of Public Finance

Public finance as a subject, which studies the income and expenditure of the
government, it’s scope may be summarised in five (5) broad ways as follows:
1. Public Revenue
2. Public Expenditure
3. Public Debt
4. Financial Administration
5. Economic Stabilization
1. Public Revenue: Public revenue concentrates on the methods of raising public
revenue, the principles of taxation and its problems. It further studies the classification
of various resources of public revenue into taxes, fees and assessment etc.
2. Public Expenditure: This part studies the fundamental principles that govern the
flow of Government funds into various streams.
3. Public Debt: This section is concerned with, the problem of raising loans. The loan
raised by the government in a particular year is the part of public revenue.
4. Financial Administration: This refers to the organisation and administration of the
financial mechanism of the Government by relevant Government machinery.
5. Economic Stabilization: This part describes the various economic policies and
other measures of the government to bring about economic stability in the country.

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The subject-matter of public finance is not static, but dynamic. As the economic and
social responsibilities of the state are increasing day by day, the methods and
techniques of raising public income, public expenditure and public borrowings are
also changing.
1.2. General Overview of Public Financial Management

as Envisaged by the Constitution
Public Finance is covered under chapter twelve of the constitution of Kenya, 2010
which came into effect on the 27th of August 2010 after almost two decades of constant
pushes for a new constitutional dispensation and one failed referendum held in 2005.
Chapter twelve sets out the general principles that apply to all public money with
emphasis on accountability and public participation in decision making on how such
money is used. It is divided into seven (7) distinct functional parts as follows: -
Part I — Principles & Framework of Public Finance
Part 2 — Other Public Funds
Part 3 — Revenue-Raising Powers and the Public Debt
Part 4 — Revenue Allocation
Part 5 — Budgets and Spending
Part 6 — Control of Public Money
Part 7 — Financial Officers and Institutions
Part I — Principles & Framework of Public Finance

A. Principles of public finance
Article 201 outlines the principles that guides aspects of public finance as : —
1) Openness & accountability, including public participation in financial matters
2) Equitable Public finance system
a. Sharing of burden of taxation fairly;

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b. Sharing of revenue raised equitably among national & county
governments; and
c. Equitable development of the country.
3) Equitable sharing between present & future generations the burdens & benefits
of use of resources & public borrowing;
4) Prudent & responsible Use of public money; and
5) Responsible financial management & clear fiscal reporting.
B. Equitable sharing of national revenue

Article 203 details the conditions taken into account in determining equitable share of
national Revenue from national to county government
i) National interest
ii) Public debt
iii) Needs of the national government
iv) Need to ensure county governments can perform tasks required of them
v) Fiscal capacity of county governments
vi) Developmental needs of the counties
vii) Economic disparities in the counties
viii)Affirmative action in respect of disadvantaged areas and people
ix) Stability and predictability in allocation of revenue
x) Flexibility in responding to emergencies
Every fiscal year the minimum revenue allocated to county governments will be 15%
of revenues collected by national government.
C. Equalization Fund.
Article 204 establishes this Fund and 0.5% of all revenues collected in each fiscal year
by the National government is paid into the fund.

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• This fund is used to provide basic services namely water, roads, health and
electricity to marginalized areas raising these services to levels enjoyed by the
rest of the country.
• The national government may only use this fund as approved by an
appropriation bill in parliament and through grants to counties in which
marginalized communities exist.
• Money not used in any fiscal year is carried forward for use in subsequent
years.
• NO funds can be withdrawn from the Fund without the Controller of Budget’s
approval.
Article 204 clause 6 envisages, that this fund will be required for 20 years after which
the provisions made lapse. However, parliament may extend the longevity of the
article if necessary.
Part 2 — Other Public Funds

Other than the equalization fund under Article 205, the other three (3) funds
established by Chapter twelve of the constitution are : —
1. Consolidated fund
2. Revenue fund
3. Contingency fund
1. Consolidated Fund
All monies and revenue raised by the national government other than that which is
excluded by an act of parliament is paid into the Consolidated fund. Money from this
fund can only be withdrawn
• In accordance with an appropriation act by parliament
• As a charge authorised by the Constitution or act of parliament

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Money cannot be withdrawn unless the controller of budget has approved the
withdrawal.
2. Revenue Fund
There is a revenue fund for each county government into which all county revenues
are paid.
Money may only be withdrawn from the revenue fund as provided for by an act of
parliament or county assembly legislation.
Money cannot be withdrawn unless the controller of budget has approved the
withdrawal.
3. Contingency Fund
The use of this fund is for unforeseen and urgent expenditure and its operation is in
accordance with act of parliament.
Part 3 — Revenue-Raising Powers and the Public Debt

A. Power to impose taxes and charges
According to article 209 of the constitution, Only the national government has powers
to impose : —
o Income tax;
o Value-added tax (VAT);
o Customs duties and other duties on import and export goods; and
o Excise tax.
An Act of Parliament may authorise the national government to impose any other tax
or duty, except those specified above
Article 209 of the constitution further gives County governments authority to impose
the following : —
o Property rates;
o Entertainment taxes; and
o any other tax that it is authorized to impose by an Act of Parliament.

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National & County governments have powers to impose charges for the services they
provide in a manner that doesn’t prejudice national economic policies, economic
activities across county boundaries or the national mobility of goods, services, capital
or labour.
B. Imposition of Tax
No tax or licensing fee can be imposed, waived or varied without legislation and
waived taxes must be have a public record together with reason for waiver and the
auditor general must be notified of the waiver.
No law excludes or authorizes the exclusion of a State officer from payment of tax by
reason of—
– Office held; or
– Nature of the work.
C. Borrowing by national government
Parliament prescribes terms on which national government borrows and imposes
reporting requirements.
The cabinet secretary responsible for finance must report to either house of parliament
within 7 days of request with full details of any loan or guarantee.
D. Borrowing by county government
County governments can only borrow if the loan is guaranteed by national
government and approved by county assembly.
E. Loan guarantees by national government
Parliament determines the terms under which national government may guarantee
loans and at the end of each financial year national government must report on the
guarantees provided in that financial year.
F. Public debt
Public debt is any charge on the consolidated fund.

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Part 4 — Revenue Allocation

i) Commission on revenue allocation
Article 215 of the Constitution establishes the CRA & its composition. The commission
on revenue allocation is appointed by the president and consists of:
• A chairperson approved by parliament
• Two members nominated by political parties represented in the national
assembly according to their proportion of members.
• Five members nominated by political parties represented in the senate
according to their proportion of members.
• Principal Secretary in the ministry of finance
Functions of the Commission on revenue allocation
1. Article 216 specifies the principal function of the CRA as to recommend the basis
of equitable sharing of revenue between the national and county governments and
among the county governments. In formulating those recommendations, the
commission MUST seek to promote the conditions under article 203 – see above.
2. CRA also determines, publishes and regularly reviews policies in which it sets out
the criteria by which to identify the marginalized areas for purposes of Article 204
(2).
3. Recommendations are submitted to senate, national assembly, national executive,
county assembly and county executives.
ii) Division of revenue
The Senate by resolution determines the basis for allocating national revenue amongst
the counties and must be endorsed by the national assembly before approval.
Revenue raised nationally will be shared between National and County governments
and among county governments as follows;
Total revenue raised = 100%

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(a) National Government < 84.5 %
(b) 47 County Governments >15 %
(c) Equalization fund = 0.5 %
The >15% revenue sharable among the 47 county governments will be shared using
the formula approved by parliament. see below:
iii) Annual Division and Allocation of Revenue Bills
At least 2 months before the end of each financial year :
(a) A division of revenue bill will be introduced in parliament to divide national
revenue between national and county governments
(b) A County Allocation Of revenue bill will be introduced to allocate amongst
county governments the monies allocated to county government.
A county’s share of revenue will be transferred without undue delay or deduction.
Part 5 — Budgets and Spending

(a) Form, content and timing of budgets
Budgets of national and county governments must contain :
• Estimates of revenue and expenditure – differentiating between recurrent and
development expenditure
• Proposals for deficit financing

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• Proposals for borrowing and increase in public debt
National legislation must prescribe :
• Structure of development plans
• Timing of budgets
• Form of consultation between governments in the process of preparing the
budgets
(b) Budget Estimates and annual Appropriation bill
At least 2 months before the end of each financial year Cabinet Secretary responsible
for finance submits to parliament estimates for revenue and expenditure of the
national government for the next financial year.
After consideration these estimates are included in an Appropriation bill to authorise
the expenditure from the Consolidated Fund.
(c) Expenditure before annual budget is passed
If the appropriation bill is delayed, national assembly may nevertheless authorise
withdrawal of money from the consolidated fund if the money is to carry on the
services of national government until the delay is resolved and does not exceed 50%
of the expenditure estimate for the year.
(d) Supplementary Appropriation
The national government may spend money that has not been appropriated if the
money appropriated is insufficient or a need for expenditure for which no money has
been appropriated has arisen
Approval for supplementary appropriation will be sought from parliament within
two months after the first withdrawal. An appropriation bill will be tabled to approve
the supplementary withdrawal.
The maximum that may be withdrawn under this article 223 is 10% of the sum
appropriated by parliament for that financial year.

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Part 6 — Control of Public Money

1. Financial Control
Article 225 establishes the National Treasury, laying down its functions &
responsibilities with regard to control of public money.
Expenditure control and transparency (not the same as judicious) use of public money
is implemented by legislation. Under such legislation the Cabinet secretary may stop
transfer of funds to state organs for material breaches of measures provided for in the
legislation. Such stoppage has to be approved by parliament.
County funds cannot be stopped in excess of 50%
2. Accounts and Audit of Public Entities
An act of parliament provides for keeping of financial records and the auditing of
accounts of government and other public entities and provides for the designation of
an accounting officer in every public entity at the national and county level of
government.
The auditor-general is responsible for auditing the government and public entity
accounts. The auditor-generals own accounts are independently audited by an accountant

appointed by national assembly.
3. Procurement of Public Goods and Services
Public entity contracts for goods and services must be fair, equitable, transparent,
competitive and cost-efficient.
Act of parliament defines the framework within which policies for procurement and
disposal of assets are implemented.
Part 7 — Financial Officers and Institutions

1) Controller of Budget
Article 228 (1) creates The Controller of Budget who is nominated by the President
and, with the approval of the National Assembly, appointed by the President.

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The office holder must have a minimum of 10 years knowledge of auditing public
finance management and holds office for a maximum of 8 years.
Oversees the implementation of national and county government budgets.
2) Auditor-General
Article 229 (1) creates The Auditor-General who is nominated by the President and,
with the approval of the National Assembly, appointed by the President.
This office holder must have a minimum of 10 years knowledge of auditing public
finance management and holds office for a maximum of 8 years.
They audit accounts of: The national and county governments, Courts, all commissions
established by the constitution, National parliament, senate and county assemblies, Political
parties funded from public funds, & Public debt.
3) Salaries and Remuneration Commission
Article 230 (1) creates The Salaries and Remuneration Commission and consists of a
chairperson appointed by the President :
A person each nominated by : Parliamentary service commission, Public service
commission, Judicial service commission, Teachers service commission, National police service
commission, Defence council, The senate on behalf of counties, Umbrella group of trade unions,
Umbrella group of employers, Joint forum of professional bodies, A person nominated by
Cabinet secretary for finance – No vote, A person nominated by the attorney general – No vote,
& A person nominated by Cabinets secretary responsible for public service – no Vote
This commission:
(a) sets and reviews the remuneration and benefits of state officers, and
(b) advices governments on the remuneration and benefits of public officers.
The commission must ensure the public compensation bill is sustainable, helps to
attract and retain people with appropriate skills and recognises productivity and
performance.

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4) Central Bank of Kenya
Article 231 (1) creates The Central Bank of Kenya to formulate monetary policy,
promote price stability and issue currency.
Notes and coins issued by the CBK must not bear the portrait of any individual.
1.3. Role of the National and County Treasuries
Role of the National Treasury

The National Treasury derives its mandate from Article 225 of the Constitution 2010,
Section 11 of the Public Management Act 2012 and the Executive order No. 2/2013. It
executes its mandate in consistency with any other legislation as may be developed or
reviewed by Parliament from time to time.
The core functions of the National Treasury as derived from the above legal provisions
include;
1) Formulate, implement and monitor macro-economic policies involving
expenditure and revenue;
2) Manage the level and composition of national public debt, national guarantees and
other financial obligations of national government;
3) Formulate, evaluate and promote economic and financial policies that facilitate
social and economic development in conjunction with other national government
entities;
4) Mobilize domestic and external resources for financing national and county
government budgetary requirements;
5) Design and prescribe an efficient financial management system for the national
and county governments to ensure transparent financial management and
standard financial reporting;
6) In consultation with the Accounting Standards Board, ensure that uniform
accounting standards are applied by the national government and its entities;

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7) Develop policy for the establishment, management, operation and winding up of
public funds;
8) Prepare the annual Division of Revenue Bill and the County Allocation of Revenue
Bill;
9) Strengthen financial and fiscal relations between the national government and
county governments and encourage support for county governments and assist
county governments to develop their capacity for efficient, effective and
transparent financial management; and
10) Prepare the National Budget, execute/implement and control approved budgetary
resources to MDAs and other Government agencies/entities.
Role of the County Treasuries

The County Treasuries are established pasuant to Section 103 of the Public
Management Act 2012 for each county government. The County Treasury comprise
of:
i) The County Executive Committee member for finance; (Head of the County
Treasury)
ii) The Chief Officer; and
iii) The department or departments of the County Treasury responsible for
financial and fiscal matters.
The core function of a County Treasury is to monitor, evaluate and oversee the
management of public finances and economic affairs of the county government
including:
1) developing and implementing financial and economic policies in the county;
2) preparing the annual budget for the county and coordinating the preparation of
estimates of revenue and expenditure of the county government;
3) co-ordinating the implementation of the budget of the county government;

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4) mobilising resources for funding the budgetary requirements of the county
government and putting in place mechanisms to raise revenue and resources;
5) managing the county government's public debt and other obligations and
developing a framework of debt control for the county;
6) consolidating the annual appropriation accounts and other financial statements of
the county in a format determined by the Accounting Standards Board;
7) acting as custodian of the inventory of the county government's assets except
where provided otherwise by other legislation or the Constitution;
8) ensuring compliance with accounting standards prescribed and published by the
Accounting Standards Board from time to time;
9) ensuring proper management and control of, and accounting for the finances of
the county government and its entities in order to promote efficient and effective
use of the county's budgetary resources;
10) maintaining proper accounts and other records in respect of the County Revenue
Fund, the County Emergencies Fund and other public funds administered by the
county government;
11) monitoring the county government's entities to ensure compliance with this Act
and effective management of their funds, efficiency and transparency and, in
particular, proper accountability for the expenditure of those funds;
12) assisting county government entities in developing their capacity for efficient,
effective and transparent financial management, upon request;
13) providing the National Treasury with information which it may require to carry
out its responsibilities under the Constitution and this Act;
14) issuing circulars with respect to financial matters relating to county government
entities;
15) advising the county government entities, the County Executive Committee and the
county assembly on financial matters;

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16) strengthening financial and fiscal relations between the national government and
county governments in performing their functions;
17) reporting regularly to the county assembly on the implementation of the annual
county budget; and
18) taking any other action to further the implementation of this Act in relation to the
county.
1.4. Overview of the Public Financial Management Act
Subject to Article 201 of the Constitution and the 5th schedule, the Public Finance
Management Act, 2012 was enacted by the Parliament of Kenya to provide for : -
- Effective management of public finances by the national and county
governments;
- Oversight responsibility of Parliament and county assemblies;
- Different responsibilities of government entities and other bodies, and for
connected purposes
The Act was Assented to by the president on 24th July 2012 and all provisions relating
to county governments come into operation upon the final announcement of the
results of the first elections under the Constitution (9th March 2013 at 1440Hrs), while,
all other Provisions came into force on 27th August 2012
Objectives of Public Finance Management Act, 2012

The core object of this Act is to ensure that:
(a) Public finances are managed at both the national and the county levels of
government in accordance with the principles set out in the Constitution.
(Promote good financial management at the National and County Government
level); and

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(b) Public officers who are given responsibility for managing the finances are
accountable to the public for the management of those finances through
Parliament and County Assemblies. (Facilitate effective and efficient use of
limited resources)
Others include:
• Have one overarching legislation applied to both levels of governments
instead of several PFM laws as was the case before.
• Article 189 of the constitution requires national and county governments to
have autonomy in the management of their finances and setting priories.
Hence the mirror treatment of the roles and responsibilities of key institutions
involved in public financial management at the two levels of governments.
• Comply with constitutional requirement to enact legislations on public
finance listed in the 5th schedule and also mentioned in Chapter 12.
Areas Covered by the Public Finance Management Act, 2012
Macro-Fiscal
Policymaking
Accounting, Institutions:
Reporting and Powers and Budgeting
Audit Functions
Treasury
Management
and Budget
Execution

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A. Institutions: Powers and Functions

National PFM Institutions County PFM Institutions
• Parliament: National • County Assemblies
Assembly/Senate/PBO
• Cabinet • County Executive Committee
• National Treasury • County Treasuries
• Cabinet Secretary for finance • County Executive Member for
Finance
• Accounting Officers for National • Accounting Officers for County
Government Governments
• Receivers and Collectors of • Receivers and Collectors of
Revenue for NG Revenue for CG
• Public Debt Management Office • County Budget and Economic
(PDMO) Forum
• Accounting Standards Board
(ASB)
• Controller of Budget and Auditor-
General;
• Commission on Revenue
Allocation
Intergovernmental Fiscal Coordination Institutions
• The Intergovernmental Budget and Economic Council which comprises of
the: -
– Deputy President,
– Cabinet Secretary (finance),
– Cabinet Secretary (intergovernmental relations),
– Chair of Council of County Governors,

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– each County Executive Committee members (finance)
– representatives of Parliamentary Service Commission, Judicial Service
Commission & Commission on Revenue Allocation.
• Joint Intergovernmental Technical Committee which reviews any
discretionary national intervention (by the Cabinet Secretary) in the financial
management of county governments. It Comprises of:
– The Cabinet Secretary responsible for finance,
– Cabinet Secretary responsible for intergovernmental relations;
– Representative of the CG or CG entity concerned;
– Representative of the Commission on Revenue Allocation; and
– Representative of the Intergovernmental Budget and Economic Council
B. Macro-Fiscal Policymaking framework

National Government County Government
• Prepares a Medium -Term fiscal • Prepares a Medium -Term
strategy: Budget Policy Statement. fiscal strategy: County Fiscal
• Prepares progress reports on fiscal Strategy Paper (CSFP).
strategy by way of the Budget • Prepares progress reports on
Review & Outlook Paper (BROP). CFSP by way of the County
• Prepares a pre-election & post- Budget Review & Outlook
election report. Paper (CBROP).
• Required to observe the fiscal • Required to observe the fiscal
responsibility principles covering responsibility principles
– debt, spending, wage bill, covering – debt, spending,
borrowing, fiscal risks and tax wage bill, borrowing, fiscal
rates/bases risks and tax rates/bases.

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C. Budgeting
National Government Budget County Government Budget
Process Process
• Issuance of the Budget circular • Issuance of the Budget Circular
• Budget Review and Outlook Paper • County Budget Review and
(BROP) and the Budget Policy Outlook Paper (CBROP) and
Statement. the CFSP
• Division of Revenue Bill and • County Government
County Allocation of Revenue Bill development plan.
• Budget estimates • Budget estimates
• Appropriation Bill • Appropriation Bill
• Submission of the National Debt • Submission of the county Debt
Management Strategy Management Strategy
• Public pronouncement of budget • Public pronouncement of
policy highlights and revenue revenue raising measures
raising measures by the Cabinet
Secretary
• Approval of Finance Bill • Approval of Finance Bill
D. Treasury Management and Budget Execution

• Provides for the operationalization • Provides for the
of Consolidated Fund, operationalization of the
Equalization Fund and County Revenue Fund.
Contingencies Fund. • Authorises each county
government to open a County
Emergency Fund.

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• Provides for the establishment of • Provides for the establishment
other national public funds of other county public funds.
• Establishes a Single Treasury • Each County Treasury shall
Account for the National establish a Treasury Single
Government Account for each CG.
• Each national government entity is • Each county government entity
required to prepare an annual is required to prepare an
cash flow plan and forecast annual cash flow plan and
forecast
• Every county government
prepare a consolidated annual
cash flow projection by 15th
June which shall be the basis
for the preparation of the NT
schedule of disbursement to
CGs.
• Provides for process of budget • Provides for process of budget
reallocations and supplementary reallocations and
estimates supplementary estimates
E. Accounting, reporting and audit

Provides for the preparation of: Provides for the preparation of:
• Consolidated annual financial • Consolidated annual financial
statement of NG statement of CG.

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• Annual financial statement of NG • Annual financial statement of
entity CG entity
• Quarterly report of NG entity. • Quarterly report of CG entity.
• Annual report of revenue • Annual report of revenue
received and collected received and collected
• Report of waivers and variations • Report of waivers and
in taxes, fees and charges. variations in taxes, fees and
charges.
• Annual financial statement of a • Annual financial statement of
national public fund a county public fund
• Quarterly report of a national • Quarterly report of a county
public fund public fund
• Separate reports by State • Separate reports by County
Corporations (sections 88 & 89) Corporations (sections 184 &
185)
• Pre and Post-election reports
Enforcement
• Any offence under the PFM Act, • Any offence under the PFM
2012 attracts a term of Act, 2012 attracts a term of
imprisonment of up to 5 years or imprisonment of up to 5 years
a fine of up to Kshs. 10 Million, or a fine of up to Kshs. 10
or both Million, or both
• Principal Secretary responsible for • County Chief Officer
National Treasury to report responsible for finance to

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suspected offences to relevant law report suspected offences to
enforcement authorities. relevant law enforcement
• Public Officers are personally authorities.
liable for losses incurred by NG as • Public Officers are personally
a result of their fraudulent, corrupt liable for losses incurred by CG
or negligent acts. as a result of their fraudulent,
corrupt or negligent acts.
Public Participation
• Various sections in the PFM Act 2012 provide for public participation in public
financial management and in particular:
– the formulation of the Budget Policy Statement, County Fiscal Strategy
Paper and the Budget Estimates.
– the preparation of division of revenue Bill and County Allocation of
Revenue Bill.
– County Budget and Economic Forum provides a platform for public
participation in county planning and budgeting.
• Requirement for publication and publicizing of budget documents and reports
enhances public participation.
• Section 207 of the PFM Act, 2012 requires development of regulations to
prescribe further guidelines for public participation in public financial
management.
1.5. Financial Regulations
PFM legal instruments in force:

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– Public Finance Management Act, 2012;
– The Commission on Revenue Allocation Act, 2011;
– The Independent Offices (Appointment) Act, 2011; and
– The Salaries and Remuneration Commission Act, 2011;
– The Procurement of Public Goods and Services, 2015
– The Public Audit Act, 2015; and
– The Controller of Budget Act, 2016.
In order to consolidate the PFM legal framework, the following Acts were repealed:
(a) the Fiscal Management Act (No. 5 of 2009);
(b) the Government Financial Management Act (No. 5 of 2004);
(c) the Internal Loans Act (Cap. 420);
(d) the Contingencies Fund and County Emergency Funds Act, 2011 (No. 17 of 2011);
(e) the National Government Loans Guarantee Act, 2011 (No. 18 of 2011); and
(f) the External Loans and Credits Act (Cap. 422).
1.6. Treasury Circulars; Meaning and Application
Meaning
Treasury circulars provide guidance and instructional information principally to
government departments and state-owned enterprises and request financial
information from those agencies. They are usually addressed to :
– Chief executives (CEs);
– Chief Financial Officers (CFOs);
Application
- The main purpose of Treasury circulars is to provide guidance & instructional
information and to request for financial information.

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- Treasury circulars may also cover matter which are outside the scope of treasury
instructions such a budget timetable.
- Treasury circulars may also cover matters that are to take effect immediately (but
these may be incorporated within treasury instructions as part of an annual update)
Chapter 12 & Sec. 104 of the PFM Act allows both the National and County Treasuries
to issue Treasury Circulars (See sample below)

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1.7. Process of Developing National and County

Government Finance Bills
Refer to: Chapter 1.10 (Duplication)
1.8. Role of Budget Officers in Budget Preparation and

Execution
The Parliamentary Budget Office (PBO) was established in the year 2007 as a unit
under the Directorate of Information and Research services following a resolution of
Parliament. The office further got a legal backing with the enactment of the Fiscal
Management Act 2009 (FMA), which established the PBO as an office in the
Parliamentary Service Commission. The office was subsequently elevated to a
directorate in 2010.

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The Finance Management Act was repealed in 2012 with the enactment of the Public
Finance Management Act 2012 (PFM), which re-established the PBO as an office of the
Parliamentary Service and enhanced its roles.
The Budget Office consists of persons (Officers) appointed on merit based on their
experience in finance, economics and public policy matters. The functions of the PBO
are outlined in section 10 of the PFM Act, 2012 are as follows: -
1) Provide professional services in respect of budget, finance, and economic
information to the committees of Parliament;
2) Prepare reports on budgetary projections and economic forecasts and make
proposals to Committees of Parliament responsible for budgetary matters;
3) Prepare analyses of specific issues, including financial risks posed by Government
policies and activities to guide Parliament;
4) Consider budget proposals and economic trends and make recommendations to
the relevant committee of Parliament with respect to those proposals and trends;
5) Establish and foster relationships with the National Treasury, county treasuries
and other national and international organisations, with an interest in budgetary
and socio-economic matters as it considers appropriate for the efficient and
effective performance of its functions;
6) Ensure that all reports and other documents produced by the Parliamentary
Budget Office are prepared, published and publicised not later than fourteen days
after production; and
7) Report to the relevant committees of Parliament on any Bill that is submitted to
Parliament that has an economic and financial impact, making reference to the
fiscal responsibility principles and to the financial objectives set out in the relevant
Budget Policy Statement; and
8) Propose, where necessary, alternative fiscal framework in respect of any financial
year.

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The Parliamentary Budget Office MUST observe the principle of public participation
in budgetary matters.
1.9. Responsibilities of the National and County

Treasuries in Relation to Budget Preparation
The National Treasury

The general responsibilities of the National Treasury with respect to the budget
Process provided under Part III of the Public Finance Management Act 2012 (PFM),
include: -
a) Preparation of the annual Budget Policy Statement.
b) Preparation of the Budget Review and Outlook Paper.
c) Publication of pre- and post-election economic and fiscal reports by National
Treasury.
Additionally, a Budget Supply Department of Treasury headed by a Director of
Budget with technical officers of Finance cadre, Economists Accountants and
Administrators mandated with the preparation of annual estimates of revenues and
expenditures that are laid before Parliament every year for approval. It does also
prepare supplementary estimates as the need arises.
Objectives of The Budgetary Department
a) Strengthen the budget and reporting system to put in place a more efficient and
effective Public Financial Management System.
b) Implementation of budget process to conform to the essential principles for sound
budget management
c) To introduce a performance perspective to the budget process by aligning
expenditure to policy priorities
d) To link to planning, policy objectives to budget allocation.

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e) Restructure the budget to fund programs that can be identified in line with the ERS
targets
Responsibilities of The Budgetary Department
1) Coordination of the preparation and presentation to Parliament of MTEF and
Annual Estimates of expenditure
2) Development of broad priorities for allocation of public expenditure and
implementing Ministerial Ceiling System
3) Enforcing proper management control, monitoring and evaluation for efficient
utilization of budgetary resource to realize value for money
4) Setting up systems for the budget process e.g. GFS classification MTEF Budget.
5) Ensuring that allocation of resources is consistent with Government policy
priorities.
The County Treasuries

The general responsibilities of the County Treasuries with respect to the County
Budget Process provided under Part IV of the Public Finance Management Act 2012
(PFM), include: -
a) Preparation of the County Fiscal Strategy Paper.
b) Preparation of the County Budget Review and Outlook Paper.
Additionally, the County Treasuries: -
a) Prepare the annual budget for the county and coordinating the preparation of
estimates of revenue and expenditure of the county government;
b) Co-ordinate the implementation of the budget of the county government;
c) Mobilize resources for funding the budgetary requirements of the county
government and putting in place mechanisms to raise revenue and resources;
d) Report regularly to the county assembly on the implementation of the annual
county budget; and

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e) Considers any recommendations made by the county assembly when
finalizing the budget proposal for the financial year concerned.
f) Publish and publicize the County Fiscal Strategy Paper within seven days after
it has been submitted to the county assembly.
1.10. Budget Process for Both National, County and

Public Entities
National Government Budget Process

The National Budget Process is outlined under Part III of the Public Finance
Management Act 2012 (PFM), and it provides in Section 35 (1) of the Act that, the
budget process for the national government in any financial year comprises of the
following stages: -
1) Integrated development planning process which includes both long term and
medium-term planning;
2) Planning and determining financial and economic policies and priorities at the
national level over the medium term;
3) Preparing overall estimates in the form of the Budget Policy Statement of
national government revenues and expenditures;
4) Adoption of Budget Policy Statement by Parliament as a basis for future
deliberations;
5) Preparing budget estimates for the national government;
6) Submitting those estimates to the National Assembly for approval;
7) Enacting the appropriation Bill and any other Bills required to implement the
National government's budgetary proposals;
8) Implementing the approved budget;

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9) Evaluating and accounting for, the national government's budgeted revenues
and expenditures; and
10) Reviewing and reporting on those budgeted revenues and expenditures every
three months.
County Government Budget Process

The County Budget Process is outlined under Part IV of the Public Finance
Management Act 2012 (PFM), and it provides in Section 125 (1) of the Act that, the
budget process for the county governments in any financial year shall comprise the
following stages: -
1) Integrated development planning process which shall include both long term
and medium-term planning;
2) Planning and establishing financial and economic priorities for the county over
the medium term;
3) Making an overall estimation of the county government's revenues and
expenditures;
4) Adoption of County Fiscal Strategy Paper;
5) Preparing budget estimates for the county government and submitting
estimates to the county assembly;
6) Approving of the estimates by the county assembly;
7) Enacting an appropriation law and any other laws required to implement the
county government's budget;
8) Implementing the county government's budget; and
9) Accounting for, and evaluating, the county government's budgeted revenues
and expenditures;
The Cabinet Secretary & The County Executive Committee member for finance MUST
ensure that there is public participation in the budget process.

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Chapter Two: Establishment of Public Funds in the Public Sector
Table of Contents
Chapter Two
2 ESTABLISHMENT OF PUBLIC FUNDS IN THE PUBLIC SECTOR .................2
2.1. Provision of Establishing Public Funds .................................................................. 2
2.2. Rationale of Creation of Public Funds..................................................................... 2
2.3. The Consolidated Fund ............................................................................................. 2
2.4. The Establishment and Administration of Contingency Funds .......................... 4
2.5. The Establishment and Administration of Equalization Funds .......................... 5
2.6. County Revenue Sources .......................................................................................... 7
1
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2 ESTABLISHMENT OF PUBLIC FUNDS IN THE PUBLIC

SECTOR
2.1. Provision of Establishing Public Funds

These are government entities created by the Constitution for particular purposes and
are separately organised from other financial obligations of the government with
capability to hold their Assets and Liabilities separately.
They engage in financial transactions on their own account. Their sources of finance
are: -
– Provided for by law
– Transfer from budget
– User Charges
– Borrowing or Donor funds
2.2. Rationale of Creation of Public Funds
There are three major reasons behind the necessity to create public funds. These are:
- Budget failure to address specific needs that may require more attention.
- Failure by the budget to fully or adequately fund some activities.
- Protection of important programs from budget cuts.
2.3. The Consolidated Fund
Establishment: Article 206 (1) of the constitution establishes the Consolidated

Fund. The fund receives all money raised or received by or on behalf of the national
government, except : -
– Money reasonably excluded from the Fund by an Act of Parliament and payable
into another public fund established for a specific purpose; or

Page 40
– Money retained by the State organ that received it for the purpose of defraying
the expenses of the State organ.
Withdrawal from the Fund: Money can only be withdrawn from the
Consolidated Fund under the following conditions : -
– Accordance to an appropriation by an Act of Parliament (Appropriation Act);
– Accordance with Article 222 (Authorise before Appropriation Act is passed) or
223 (Supplementary Appropriation); or
– As a charge against the Fund as authorized by the Constitution or an Act of
Parliament.
Administration of the Fund: According to Sec. 17 (1) of the PFM Act, 2012, The
National Treasury is mandated to administer the Consolidated Fund and to maintain
the Consolidated Fund in the National Exchequer Account, kept at the Central Bank
of Kenya.
The National Treasury does the following in carrying out its duty as the Fund’s
administrator : -
– Facilitates payments into that account all money raised or received by or on
behalf of the national government; and
– Pays from that National Exchequer Account without undue delay all amounts
that are payable for public services.
– Ensures that the Exchequer Account is NOT overdrawn at any time.
For every withdrawal, the Treasury MUST make a requisition and submit it to the
Controller of Budget for approval. The approval, together with written instructions
from the Treasury is sufficient authority for the CBK to pay.

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2.4. The Establishment and Administration of

Contingency Funds
Establishment: Article 208 (1) of the constitution establishes Contingencies Fund.

The Fund consists of monies appropriated from the Consolidated Fund for urgent &
unforeseen need.
Administration of the Fund: The Cabinet Secretary is the administer of the Fund
and should ensure that the Permanent capital of the Fund doesn’t exceed 10B or as
may be prescribed by the Cabinet Secretary with the approval of Parliament.
The Cabinet Secretary keeps the Fund in a separate account, maintained at CBK and
can only pay : -
– into that account monies appropriated to the Contingencies Fund by an
Appropriation Act; and
– from the Contingencies Fund, without undue delay, all advances made.
Advances from the Fund: This can only be done in case of urgent &
unforeseen need. There is an urgent need for expenditure if the Cabinet Secretary,
guided by regulations and relevant laws, establishes that : -
– The payment was not budgeted for; and
– The event was unforeseen and cannot be delayed until a later financial year
without harming the general public interest. An unforeseen event is one which
:-
i) Threatens serious damage to human life or welfare;
ii) Threatens serious damage to the environment; and
iii) is meant to alleviate the damage, loss, hardship or suffering caused
directly by the event. An event is considered to threaten damage to
human life or welfare only if it involves, causes or may cause : -

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a) Loss of life, human illness or injury;
b) Homelessness or damage to property;
c) Disruption of food, water or shelter; or
d) Disruption to services, including health services
Financial statements in respect of the Fund: Within three months after the
end of each financial year, the National Treasury MUST prepare and submit to the
Auditor-General financial statements for that year which should contain the following
information : -
– Date & amount of each payment made from the Fund;
– The person to whom the payment was made;
– The purpose for which the payment was made;
– In case the money has been spent for the purpose it was intended, a statement
to that effect;
– In case the money has NOT YET been spent for the purpose it was intended, a
statement specifying the reasons for not having done so; and
– a statement indicating how the event was unforeseen and couldn’t be delayed.
2.5. The Establishment and Administration of

Equalization Funds
Establishment: Article 204 (1) of the constitution establishes the Equalization Fund
and allocated to it 0.5% of all the revenue collected by the National Government each
year. Total revenue is calculated on the basis of the most recent audited accounts of
revenue received, as approved by the National Assembly.
Purpose of the Fund: The National Government uses the Equalization Fund only
to provide basic services to marginalized areas to the extent necessary to bring the

Page 43
quality of those services in those areas to the level generally enjoyed by the rest of the
nation. These services include:
– Water;
– Roads;
– Health facilities; and
– Electricity.
Withdrawal from the Fund: The National Government may use the Equalization
Fund under the following conditions : -
– In accordance with an Appropriation Act; and
– Either directly, or indirectly through conditional grants to counties in which
marginalized communities exist.
Administration of the Fund: Sec. 18 of the PFM Act, 2012 Authorises The
National Treasury is to administer the Fund and keep the Fund in a separate account
maintained at the CBK. The National Treasury:
– Ensures that the Fund Account is not overdrawn at any time.
– Ensures that no funds are withdrawn without the approval of the Controller
of Budget.
The approval, together with written instructions from the National Treasury
requesting for the withdrawal, are sufficient authority for the CBK to pay amounts
from the Fund.
Unutilized balances in the Fund at the end of the year remains in that Fund for use in
the subsequent financial year.

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2.6. County Revenue Sources
County governments may collect/revenue from the following sources : —
– Property rates;
– Entertainment taxes; and
– any other tax that it is authorized to impose by an Act of Parliament.
In addition, they have powers to impose charges for the services they provide in a
manner that doesn’t prejudice national economic policies, economic activities across
county boundaries or the national mobility of goods, services, capital or labour.

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Chapter Three: Supply Chain Management in Public Entities
Table of Contents
Chapter Three
3 SUPPLY CHAIN MANAGEMENT IN PUBLIC ENTITIES ................................. 2
3.1. DEFINITIONS AND TERMINOLOGIES ...................................................................... 2
3.2. GENERAL OVERVIEW OF PUBLIC PROCUREMENT AND DISPOSAL (PPD) ACT ... 4
3.3. PROCUREMENT GUIDELINES AS ENVISAGED BY PPD ACT .................................. 6
3.4. COMMITTEES RESPONSIBLE FOR PROCUREMENT................................................ 11
3.5. PROCUREMENT PROCESS BY NATIONAL, COUNTY AND OTHER PUBLIC
ENTITIES ............................................................................................................................. 12
3.6. TENDERING PROCESS AND SELECTION OF SUPPLIERS IN PUBLIC SECTOR ....... 12
3.7. CONCEPT OF E-PROCUREMENT ............................................................................. 13

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3 SUPPLY CHAIN MANAGEMENT IN PUBLIC ENTITIES
3.1. Definitions and Terminologies

1. “Accounting officer” means: -
(a) Officer for a public entity other than a local authority, the person appointed
by the CS to the Treasury as the accounting officer or, if there is no such
person, the chief executive of the public entity; or
(b) Officer for a local authority, the town or county clerk of the local authority;
2. “Advisory Board” means the Public Procurement Oversight Advisory Board
established under section 21;
3. “Authority” means the Public Procurement Oversight Authority established
under section 8;
4. “Candidate” means a person who has submitted a tender to a procuring entity;
5. “Citizen contractor” means a natural person or an incorporated company wholly
owned and controlled by persons who are citizens of Kenya;
6. “Contractor” means a person who enters into a procurement contract with a
procuring entity;
7. “Corruption” has the meaning assigned to it in the Anti-Corruption and Economic
Crimes Act,
8. 2003 and includes the offering, giving, receiving or soliciting of anything of value
to influence the action of a public official in the procurement or disposal process
or in contract execution.
9. “Director-General” means the Director-General of the Authority provided for
under Sec 10;
10. “Disposal” means the divestiture of public assets, including intellectual and
proprietary rights and goodwill and other rights of a procuring entity by any
means including sale, rental, lease, franchise, auction or any combination however
classified, other than those regulated by any other written law;

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11. “Fraudulent practice” includes a misrepresentation of fact in order to influence a
procurement or disposal process or the exercise of a contract to the detriment of
the procuring entity, and includes collusive practices amongst bidders prior to or
after bid submission designed to establish bid prices at artificial non-competitive
levels and to deprive the procuring entity of the benefits of free and open
competition;
12. “Goods” includes raw materials, things in liquid or gas form, electricity and
services that are incidental to the supply of the goods;
13. “Local contractor” means a contractor who is registered in Kenya under the
Companies Act and whose operation is based in Kenya;
14. “Procurement” means the acquisition by purchase, rental, lease, hire purchase,
license, tenancy, franchise, or by any other contractual means of any type of works,
assets, services or goods including livestock or any combination;
15. “Procuring entity,” means a public entity making a procurement to which PPD
Act applies;
16. “Review Board” means the Public Procurement Administrative Review Board
established under section 25;
17. “Services” means any objects of procurement or disposal other than works and
goods and includes professional, non-professional and commercial types of
services as well as goods and works which are incidental to but not exceeding the
value of those services;
18. “Works” means the construction, repair, renovation or demolition of buildings,
roads or other structures and includes: -
a) Installation of equipment and materials;
b) Site preparation; and
c) Other incidental services.

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3.2. General Overview of Public Procurement and

Disposal (PPD) Act
The purpose of the Act is to establish procedures for procurement and the disposal of
unserviceable, obsolete or surplus stores and equipment by public entities to achieve
the following objectives: -
a) To maximize economy and efficiency;
b) To promote competition and ensure that competitors are treated fairly;
c) To promote the integrity and fairness of those procedures;
d) To increase transparency and accountability in those procedures; and
e) To increase public confidence in those procedures;
f) To facilitate the promotion of local industry and economic development.
When a State organ or any other public entity contracts for goods or services, it must
do so in accordance with a system that is fair, equitable, transparent, competitive and
cost-effective. The Act is applied with respect to: -
a) Procurement by a public entity;
b) Contract management;
c) Supply chain management, including inventory and distribution;
d) Disposal by a public entity of stores and equipment that is unserviceable,
obsolete or surplus.
e) Renting of premises;
f) Appointing, other than under the authority of an Act, of an individual to a
committee, task force or other body if the individual will be paid an amount
other than for expenses; and
g) Acquiring of real property.
For greater certainty, the following are NOT procurements with respect to the Act: -
a) The retaining of the services of an individual for a limited term if;

Page 49
b) The acquiring of stores or equipment if the stores or equipment are being
disposed of by a public entity in accordance with the procedures set.
c) The acquiring of services provided by the Government or a department of
the Government.
Conflicts with Other Acts

If there is a conflict between PPD Act and the regulations made under the Act and any
other Act or regulations, in matters relating to procurement and disposal, PPD Act or
the regulations made under the Act prevails.
Conflict with International Agreements

• Where any provision of PPD Act conflicts with any obligations of the Republic of
Kenya arising from a treaty or other agreement to which Kenya is a party, the Act
prevails except in instances of negotiated grants or loans.
• Where a treaty or agreement referred to above contains favorable provisions to
citizens and local contractors, full advantage is taken of these provisions of the Act
in the interest of promoting domestic capacity development.
• Where procurement conflict with obligations of the Republic of Kenya arising from
a treaty or other agreement to which Kenya is a party favors an external
beneficiary: -
o Procurement through contributions made by Kenya, shall be undertaken in
Kenya through contractors registered in Kenya; and
o All relevant insurances shall be placed with companies registered in Kenya
and goods shall be transported in carriages registered in Kenya.
Conflict with Conditions on Donated Funds
If there is a conflict between PPD Act, the regulations or any directions of the
Authority and a condition imposed by the donor of funds, the condition prevails with
respect to procurement that uses those funds and no others.

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However, this does not apply if the donor of funds is a public entity.
The Public Procurement Oversight Authority

This is a body established under the Act and has all the powers necessary for the
performance of its functions which includes:
1. Ensuring that the procurement procedures are complied with;
2. Monitors the public procurement system and reports its overall functioning to
the Minister;
3. Assists in the implementation and operation of the public procurement system
and in so doing to prepare and distribute manuals and standard documents;
a. To provide advice and assistance to procuring entities;
b. To develop, promote and support the training and professional
development of persons involved in procurement; and
c. To issue written directions to public entities with respect to procurement
including the conduct of procurement proceedings and the
dissemination of information on procurements; and
d. To ensure that procuring entities engage procurement professionals in
their procurement units.
4. Initiates public procurement policy and proposes amendments to the Act or to
the regulations; and
5. Performs such other functions and duties as are provided for under the Act.
3.3. Procurement Guidelines as Envisaged by PPD Act
General Procurement Rules

Rule One: Choice of procurement procedure
1) In procurement, the procuring entity should use open tendering or an
alternative procurement procedure only if that procedure is allowed.

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2) A procuring entity can also use restricted tendering or direct procurement as
an alternative procurement procedure upon: -
(a) Obtaining a written approval from tender committee; and
(b) Records in writing the reasons for using the alternative procurement
procedure.
Rule Two: Procurement not to be split or inflated
1) No procuring entity may structure procurement as two or more procurements
for the purpose of avoiding the use of a procurement procedure.
2) Standard goods, services and works with known market prices are to be
procured at the prevailing real market price.
3) Public officials involved in transactions in which are unreasonably inflated,
will be required to pay the procuring entity for the loss resulting from their
actions.
Rule Three: Qualifications to be awarded contract

One is qualified to be awarded a contract for procurement only if he satisfies the
following criteria: -
1) Meets necessary qualifications, capability, experience, resources, equipment
and facilities to provide what is being procured;
2) Has legal capacity to enter into a contract for the procurement;
3) Not insolvent, in receivership, bankrupt or in the process of being wound up
and is not the subject of legal proceedings relating to the foregoing;
4) The procuring entity is not precluded from entering into the contract with the
person under Limitation on contracts with employees,
5) Not debarred from participating in procurement proceedings under Limitation
on contracts with employees.

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Rule Four: Pre-qualification procedures
To identify qualified persons a procuring entity may use a pre-qualification procedure
or may use the results of a pre-qualification procedure used by another public entity
Rule Five: Limitation on contracts with employees
Except as expressly allowed, a procuring entity must not enter into a contract
for procurement with: -
1) An employee of the procuring entity or a member of a board or committee of
the procuring entity;
2) A CS, public servant or a member of a board or committee of the Government
or any department of the Government or a person appointed to any position
by the President or a CS; or
3) A person, including a corporation, who is related to the people above
Rule Six: Specific requirements
1) The procuring entity MUST prepare specific requirements relating to the
goods, works or services being procured that are clear, that give a correct and
complete description of what is to be procured.
2) The specific requirements MUST include all the procuring entity’s technical
requirements with respect to the goods, works or services being procured.
Rule Seven: Verification that not debarred
A tender, proposal or quotation submitted by any person must include a statement
verifying that the person is not debarred from participating in procurement
proceedings and a declaration that the person will not engage in any corrupt practice.
Rule Eight: Termination of procurement proceedings
In case a public entity terminates procurement proceedings it is not liable to any
person for termination but must:
1) Give the Authority a written report on the termination.

Page 53
2) Give prompt notice of a termination to each person who submitted a tender,
proposal or quotation.
3) On request, give reasons for terminating the proceedings within 14 days of the
request.
4) Return the tenders unopened proceedings are terminated before the tenders
are opened.
Rule Nine: Inappropriate influence on evaluations
After the deadline for the submission of tenders, proposals or quotations: -
1) No unsolicited communications to the procuring entity or any person involved
in the proceedings that might reasonably be construed as an attempt to
influence the evaluation and comparison of tenders, proposals or quotations by
anyone who submitted a tender, proposal or quotation; and
2) No person who is not officially involved in the evaluation and comparison of
tenders, proposals or quotations shall attempt, in any way, to influence that
evaluation and comparison.
Rule Ten: Participation in procurement
1) Candidates participate in procurement proceedings without discrimination
except where participation is limited in accordance with the Act and the
regulations.
2) The CS shall, in consideration of economic and social development factors,
prescribe preferences and or reservations in public procurement and disposal.
Rule Eleven: Corrupt practice
No person should be involved in any corrupt practice in any procurement proceeding
and should any person/employee or agent of a person contravene this provision, the
following shall apply: -
1) The person to be disqualified from entering into a contract; or

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2) If a contract has already been entered into, the contract must be terminated.
Rule Twelve: Fraudulent practice
Fraudulent practice in any procurement proceeding is not acceptable and any person
is involved then: -
1) The person must be disqualified from entering into a contract; or
2) If a contract has already been entered into, the contract must be terminated.
Rule Thirteen: Collusion
Any form of collusion or attempt to collude with any other person to do the following
is strictly prohibited.
Rule Fourteen: Conflicts of interest
An employee or agent of the procuring entity or a member of a board or committee of
the procuring entity who has a conflict of interest with respect to a particular
procurement process cannot take part in that procurement proceedings and in any
decision relating to that procurement or contract.
Rule Fifteen: Confidentiality
During or after procurement proceedings no procuring entity, employee, agent of
procuring entity, member of a board or committee of the procuring entity are all
bound not to disclose the following: -
1) Information relating to a procurement whose disclosure would impede law
enforcement or whose disclosure would not be in the public interest;
2) Information relating to a procurement whose disclosure would prejudice
legitimate commercial interests or inhibit fair competition;
3) Information relating to the evaluation, comparison or clarification of tenders,
proposals or quotations; or
4) The contents of tenders, proposals or quotations.

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Rule Sixteen: Procurement records
A procuring entity must maintain a proper filing system with clear links between
procurement and expenditure and is required by law to keep such records for each
and every procurement for at least six (6) years after the resulting contract was
entered into or, if no contract resulted, after the procurement proceedings were
terminated.
3.4. Committees Responsible for Procurement
For purpose of ensuring that procurement and asset disposal decisions are made in a
systematic, corporate and structured manner the following standing committees are
formed:
a) Disposal committee; and
b) Tender committees which includes: -
1) Tender opening committee;
2) Tender evaluation committee;
3) Negotiation committee; and
4) Inspection and acceptance committee.
Where a county public entity lacks capacity to form these committees then, the
accounting officer seek advice from the Authority. The Tender Committees
compromises of:
1) Chairperson;
2) Deputy Chairperson;
3) Five Members; and
4) Secretary - procurement professional heading the procurement unit.

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3.5. Procurement Process by National, County and

Other Public Entities
The accounting officer are charged with the sole responsibility of informing the
Authority on the composition of the county public entity’s tender committee and
respective alternates within 14 days from the date of appointment.
The accounting officer or head of the procuring entity appoints an alternate member
for each tender committee, and it is only the alternate who attend any meeting of the
county and designated tender committee whenever the member is unable to attend.
Compliance
A county procuring entity shall ensure that it complies with the provisions of the Act,
all the Public Procurement and Disposal Regulations, 2006, these Regulations, the
directions of the Authority and the Administrative Review Board in respect of its
procurement and disposal activities.
For Further Reading Please refer to The Public Procurement and Disposal Regulations,
2006
3.6. Tendering Process and Selection of Suppliers in

Public Sector
As Discussed under 3.3
For Further Reading Please refer to The Public Procurement and Disposal Regulations,
2006 and Regulations

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3.7. Concept of e-Procurement
E-Procurement is an automated business process, which includes procurement
planning, management of suppliers, requisitions, quotations, contracts and receipts
will be shifted to a more effective and cost-efficient online transaction.
Categories for E-procurement:

According to Baily (2008), the following are the types of E-procurement:
1. Web-based ERP (Enterprise Resource Planning) deals with creating and
approving purchasing requisitions, placing purchase orders and receiving goods
and services by using a software system based on Internet technology.
2. E-MRO (Maintenance, Repair and Operations) deals with creating and
approving purchasing requisitions, placing purchase orders and receiving non-
product related MRO supplies
3. The third type is E-sourcing involves Identifying new suppliers for a specific
category of purchasing requirements using Internet technology.
4. E-tendering involves sending requests for information and prices to suppliers and
receiving the responses of suppliers using Internet technology
5. E-reverse auctioning is another type of e-procurement. This uses Internet
technology to buy goods and services from a number of known or unknown
suppliers.
6. E-informing This involves gathering and distributing purchasing information
both from and to internal and external parties using Internet technology
7. E-market sites. Here, buying communities can access preferred suppliers'
products and services, add to shopping carts, create requisition, seek approval,
receipt purchase orders and process electronic invoices with integration to
suppliers' supply chains and buyers' financial systems.

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Benefits of E-Procurement
An organization, which uses E-procurement, has the following advantages:
1. Price reduction in tendering:
In this method, there is no paperwork, postage fee and other costs associated with
preparation and sending tender documents. It is also faster to send a document
electronically as compared to the traditional method of sending tender documents
through post office. It results to improved order tracking and tracing, for it is much
easier to trace the orders and make necessary corrections in case an error is
observed in the previous order.
2. There is reduction in time to source materials:
A lot of time is spent on paper invoicing in terms of writing, filing and postal
communication but while in e-procurement, staff have sufficient time to engage
on strategic issues of procurement The time wasted in moving from one town or
country to another to look for a potential supplier or buyer is greatly reduced since
with a click of a button, you can readily get the information in the internet.
3. Lower Administration costs
Reduction in paperwork and this leads to lower administration costs.
4. Reduction in procurement staff
Since most of the procurement process is done electronically, the number of staff
needed to facilitate the process reduces. Reduction in staff is an important way of
producing competitive advantage through reduced costs.
5. E-procurement gives an organization competitive advantage over its
competitors.
As a centralized department oversees all procurement activities worldwide and
can access documentation when required, this gives a distinct advantage over the
much slower process of having to post documentation between offices. This
extends the supply chain beyond geographical boundaries to a much wider group.

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6. E-procurement is improvement of communication
E-procurement allows sections of electronic documentation to flow through the
supply chain; it improves the speed of returns and subcontractor price visibility.
7. Enhanced inventory management
8. Increased accuracy of production capacity
9. Negotiated unit cost reduction
E-Procurement in Kenya
Integrated Financial Management Information System (IFMIS)
According to the National Treasury, IFMIS is an automated system used for public
financial management that interlinks planning, budgeting, expenditure management
and control, accounting, procurement, audit and reporting.
E-procurement is a component of IFMIS whose usage is submission and evaluation of
procurement applications. According to the Kenya ICT Authority, its benefits are: -
a) Enhances efficiency and transparency in public procurement thus eliminating
corruption,
b) Provides an equal platform for suppliers to compete for tenders and also
c) Dispensing justice through archiving of records.
From this analysis, e-procurement platform is a tool primarily aimed at reducing
wastage, graft and plunder of national resources. It brings discipline on how public
procurement is done and can help transform how public finances are managed.
Counties have been against the system. The gravity of this mischief is escalated by the
allegation that the governors are willing to embrace the accounting platform of IFMIS
but not the e-procurement platform. The governors allege that e-procurement:
a) Lacks adequate infrastructure in the counties;
b) Slow; and
c) Lacks an enabling legal framework, which renders its roll out ineffective.

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Problems Encountered in Implementing E-Procurement

Peter Smith, from Public Spend Matters Europe, in his article “Implementing
eProcurement – Kenya Runs into Problems” states that, It is not long ago that the
introduction of eProcurement in Kenya was being hailed as a big success. Like many
other countries in Africa and indeed other parts of the world, corruption has been a
major problem in public procurement, and the introduction of eProcurement was seen
as one way of countering this. The system included for instance built-in price
referencing, so bids that were above a benchmark could not be accepted.
eProcurement can help most of all because it provides a clear audit trail for bidding
and supplier selection. Everything is documented and it is easy to see which suppliers
have bid and what they have bid. Aspects such as ensuring bids are “opened” at the
same time can also be managed more easily than with manual processes. However, it
appears that all is not well now with the system in Kenya, and the leaders of 47
counties within the country suggested the system should be suspended.
The Council of Governors (CoG) wanted the National Government to suspend the e-
procurement system in counties specifically because the system was hampering
effective service delivery due to lack of proper infrastructure to support the system.
The council called for immediate suspension until the supporting infrastructure is in
place and threatened go to court. The governors have identified a number of problems
with the system:
1) It has “recentralized procurement and contributed to marginalization of locals
in tendering.”
2) People and businesses that do not have access to the Internet cannot take part
in the supplier selection and contracting process at county level.
3) Malfunctioning of the system, hence, unable to promptly pay bills to suppliers,
causing problems for those firms and creating a crisis of confidence in the

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process. There are also issues with the infrastructure that is needed to support
electronic procurement. In some cases, the system has had very limited
availability – “one county was allowed to access the system for two hours only
in two weeks.”
Some observers saw this as a push-back against the anti-corruption aspect of the
system. But the government does need to show that it is doing everything possible to
make this a success, and these do seem to be fundamental issues. But what can we
learn from this that might be relevant to contracting authorities and governments in
other parts of the world, including Europe?
The most important point is that it is not enough to just have a system. It is (as we
mathematicians say) a necessary but not sufficient condition for achieving successful
eProcurement. So, whatever happens next in Kenya, we can see that having the
technical infrastructure for eProcurement is vital. A reliable Internet service that can
be accessed reliably by the supply market is essential if this is to work well.
Then, we need a supply market that is sophisticated enough to use eProcurement. It
is not enough to have a system and Internet connections – your suppliers need to
know how to use the system and be prepared to use it. The particular risk identified
now in Kenya is that the smaller, local suppliers will lose out, because they are the
potential suppliers who do not have the equipment, knowledge or resources to access
the system. Given that virtually every government and contracting authority wants to
promote local business, and small, dynamic, innovative firms, then this is critical.
As well as the market, you must have capability and capacity amongst the staff who
are going to operate the eProcurement system and process. that appears to be another
issue in Kenya, and really is a failing of the center if that is the case. Training must be
the responsibility of the “Programme owner” as it were, the central government in
this case.

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We also wonder whether the implementation in Kenya the stakeholder buy-in that
had again is necessary for a successful implementation – indeed, necessary for any
major change Programme really. If there was resistance to the new system, even if it
was not obvious or overt, then when anything goes wrong, those who oppose it will
jump on that immediately.
Smith finally sums it all up that, it has not been possible to establish if this is a home-
grown system or something bought in. He says that their own views on this are clear
– buy rather than build. However, in this case it does not seem to be the technical
features of the system that are the problem. But even so, we would always prefer to
see governments using off the shelf systems – if nothing else, it would be much easier
to find the resource to drive implementation and do the training needed on the ground
in Kenya if it was a eProcurement system that was in widespread use elsewhere.

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Chapter Four: Oversight Function in Public Finance Management
Table of Contents
Chapter Four
4 OVERSIGHT FUNCTION IN PUBLIC FINANCE MANAGEMENT ................ 2
4.1. THE ROLE OF NATIONAL ASSEMBLY ...................................................................... 2
4.2. THE ROLE OF SENATE .............................................................................................. 4
4.3. THE ROLE OF COUNTY ASSEMBLY .......................................................................... 5
4.4. THE ROLE OF AUDITOR GENERAL .......................................................................... 5
4.5. THE ROLE OF INTERNAL AUDIT .............................................................................. 6
4.6. ROLE OF CONTROLLER OF BUDGET IN RELATION TO DISBURSEMENT OF PUBLIC
FUNDS AS ENVISAGED BY THE CONSTITUTION AND PFM ACT, 2012 ............................. 6

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4 OVERSIGHT FUNCTION IN PUBLIC FINANCE

MANAGEMENT
4.1. The Role of National Assembly

The Budget Committee
The National assembly has established a “budget committee” in public finance matters
meant to oversee public finance management.
The committee is established to deal with budgetary matters and has responsibility
for the following matters, in addition to the functions set out in the Standing Orders:
a) Discuss and review the Budget Policy Statement and budget estimates and
make recommendations to the National Assembly;
b) Provide general direction on budgetary matters;
c) Monitor all budgetary matters falling within the competence of the National
Assembly under this Act and report on those matters to the National Assembly;
d) Monitor adherence by Parliament, the Judiciary and the national government
and its entities to the principles of public finance and others set out in the
Constitution, and to the fiscal responsibility principles of this Act;
e) Review the Division of Revenue Bill presented to Parliament and ensures that
it reflects the principles of the Constitution;
f) Examine financial statements and other documents submitted to the National
Assembly and make recommendations to the National Assembly for
improving the management of Kenya's public finances;
g) Make recommendations to the National Assembly on "money Bills", after
taking into account the views of the Cabinet Secretary; and
h) Table in the National Assembly a report containing the views of the Cabinet
Secretary

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i) Introduce the Appropriations Bill in the National Assembly. accordance with a
system that is fair, equitable, transparent, competitive and cost-effective.
Parliamentary Budget Office

The office known as the “Parliamentary Budget Office” exists as an office of the
Parliamentary Service. In addition to any other criteria established by the
Parliamentary Service Commission, the
Budget Office consists of people appointed on merit by virtue of their experience in
finance, economics and public policy matters.
Responsibilities of the Parliamentary Budget Office
The Parliamentary Budget Office does the following: -
a) Provide professional services in respect of budget, finance, and economic
information to the committees of Parliament;
b) Prepare reports on budgetary projections and economic forecasts and make
proposals to Committees of Parliament responsible for budgetary matters;
c) Prepare analyses of specific issues, including financial risks posed by
Government policies and activities to guide Parliament;
d) Consider budget proposals and economic trends and make recommendations
to the relevant committee of Parliament with respect to those proposals and
trends;
e) Establish and foster relationships with the National Treasury, county treasuries
and other national and international organizations, with an interest in
budgetary and socioeconomic matters as it considers appropriate for the
efficient and effective performance of its functions;
f) Subject to Article 35 of the Constitution, ensure that all reports and other
documents produced by the Parliamentary Budget Office are prepared,
published and publicized not later than fourteen days after production; and

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g) Report to the relevant committees of Parliament on any Bill that is submitted
to Parliament that has an economic and financial impact, making reference to
the fiscal responsibility principles and to the financial objectives set out in the
relevant Budget Policy Statement; and
h) Propose, where necessary, alternative fiscal framework in respect of any
financial year.
i) In carrying out its functions the Parliamentary Budget Office shall observe the
principle of public participation in budgetary matters.
4.2. The Role of Senate
The Committee
There is a Committee of the Senate set to deal with budgetary and financial matters,
it has responsibilities for the following matters, in addition to the functions set out in
the Standing Orders: -
a) Present to the Senate, subject to the exceptions in the Constitution, the proposal
for the basis of allocating revenue among the Counties and consider any bill
dealing with county financial matters;
b) Review the County Allocation of Revenue Bill and the Division of Revenue Bill
in accordance with the Constitution at least two months before the end of the
financial year;
c) Examine financial statements and other documents submitted to the, and make
recommendations to the Senate for improving the management of
government's public finances; and
d) Monitor adherence by the Senate to the principles of public finance set out in
the Constitution, and to the fiscal responsibility principles of this Act.

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e) In carrying out its functions under the Committee shall consider
recommendations from the Commission on Revenue Allocation, County
Executive Committee member responsible for finance, the Intergovernmental
Budget and Economic Council, the public and any other interested persons or
groups.
4.3. The Role of County Assembly
Read: PART IV—COUNTY GOVERNMENT RESPONSIBILITIES WITH RESPECT TO

MANAGEMENT AND CONTROL OF PUBLIC FINANCE – SECTION 102
4.4. The Role of Auditor General
The Auditor-General audits and reports, in respect of that financial year, on the
following: -
a) The accounts of the national and county governments;
b) The accounts of all funds and authorities of the national and county
governments;
c) The accounts of all courts;
d) The accounts of every commission and independent office established by the
Constitution;
e) The accounts of the National Assembly, the Senate and the county assemblies;
f) The accounts of political parties funded from public funds; the public debt; and
g) The accounts of any other entity that legislation requires the Auditor-General
to audit.
The Auditor-General may audit and report on the accounts of any entity that is funded
from public funds. An audit report confirms whether or not public money has been
applied lawfully and in an effective way.

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Audit reports shall be submitted to Parliament or the relevant county assembly and
Parliament or the county assembly within three (3) months after receiving an audit
report should debate and consider the report and take appropriate action.
4.5. The Role of Internal Audit
There is an Internal - Auditor Generals Department at the National Treasury, which
ensures that its arrangements for conducting internal auditing include: -
(a) Reviewing the governance mechanisms of the entity and mechanisms for
transparency and accountability with regard to the finances and assets of the
entity;
(b) Conducting risk-based, value-for-money and systems audits aimed at
strengthening internal control mechanisms that could have an impact on
achievement of the strategic objectives of the entity;
(c) Verifying the existence of assets administered by the entity and ensuring that
there are proper safeguards for their protection;
(d) Providing assurance that appropriate institutional policies and procedures and
good business practices are followed by the entity; and
(e) Evaluating the adequacy and reliability of information available to
management for making decisions with regard to the entity and its operations.
4.6. Role of Controller of Budget in Relation to

Disbursement of Public Funds as Envisaged by the
Constitution and PFM Act, 2012
Controller of Budget is nominated by the President and, with the approval of the
National Assembly and to qualify to be the Controller, one needs to have extensive
knowledge of public finance or at least ten (10) years’ experience in auditing public

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finance management. The Controller, hold office for a term of eight (8) years and is
not eligible for re-appointment.
The Role of The Controller

1) To oversees the implementation of the budgets of the national and county
governments by authorizing withdrawals from public funds
2) Not approve any withdrawal from a public fund unless satisfied that the
withdrawal is authorized by law
3) Submits to each House of Parliament every four (4) months, a report on the
implementation of the budgets of the national and county governments.

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Table of Contents
Chapter Five
5 INTRODUCTION TO TAXATION .......................................................................... 2
5.1. HISTORY OF TAXATION ........................................................................................... 2
5.2. TYPES OF TAXATION................................................................................................. 8
5.3. PRINCIPLES OF AN OPTIMAL TAX SYSTEM .............................................................. 9
5.4. SINGLE VERSUS MULTIPLE TAX SYSTEMS ............................................................. 13
5.5. CLASSIFICATION OF TAX SYSTEMS........................................................................ 18
5.6. TAX SHIFTING......................................................................................................... 25
5.7. FACTORS THAT DETERMINE TAX SHIFTING .......................................................... 28
5.8. TAX EVASION AND TAX AVOIDANCE .................................................................... 29
5.9. TAXABLE CAPACITY................................................................................................ 32
5.10. FISCAL POLICIES ..................................................................................................... 35
5.11. THE REVENUE AUTHORITY; HISTORY, STRUCTURE AND MANDATE .................. 36
| Strathmore University | Strathmore Institute |

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5 INTRODUCTION TO TAXATION
5.1. History of taxation

World History
Benjamin Franklin (January 17, 1706 to April 17, 1790), a polymath, inventor, scientist,
printer, politician, freemason and diplomat best known as one of the Founding
Fathers who drafted the Declaration of Independence and the Constitution of the
United States once said, "In this world, nothing can be said to be certain, except death
and taxes." Emphasizing on the inevitability of both
Contrary to this popular believe in recent times, taxes haven’t been around forever.
Sure, there were taxes in ancient Greek, ancient Egypt, and ancient Roman
governments in times of war levied taxes on their citizens to pay for military expenses
and other public services. Taxation evolved significantly as empires expanded and
civilizations become more structured. But the idea of sales taxes, income taxes, payroll
taxes, and other types of taxes is mostly a modern invention.
“The earliest known tax records, dating from approximately six thousand years B.C.,
are in the form of clay tablets found in the ancient city-state of Lagash in modern day
Iraq,” according to a publication on the Association of Municipal Assessors of New
Jersey (AMANJ) website. This early form of taxation was kept to a minimum, except
during periods of conflict or hardship.
What does the Bible say about paying taxes?
In Matthew 22:17–21, the Pharisees asked Jesus a question: "'Tell us then, what is your
opinion? Is it right to pay taxes to Caesar or not?' But Jesus, knowing their evil intent,
said, 'You hypocrites, why are you trying to trap me? Show me the coin used for
paying the tax.' They brought Him a denarius, and He asked them, 'Whose portrait is
this? And whose inscription?' 'Caesar's,' they replied. Then He said to them, 'Give to
Caesar what is Caesar's, and to God what is God's.'" In full agreement, the apostle Paul

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taught, "This is also why you pay taxes, for the authorities are God's servants, who
give their full time to governing. Give everyone what you owe him: If you owe taxes,
pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor"
(Romans 13:6–7).
Taxation History in Kenya

I. Initial Stage: Portuguese
This can be traced back to the Portuguese who arrived at the Kenyan coast and took
over from the Arabs and signed the ﬁrst recorded treaty that involved a form of
taxation in in 1502. The then Sultan Ibrahim of Malindi was held against his wishes
and forced to accept defeat. While being held hostage during negotiations on Vasco
da Gamma’s boat, a treaty of surrender was signed with Portugal for an annual
tribute of 1,500 meticals of gold.
By the end of the rule of the Arabs and Portuguese along the East coast of Africa the
existing balance of taxation that was inherited by the British included a capitation tax
payable per head of slave exported and customs revenue shared equally between the
Arabs and Portuguese. The tax base was, however, limited to traders only.
II. Second Stage: British
The British who ruled what is presently Kenya and Uganda together to form British
East Africa Protectorate colonial tax policy supported its own economy. This was done
initially through the Chartered company concept. However, later in order to
encourage rule from within the territory to make it viable after the accidental
discovery of arable land in Kenya. They introduced the following taxes:
1) Hut and Poll Tax in 1901, (fee payable by all locals per hut through labor,
money, and grain or stock.),
2) Land tax 1908,

3) Income tax 1921,
4) Graduated personal tax 1933

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III. Third Stage: Post independence
Soon after independence Kenya had income tax, corporation tax, trade taxes and
excise taxes. Value-added taxes were introduced later. During the first decade and a
half of independence, the government mainly dealt with taxation as there was a
desperate need.
IV. Fourth Stage: Currently
The new Constitution which was approved by 67% of Kenyan voters was presented
to the Attorney General of Kenya on 7th April 2010, officially published on 6th May
2010, and was subjected to a referendum on 4th August 2010. The constitution was
promulgated on 27 August 2010.
Article 209 of the Constitution of Kenya 2010 outlines powers to impose taxes or raise
revenue for both national government and county government.
Tax and Its Characteristics

Definition:
Dr. Dalton defines tax as a compulsory contribution levied on persons of a state for a
common purpose. While Prof. Sallingman, says tax is a compulsory contribution from
a person to the government to meet the expenses incurred in the common interest of
all without reference to special benefits conferred.
Tax can therefore be comprehensively defined as:
Compulsory/involuntary payment by a tax payer without directly obtaining

goods or services (as a "quid pro quo") in return.
In other words, there are no direct goods or services given to a tax payer i.e. no direct
benefit in return for the tax paid. The tax payer can, however enjoy goods or services
provided by the government like any other citizen without any preference or
discrimination

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Characteristics of Tax
a) It is a compulsory contribution from the people to the government hence anyone who
refuses to pay tax is punished.
b) It’s a payment of the people to the government to finance its functions for the
benefit of all citizens.
c) It’s not paid for a specific service rendered by the government to the person paying the
tax. This means that the person can’t ask the government to provide a service to
him for the tax he has paid. And one cannot refuse to pay tax because he does not
require the services of the government.
Taxation is the part of public finance that deals with the means and/or a system of
raising money to finance government by way of Taxes among other sources. All
governments require payment of money - taxes - from people.
Governments use tax revenues to provide goods and services to the public (its
Citizens) i.e. pay soldiers & police, build dams & roads, operate schools & hospitals,
provided food for the poor & medical care to the elderly, and for hundreds of other
purposes. Without taxes to funds its activities, government could not exist.
Generally, Taxation is part of a boarder discussion on public finance while Public
Finance is the section of economic theory that deals with public expenditure and
revenue.
Whereas Public Revenue is the cash inflow of the government from various sources,
which include: -
i. Taxes
ii. Fees levied on services provided by the government i.e. Motor Vehicle
registration fees, Import licensing fees etc.
iii. Fines charged on law brokers
iv. State property fees i.e. Entrance fees for Game Reserves
v. Public debts i.e. Treasury Bills

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vi. Disposal of public investments i.e. Sale of government shareholding in
parastatals
vii. Donor Aid i.e. IMF, World Bank
viii. Grants
Public expenditure on the other hand is the allocation of public revenue to the various
functions of the government like recurrent expenditure which is day to day operations
of the government i.e. salaries and wages of civil servants. Capital expenditure, which
includes investment projects of the government i.e. Building Schools, Roads and
Hospitals.
Functions of The Government

Governments world over are expected to carry out certain activities as part of their
services to the public. These are divided into four major functions, namely: -
1) Administration: The government oversees the administration of the country
by for instance in the Kenyan scenario, creation of provinces; Districts;
Divisions; Locations and Sub-Location.
2) Protection: A good government must ensure the security of its people from
external aggression and internal security must be provided. This is done
through The Armed Forces and The Police.
3) Social functions: The government provides social facilities like Housing,
Education and Health care among others
4) Development functions: It is the duty of the government to develop and
maintain transport and communication network, agricultural systems and the
economic infrastructure in general.
Principally, the role of governments is to enable us to appreciate the importance of
government sector and therefore towards this end in trying to fulfill the above
functions modern governments generally undertake the following: -

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1. Security (external & internal) involving military, police & other protective
services.
2. Justice or settlement of disputes
3. The regulation & control of economy including coinage, weights and measures,
the business practices, operation of public sector undertakings
4. Social and cultural welfare through education, social relief, social insurance,
health and other activities.
5. Conservation of natural resources.
6. Promotion of the unity of the state by control of transportation and
communication.
7. Administration and financial system, government revenue expenditure and
fiscal control.
8. Education and employment.
9. Housing.
10. Public health.
11. Uplifting of weaker sections of the society.
12. Restoration of social justice in the society.
To perform the above functions effectively and adequately, the government needs
funds
Why Governments Levy Taxes
Government(s) world over levy taxes not only limited to raising of revenue: -
a) Raising Revenue: - Every government requires funding to carry out its operations.
A significant part of this funding is the revenue raised through taxation. Revenue
is used to fund both recurrent and capital expenditure.
b) Protectionist policy: - The government uses taxes to protect local industries from
competition brought by foreign industries. This involves taxation of similar goods
imported into Kenya or the exemption of local products from taxation.

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c) Economic stability: - The government uses taxes in times of inflation and
deflation. This is mainly used to control expenditure patterns in the economy i.e.
during inflation taxes rates are raised to suppress the purchasing power of money
while in times of deflation tax rates are lowered to increase the purchasing power
of people.
d) Distribution of Wealth: - A good tax system will tax the poor at lower rates than
the rich and the money raised used to improve the living standards of the poor
hence wealth balancing.
e) Allocation of resources: - Taxes are also used for optimal allocation of resources
in order of priority. Revenue raised in taxes will be allocated to projects which are
of fundamental importance to a society i.e. Beer and cigarettes are heavily taxed in
terms of excise duty and the amount so raised used to fund social projects like
Schools, health care etc.
f) Employment Policy: - The government can use money raised from taxes to put up
projects to create jobs. This can be done by funding government institutions so as
to employ people i.e. TSC. The government can also use the same to salvage
government institutions, which are in financial difficulties to avoid job losses.
5.2. Types of taxation
Income Taxes
Income tax is a tax that governments impose on financial income generated by all
entities within their jurisdiction. By law, businesses and individuals must file an
income tax return every year to determine whether they owe any taxes or are eligible
for a tax refund. Income tax is a key source of funds that the government uses to fund
its activities and serve the public.
They include among others: Corporation taxes for companies, PAYE for individuals,
Capital gains tax, Advance tax, Presumptive tax, Fringe benefit tax, Withholding tax.

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Consumption Taxes
A consumption tax, sometimes referred to as a "spendings tax,” is a tax levied
on consumption spending on goods and services. The tax base of such a tax is the
money spent on consumption. It closely resembles the income tax except that the tax
base is spending, not income. The important difference is that the tax base is
expenditure rather than income.
They include among others: Value Added Tax, excise duty, Withholding tax
Customs Duties
Customs Duty is a tax imposed on imports & exports. The rates of customs duties are
either specific or on ad valorem basis, that is, it is based on the value of goods traded.
Other Taxes, Fees & Levies

These include:
a) Entertainment tax e) Road Maintenance Levy
b) Petroleum Development Fund f) Road Transit Toll Levy
c) Import Declaration & Fund g) Aviation Revenue
(IDF) h) Revenue Stamps
d) Foreign Motor Vehicle i) Kenya Bureau of Standards
Inspection Fee (KEBS) Levy
5.3. Principles of an optimal tax system
The Government requires funds for the performance of its various functions. These
funds are raised through tax and non-tax sources of revenue. Imposing tax on income,
property and commodities etc. raises tax revenues. In fact, tax is the major source of
revenue to the Government.
No one likes taxes, but they are a necessary evil in any civilized society. Whether we

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believe in big government or small government, governments must have some
resources to perform their essential services. So how does one go about evaluating a
tax?
Taxation is an important instrument for the development of economy of the country.
A good tax system ensures maximum social advantage without any hardship on
taxpayers. While framing the tax policy, the government should consider not only its
financial needs but also taxable capacity of the community. Besides the above,
government must consider some other principles like equality, simplicity,
convenience etc. These principles are called as "Canons of Taxation". The following
are the important canons of taxation.
Canons Advocated by Adam Smith Canons Advocated by Others
A. Canon of Equality. A. Canon of Productivity.
B. Canon of Certainty. B. Canon of Elasticity.
C. Canon of Convenience. C. Canon of Diversity.
D. Canon of Economy. D. Canon of Simplicity.
E. Canon of Expediency.
F. Canon of Co-ordination.
G. Canon of Neutrality.
Canons Advocated by Adam Smith

No one has yet come up with a better set of criteria for judging a tax than the
Canons of Taxation first proposed by Adam Smith more than two hundred years
ago. Adam Smith in his book, “Wealth of Nations” has explained the four canons
of taxation that are mentioned above. All accepts them as good taxation policy.
A. Equality
This principle of Adam Smith, states that “the subjects of every state ought to
contribute toward the support of the Government, as nearly as possible, in proportion to
their abilities". That is, a good tax system should be based on the ability to pay of
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the people. That is, all people should bear the public expenditure in proportion to
their respective abilities. Tax burden should be more on the rich than on the poor.
Since the rich people can pay more for public welfare, more tax should be collected
from richer section and less tax from the poor. The ability to pay may be
determined either based on income and wealth or based on consumption i.e.
luxury or necessity. In simple terms, canon of equality implies that when ability
to pay is taken into consideration, a good tax should distribute the burden of
supporting government more or less equally among all those who benefit from
government.
B. Certainty
Adam Smith also advocated is certainty and contended that, "the tax which each
individual is bound to pay ought to be certain and not arbitrary. The time of payment, the
manner of payment, the quantity to be paid, should be clear and plain to the contributor
and every other person". It means the time; amount and method of payment should
all be clear and certain so that the taxpayer can adjust his income and expenditures
accordingly. This principle removes all uncertainties in the payment of tax and
ensures smooth functioning of the tax department.
C. Convenience
In the canon of convenience, Adam Smith states that, "every tax ought to be levied at
the time or in the way it is most likely to be convenient for the contributor to pay it". That
is, the tax should be levied and collected in such a way that is convenient to
taxpayer. For example, it may be in installments, land revenue may be collected at
the time of harvest etc. This principle reduces the tendency of tax evasion
considerably.
D. Economy
Adam Smith believed that "every tax ought to be so contrived as both to take out and
keep out of the pockets of the people as the little as possible over and above what it brings

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into the public treasury of the state". This principle states that the minimum possible
amount should be spent on tax collection and the maximum part of the collection
should be brought to the Government treasury. This canon of ‘Economy' is
naturally sub-divided into two parts viz.,
a) ‘Taxation should be inexpensive in collection', and
b) ‘Taxation should retard as little as possible the growth of wealth'.
It may also be remarked that there is a close connection between "Economy" and
"Productivity", since the former aids in securing the latter.
Canons Advocated by Others

Other researchers have added to Adam Smith’s criteria. Some have noted that a
tax should be adequate, meaning it should produce sufficient revenue to support
whatever it is that citizens want their government to do. Some have argued for a
"Benefit Principle" whereby the amount of tax each is called upon to pay bears
some relationship to the benefits each taxpayer receives from government. Others
have argued that a tax should be neutral in its effect on the way markets work. But
Smith’s Canons remains the starting point for any serious evaluation of a tax.
A. Productivity: C.F. Bastable, identified that a tax system should be productive
enough i.e. it should ensure sufficient revenue to the Government and it should
encourage productive activity by encouraging the people to work, save and
invest.
B. Elasticity or Buoyancy: The next principle advocated by Bastable is elasticity.
The taxes should be flexible. It should be levied in such a way to increase or
decrease the tax revenue depending upon the need. For example, during
certain unforeseen situations like floods, war, famine, and drought etc. the
Government needs more amount of revenue. If the tax system is elastic in
nature, then the Government can raise adequate funds without any extra cost
of collection.

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C. Diversity: As Per this principle, there should be diversity in the tax system of
the country. The burden of the tax should be distributed widely on the entire
people of the country. The burden of the tax should be decentralized so that
everyone should pay as per his ability. To achieve this, the Government should
impose both direct and indirect taxes of various types. It should not depend
upon one or two types of taxes alone.
D. Simplicity: This principle states that the tax system should be simple, easy and
understandable to the common man. If the tax system is complex and vague,
the taxpayer cannot estimate his tax liability and it will cause irregularities in
the payments and leads to corruption.
E. Expediency: A tax should be levied after considering all favorable and
unfavorable factors from different angles such as economic, political and social.
F. Co-ordination: In a federal set up like Ethiopia, Federal and State Governments
levy taxes. So, there should be a proper co-ordination between different taxes
imposed by various authorities. Otherwise, it will affect the people adversely.
G. Neutrality: This principle stresses that the tax system should not have any
adverse effect. That is, it shouldn’t create any deflationary or inflationary
effects in the economy.
5.4. Single versus multiple tax systems
Generally, there are two major types of tax systems.
1) Single or unified tax system
2) Multiple tax system.
A. Single Tax System: means only one kind of tax. A single tax denotes the only tax
exclusive tax on the one class of things. The single tax might be proportional

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progressive or regressive. It may be for a single fixed amount. According to
Seligman “A single tax denotes the only tax, on exclusive the one class of things”
Merits of Single Tax System
a) The greatest merit of single tax is it simplicity. Since there is only one tax work
of the government is simplified.
b) Levy assessment and collection of revenue would become very easy.
c) Levy and collection of tax can be good if tax concerned is carefully selected.
Demerits of A Single Tax System
j) The greatest defect of the single tax system is that from the revenue point
of view the tax yield may not be sufficient for the government.
k) Yield of any single tax does not increase rapidly as the yield from multiple taxes
system.
l) Increase in the rate of tax alone cannot increase revenue.
B. Multiple Tax System: means a tax system comprising several types of taxes. They
may include both direct taxes and indirect taxes.
Merits of Multiple Tax System
a) Multiple tax system generally results in equitable tax burden since it is
comprising of direct and indirect, proportional and progressive taxes.
b) It is difficult for individuals to evade taxes altogether.
c) It is more useful in achieving social and political objectives.
d) Tax system becomes broad based and even covers every sector in the country.
Today, with enormous range of expenditure outlays, Governments cannot depend
upon a single tax. Because it will not provide sufficient revenue to meet their
financial needs. Moreover, with the single tax, the Government cannot achieve the
principles of equality, ability to pay and equitable distribution of income and
wealth among the people. Thus, the principle of multiple-taxation is

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recommended whereby the Government may resort to various direct and indirect
taxes to attain their objectives both fiscal and social.
Different Kinds of Multiple Taxes
Multiple Taxes
Diffrent Authorities Single Authority
International Double NationalDouble Double Taxation by the

Taxation Taxation same Authority
3. Taxation on profits
Taxes levied by two
Taxes levied by 2. Taxation on both before distribution and
Goverments of thesame 1. Taxation on capital
Goverments of two debtors and creditors on dividends after
Country i.e. National & and income.
diffrent Countries for the amount of loan. distribution.
County Goverments
1. Double Taxation by Different Authorities
When two different taxing authorities either international or National levy the
same tax base, it becomes a case of double taxation.
(a) International Double taxation: This type of double taxation occurs when the
Governments of different countries levy on the same tax base. The scope of a
tax determines the incidence of its burden. It includes both direct and indirect
taxes. Generally, the income tax, wealth tax and customs duty cause such
international double taxation.
(b) National Double Taxation: This kind of double taxation occurs when the
Governments within a country levy tax on the same base. When the National
Government and County Governments of a country levy tax on any one tax
base, it is called federal/National double taxation.

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2. Double Taxation by the Same Authority
Such a double taxation occurs when a Government either National or County
levies on the same tax base twice. The tax on capital and income, debtors and
creditors on the amount of loan, on the profits before and after distribution and
the like are the notable examples in this regard.
Effects of Double Taxation
Generally, double taxation is not liked by taxpayers and is highly criticized by the
economists as It affects the economy of the country directly and indirectly. The
main effects of double taxation are discussed below: -
1) Injustice to the Taxpayers - Double taxation causes injustice to the taxpayers.
It discriminates among the different taxpayers.
2) Does not conform to the Principle of Ability to Pay - In case of double
taxation, the tax system does not conform to the principle of ability to pay.
Because when both the Central and County Governments tax the same group
on the same tax base, the principle of ability to pay is violated.
3) Does not ensure the Principle of Equity - When the National and County
Governments levy taxes on the same commodities especially on the necessities,
it will broaden the gap between the rich and the poor. Thus, the double taxation
violates the principle of equity also.
4) Discourages the Ability to Work, Save and Invest - Double taxation increases
the price of the commodities and leaves the people with lower disposable
income. This in turn affects the standard of living of the people and thereby
reduces their ability to work, save and invest.
5) Discourages the Small-scale Industries - When the taxes are uniformly levied
without any exemption to small-scale sector, the competitive efficiency of them
will be affected. Because of a rise in their prices, they cannot compete with the
large-scale industries in the market.

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6) Discourages Exports - When the same commodities are taxed both by National
and County Governments, their price will automatically be increased which in
turn affects the export market.
7) Affects the Overall Economic Development of the Country - Since double
taxation affects the individual economic activities, the whole economic
development will be affected. In such a situation, the Government cannot use
the taxation as a weapon, boost the sick industries and to curb the effects of
trade cycles in the economy.
Remedies for Double Taxation
To remove the effects of double taxation, the following remedial measures can be
adopted. They can be classified on the following two categories: -
I. Remedies for the Problem of International Double Taxation
a) Agreement for Mutual Exemption: - The countries may enter an agreement
to exempt the income of non-residents when they take the income outside.
b) Basis for Incidence: - The double taxation can be avoided when the taxes
are levied either on residential status or on citizenship and not on the both.
c) Special Measures: - special measures should be devised so that
Governments or two countries may tax different parts of income earned by
a person.
II. Remedies for Internal or National Double Taxation
The following are the remedies to avoid internal or federal double taxation: -
a) Separate List: - There should be a separate list of taxes that can be levied by
the Union Government and State Governments.
b) Co-ordination between the Fiscal Policies: - There should be a perfect co-
ordination between the fiscal policies of the National and the County
Governments. And the problem of double taxation can be solved through

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the centralization of finance. Getting the final approval from the Central
Finance Minister for the State budgets can help achieve this.
c) Avoiding Overlapping of Taxes: - There should not be any overlapping of
taxes. The problems of double taxation can be solved to a considerable
extent if due consideration is given in this regard. To avoid the double
taxation caused by overlapping of sales tax and excise duties, they may be
replaced by a centrally administered value added tax.
5.5. Classification of tax systems

Classification of taxes can be done in two different ways, namely: -
a) Incidence of tax (Tax burden)
b) Rates of tax
A. Classification by Incidence of Tax

Incidence refers to the point or person on whom tax is imposed. Burden on tax refers
to bearing of the tax that is he/she who pays tax i.e. when tax (VAT) is imposed on a
trader he pays it to the government but he recovers it from the customer through the
selling price, in this case the incidence of the tax is on the trader but the burden is on
the customer, whereas, when tax (PAYE) is levied on once salary, he/she pays it to the
government but cannot recover it from anybody else in which case both the tax
incidence and tax burden is on him. Under this classification therefore there basically
exist two types of taxes namely: -
1) Direct taxes
2) Indirect taxes
1) Direct Taxes
This refers to the type of taxes whereby both the incidence and the burden is on the
same person. That is the person on whom the tax is imposed cannot transfer it to

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another person. He/she pays it himself/herself. They include Income tax; corporation
tax; Capital gains tax; Inheritance tax etc.
Advantages of Direct Taxes
- Equitable - Direct taxes are based on income hence people pay per ability.
- Certainty - Usually the taxpayers knows how much to pay and at what time to
pay since incomes is certain. The government also knows how much to collect and
when to collect it.
- Economical - The cost of collection is usually low since they are deducted and
remitted to the government at source, which reduces the government’s cost of
collection and the taxpayers’ cost of payment.
- Elastic - It is possible for the government to vary the rates of tax from time to time
to conform to the needs of the economy.
- Simplicity - The tax system is such that it is easy to understand and make returns.
- Civic Consciousness - They are the most understood taxes by the public since the
public knows that they pay taxes to the government. They therefore take interest
in knowing how the government uses the taxes, which promote accountability in
government.
Disadvantages of Direct Taxes
- Discourages Investment and Savings - Direct taxes consume what could have been
saved and taxes on interest and Dividends are direct taxes and discourage savings
and investments.
- Low Coverage - Some people don’t fall under these tax brackets and those who do
not earn income do not pay taxes, yet they’ll enjoy the benefits of projects funded
with such taxes.
- Discourages Production - Companies may reduce production to avoid paying
high taxes especially when faced with financial problems.

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- Prone to Evasion - Taxpayers usually avoid direct taxes by making false
statements to reduce their tax liability.
- Inconvenient - Persons paying such taxes must undergo the process of registration
with many formalities and tax payers must take their own time and resources to
make tax returns to the government.
2) Indirect Taxes
These are taxes whose incidence and burden fall on different persons. That is the
person on whom tax is levied or imposed can recover the tax so paid from another
person. They include, Value Added Tax; Import Duty; Export Duty etc.
Merits of Indirect Taxes
- Wide coverage - Since they are based on expenditure they cover all classes of
people since everyone must spend.
- Elastic - The government can easily vary the tax rates from time to time as per the
needs of the economy.
- Economical - Those making returns are charged with the responsibility of paying
the money to the government hence the governments cost of collection is minimal.
- Diversity - These taxes can be levied on a wide variety of goods and services. This
diversity increases the revenue collected by the government.
- Less Evasion - The person charging the tax acts like an agent of the government
he/she collects money from buyers hence such taxes are not a cost to him since the
burden falls on the buyer. And because the taxes are included in the prices collect
ability is high.
- Economic Policy Tool - Indirect taxes can be used to promote exports and
discourage imports by taxing imports and making exports tax free hence building
the domestic market.

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- Social welfare - Indirect taxes are levied heavily on harmful commodities like Beer
and Cigarettes, which reduce their consumption.
Demerits of Indirect Taxes
- Uncertainty - Since they are based on expenditure government revenue is
uncertain because it’s not easy to tell how much people will spend in any period.
- Regressive - The rich and the poor pay tax at equal rates in so doing the poor pay
a bigger proportion of their wealth than the rich hence the burden is more on the
poor than the rich.
- Uneconomical - They can be uneconomical to collect especially for the customs
duty. The government must employ officers at all points of entry into Kenya.
- Inflation - Indirect taxes are included in the prices leading to high costs of
production and high selling prices to consumers hence inflation.
- Lack of Civic Consciousness - They are paid in commodity prices therefore the
public is not usually aware that they are paying taxes They will not therefore be
much concerned with allocation of such funds.
NB: While Direct taxes are based on income and wealth of persons such taxes cannot be
passed to another person once paid. Indirect taxes on the other hand are based on
expenditure hence can be passed over by he/she who pays to another through commodity
prices.
B. Classification by Rates of Tax

Unlike incidence of tax this classification uses the trend in tax rates to classify taxes as
follows: -
a) Progressive Taxes
b) Proportional Taxes
c) Regressive Taxes
d) Digressive Taxes

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A. Progressive Taxes
A tax is progressive when the marginal rate of tax rises with income. A good example
of a progressive tax in Kenya is the income tax on individuals.
Merits of Progressive Taxes
- Equitable - High-income earners pay more than low-income earners
- Productive - It yields more revenue, as the rate of tax is high on higher incomes.
- Economical - Collection cost will not increase with the increase in tax payable.
- Better Distribution of Wealth - High-income earners surrender more of their
earnings than the low-income earners. This is then used to raise the living
standards of the poor.
Demerits of Progressive Taxes
- Discourages Savings - Since the rate of tax is high on high incomes this may reduce
the funds available for savings and investment.
- Arbitrary - Progressive taxes are based on scales hence complex to understand.
- Assumption - It assumes that different people get equal utility from equal incomes.
B. Proportional Taxes
A tax is proportional when the same rate of tax is applied to all tax payers irrespective
of their income level, for example the corporation tax which currently stands at 30%
for all firms.
Advantage of Proportional Tax Structure
- It is simple in nature
- It is uniformly applicable
- It leaves the relative economic status of taxpayer unchanged
Disadvantages of Proportional Tax Structure

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- Inequitable distribution
- Inadequate resources: means that the tax for the rich and poor are the same.
Hence, the government cannot obtain from the richer sections of the society as
much as they can give
- Inelastic in nature: because the government cannot raise the rate whenever it
wants to raise the revenue.
NB: Proportional tax system suffers from the defects of inequitable distribution of the tax
burden, lack of elasticity and inadequacy of funds for the increasing needs of the modern
government. Hence, it is not particularly and universally accepted.
C. Regressive Taxes
A regressive tax is one where the rate of tax falls as income rises. Here, the poor are
called upon to make a greater sacrifice than the rich.
D. Digressive Taxes
These are taxes that call upon the higher income earners to contribute less than their
due contribution compared to the lower income earners. i.e.
a) The burden is relatively less since the tax is mildly progressive-the rate of
progression is not sufficiently steep, or
b) There is progression up to a certain point beyond which the rate becomes
proportional.
NB: In deciding on whether a tax regime is progressive, proportional, regressive or
digressive it’s important to consider the proportion paid than the amount of
money paid.
Taxes can also be classified as Base of Tax on the basis if object of taxation i.e.
Tax Base for example Income Tax, Turnover Tax & Value Added Tax

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Figure 1: Tax Systems
Economic Effects of Taxation

1. Distribution of income
Progressive taxes make income more evenly distributed while regressive widen the
gap of distribution. Proportional taxes on the other hand leave the distribution
unchanged. Most indirect taxes are regressive because they impose a higher burden
on the poor than on the rich. This is because low-income earners tend to spend a
greater proportion of their income on basic commodities, which are taxed indirectly.
2. Consumption
Direct and indirect taxes affect both the total consumer spending and the pattern of
consumer spending. A direct tax reduces the disposable income hence its effect will
depend upon the propensity to consume and save. If savings are desirable, then the
person must cut down on consumption. Indirect taxes will reduce the total demand
for the goods because of higher prices; higher prices will also reduce people’s
purchasing power.

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3. General Price Levels
Direct taxes fall on income and do not have a direct influence on the general price
levels. However, since they reduce disposable income they could reduce inflation by
lowering aggregate demand. A rise in general in indirect taxes will raise the general
price levels if not checked this could result into inflation.
4. Incentives
Direct taxes (income tax and corporation tax) are criticized as being disincentives to
work save and invest. Income taxes will discourage people from working more hours
because what they’ll earn as overtime is taxed on higher brackets. Higher interest rates
on income from savings are taxed and this discourages people from saving. High
corporate taxes will also reduce the ability and incentive to invest.
5.6. Tax shifting
Tax shifting is the transferring of some or all of a tax burden of an entity to another
(for example, by a subsidiary to the parent firm, or by a producer or supplier to the
consumer).
One of the very important subjects of taxation is the problem of incidence of a tax. By
incidence of taxation it’s meant “final money burden of a tax or final resting place of
a tax”.
It is the desire of every government that it should secure justice in taxation, but if it
does not know as to who ultimately bears money burden of a tax or out of whose
packet money is received, it cannot achieve equality in taxation. If government knows
who pays tax, it can evolve an equitable tax system. It can easily tap important sources
of taxation and thus can collect large amount of money without adversely affecting
economic and social life of the citizens of the country.

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Incidence of Tax - The problem of the incidence of a tax is the problem of who pays
it. Taxes are not always borne by the people who pay them in the first instance. They
are sometimes shifted on to other people.
Incidence means the final resting place of a tax. That is to say, the incidence is on the
man’ who ultimately bears the money burden of the tax.
Impact of Tax - is on person from whom government collects money in first instance.
While incidence of a tax is on person who finally bears burden of a tax
Illustrations: - Distinguishing Impact & Incidence.
As we have already seen, the impact of the tax is on the person who pays it in the first instance
and the incidence is on the one who finally bears it.
a. Now, take for instance, if excise duty is imposed on sugar, it is paid in the
first instance by the sugar manufacturers; the impact is on them. But the
duty will be added to the price of the sugar sold, which, through a series
of transfers, will ultimately fall on the consumer of sugar. The incidence is,
therefore, on the final consumer.
b. Suppose government levies a tax on electric goods in USA. Manufacturers
of electric goods will pay tax to Government in first instance. Impact of tax is,
therefore, on them. If manufacturers of electric goods industries add tax
to price and succeed in selling goods at higher prices of electric goods to
consumers, burden of tax is thus shifted on to consumers.
Incidence and Shifting of a Tax

Incidence is final resting place of a tax while shifting is process of transferring money
burden of tax to someone else. Shifting finally ends in incidence. When a person on
whom tax is levied tries to shift tax on to the other, he may succeed in shifting tax
completely, partly, or may not succeed at all. Shifting of tax can take place in two
directions forward and backward.

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If tax is shifted, from seller to consumer, it is a case of forwarding shifting.
Backward shifting takes place when consumers do not purchase commodities at
increased prices. Sellers are then forced to cut down prices and bear burden of tax
themselves.
NB: The process of shifting may be slow or may be only partially effective so that the burden
of a tax may not fall entirely on the person, who is intended to bear it.
Incidence and Effect of a Tax

As stated earlier incidence is direct money burden of a tax. Effect of taxation is
repercussions or consequences of imposition of a tax on individuals and on
community in general.
The effect of a tax therefore, refers to incidental results of the tax. There are several
consequences of the imposition of tax, which are quite distinct from the problem of
incidence.
Illustration
The imposition of excise duty on sugar (as discussed above), we have seen, the excise
duty is shifted ultimately to the consumer of sugar. The incidence is on the consumer,
but the effects of this duty may be far-reaching! E.g.
a) A heavy excise duty may cripple the industry.
b) The manufacturer’s profits will be reduced.
c) Wages may be reduced.
d) Labour and capital m ay must leave the industry
e) Thousands of middlemen engaged in the distribution of sugar may find their earnings
reduced.
f) Reshuffling (middlemen) of their family budgets may affect the demand for certain other
goods.
g) The consumption of sugar may decrease and that of its substitutes may increase.
All these are the effects of the tax.

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5.7. Factors that determine tax shifting
1. Elasticity of demand and supply
The more the elasticity, the lower the incidence on the sales. The higher the
incidence on supply.
2. Nature of markets
In an oligopolistic market (i.e. sellers and many buyers) tax shifting to buyers
is high since few sellers can team up to determine the market price. In a
situation where there are many buyers and sellers, a large portion of tax will be
borne by sellers. For a monopolistic market, the entire tax burden falls on the
shoulders of the buyer.
3. Government policy on pricing
In the case of government price control, the supplier cannot increase prices
hence cannot shift tax burden to buyers and vice versa.
4. Geographical location
If taxes are imposed on certain regions, it is hard to shift them to consumers
because consumers will move to regions with low taxes.
5. Nature of tax (direct or indirect tax)
Direct tax e.g. PAYE cannot be shifted whatsoever while indirect taxes can be
shifted through increase in prices.
6. Rate of tax
If too high, shifting can occur backwards or forwards, if too low, it may be
absorbed by the manufacturer.
7. Time available for adjustment
The person who can adjust faster (buyer or seller) will be able to shift tax e.g. if
the buyer cash shift to substitute goods, the seller will bear the tax burden.
8. The tax point

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5.8. Tax evasion and tax avoidance
Tax avoidance and evasions constitute a problem in almost all the countries of the
world. Tax avoidance is different from tax evasion, while evasion is against the law;
In contrast, avoidance is within the ambit of law.
Tax evasion is the illegal evasion of taxes by individuals, corporations, and trusts. Tax
evasion often entails taxpayers deliberately misrepresenting the true state of their
affairs to the tax authorities to reduce their tax liability and includes dishonest tax
reporting, such as declaring less income, profits or gains than the amounts earned, or
overstating deductions.
Tax avoidance is the legal use of tax laws to reduce one's tax burden. Both tax evasion
and avoidance can be viewed as forms of tax noncompliance, as they describe a range
of activities that intend to subvert a state's tax system, although such classification of
tax avoidance is not indisputable, given that avoidance is lawful, within self-creating
systems.
A. Tax Avoidance (Tax planning)
The newly enacted (Date of Assent: 15th December 2015) Tax Procedures Act, 2015
defines “tax avoidance” as a transaction or a scheme designed to avoid liability to
pay tax under any tax law.
Section 85 of the Act whose commencement date was 19th January 2016 provides that,
If the Commissioner has applied a tax avoidance provision in assessing a taxpayer, the taxpayer
is liable for a tax avoidance penalty equal to double the amount of the tax that would have been
avoided but for the application of the tax avoidance provision [Section 23 of the of the Income
Tax Act (Cap. 470 – Laws of Kenya)]. Some tax planning opportunities, which are
exercised by companies, include: -
(a) Lease/buy decision - Whether to lease asset and pay lease charges, which are a
tax allowable, expense or buy assets and enjoy capital allowances.

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(b) Financing decision - Whether to use debt capital where interest charges are
allowable or equity capital where dividends are not allowable
(c) Form of business ownership - Whether to operate as a partnership a sole
proprietorship or a Limited liability company
(d) Trading decision - Whether to produce goods for sale locally, which are subject
to VAT or produce for exports which are deemed to be zero-rated.
Previously, no specific penalty or imprisonment term was provided in the tax law.
However, the Commissioner had powers to reverse a transaction he adjudged to
constitute tax avoidance scheme and impose penalties under various tax laws. Under
the current law (Tax Procedures Act, 2015) however, a penalty equal to 200% of the
amount avoided by a taxpayer has been introduced. This penalty is not eligible for
waiver by the Commissioner or the Cabinet Secretary.
B. Tax Evasion (Tax fraud)
Tax evasion means fraudulent action on the part of the taxpayer with a view to violate
civil and criminal provisions of the tax laws. It can be defined as “tax evasion implies
the activities involving an element of deceit, miss-representation of facts,
falsification of accounts including down right fraud”. Thus, Tax crime is a deliberate
attempt to illegally obtain a tax benefit through violation of tax laws. Domestic tax
crimes come in many forms which include: -
a) Nil/non-filing income tax returns,
b) Failure to register as a tax entity,
c) Failure to furnish tax returns,
d) Failure to pay taxes,
e) Failure to keep records,
f) Failure to remit withheld taxes,
g) Dealing with excisable goods without a valid license,
h) Fraudulent VAT refund claim,

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i) Under declaration of income, and
j) Falsification of books of accounts.
Customs Tax crimes, on the other hand, include concealment,
a) Tariff manipulation,
b) Manifest fraud,
c) Use of fake security bonds to clear transit goods,
d) Diversion/dumping of transit goods,
e) Customs miss-declarations,
f) Smuggling,
g) Fraudulent cancellation of export entries, and
h) Import or export prohibited or restricted goods.
However, human intelligence devices new methods of evasion and the Governments
are constantly trying to remove the loopholes in the tax laws.
Causes of Tax Evasion
The following are the important causes for Tax evasion:
a) Multiplicity of Tax Laws
b) Complicated Tax Laws
c) High Rates of Taxation
d) Inadequate Information as to Sources of Tax Revenue
e) Investment in Real Property
f) Ineffective Tax Enforcement
g) Deterioration of Moral Standards
Remedies for Tax Evasion
If steps are not taken to reduce tax evasion, it may cause irreparable harm. The
following are the remedies to prevent tax evasion.

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(a) Thorough Overhauling of Tax Laws One of the main reasons for tax avoidance
and tax evasion is loose drafting of tax laws which contain several loop-holes and
weak points that enable the tax evaders to carry on the unlawful activities. Hence,
it is necessary to re-draft the tax laws thoroughly without any loopholes and weak
points.
(b) Reduction in Tax Rates The prevalence of high rates is the first and foremost
reason for this tax evasion. Hence, the rate of tax should be reduced to a reasonable
level.
(c) Maintenance of Proper Accounts Maintenance of proper accounts should be made
compulsory for persons whose business and professional income exceeds a
prescribed limit. In the Income Tax law, a provision to this effect has been
introduced recently.
(d) Tightening of Tax Enforcement This may be said to be the crucial remedy if the
penalties for violation of tax laws are strictly enforced, incidence of tax evasion
could automatically be reduced.
5.9. Taxable capacity
Taxation on people must be levied with great care and rationality. To practice this
rationality and care, the taxing agency must follow certain code of conduct in the form
of principles of taxation while determining the type and amount of tax.
The term ‘taxable capacity’ occupies an important place in public finance particularly
in the domain of taxation.
The perception of taxable capacity has racked the brains of not a few economists and
publicists. Dalton describes it "a dim and confused conception". Findlay Stirras, on
the other hand, thinks that it is of great practical importance. "It is always wise and
useful," he says, "for a government to know even roughly the limit that the country

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can contribute by way of taxation both in the ordinary and extra-ordinary
circumstances."
One writer describes it as "the limit of squeezability". But this is a very vague
definition. Some nations will permit themselves to be squeezed much less than others.
Moreover, inside a nation, the limit of squeezability varies from person to person.
Another more useful definition of taxable capacity is that it is the maximum amount,
which can be deducted from a country's income consistent with the maintenance of
that income for years to come.
Josiah Stamp observed that, “taxation capacity is the total production minus the
amount required to maintain the population at subsistence level”. This definition
asserts, that total production refers to the total volume of income produced and
available for the people.
To put it in another way, there must be a minimum, which must be left with the people
to ensure their continued ability and willingness to work.
Taxable capacity is normally used into two senses, that is the absolute taxable capacity
and the relative taxable capacity.
a) The absolute taxable capacity: - The absolute taxable capacity indicates the
amount of money or the proportion of national income that can be taken away
by the government from people in the form of taxes without producing
unfavorable effects.
b) The relative taxable capacity: - The relative taxable capacity refers to the
proportion in which two or more community can contribute in the form of taxes
to meet some common expenditure. In other words, relative taxable capacity of
the community to contribute to some common expenditure in relations to the
capacities of other communities

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Factors Affecting Taxable Capacity

Taxable capacity is influenced by a variety of factors. In the short run, taxable capacity
may be less. In the long run, taxable capacity of a country may increase because
economic growth and rise in national and per capita income. Again, distribution of
income and wealth also affects taxable capacity.
Findlay Shirras says that taxable capacity of a nation is determined by the following
major factors: -
1. Number of Inhabitants. The bigger the amount, the larger is the taxable capacity of
the society to add towards the operating cost of the management.
2. Distribution of Wealth. If capital is more uniformly disseminated, the taxable
capacity will be equally abridged. But if there are big accretions of capital in the
minority hands, the management can collect additional money by levying taxes on the
rich.
3. Method of Taxation. A systematically created tax system with an intelligent
collaboration of several types of taxes, direct as well as indirect, is certain to fetch in a
better yield.
4. Purpose of Taxation. If the intention of taxation is to encourage interests of the
public, they will be more eager to taxing themselves.
5. Psychology of Taxpayers. Much relies on the people's approach towards an
administration. A well-liked government can stimulate the will of the public and train
them for larger sacrifice.
6. Stability of Income. If the revenue of the residents is unstable, there will be not
much capacity for additional taxation. It is only on stable incomes that long-term
financial arrangements can be based.
7. Inflation. It reduces the buying capacity of the nation and it cripples countless
individuals; it has an unpleasant result on taxable capacity.

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5.10. Fiscal policies
To Adams Smith fiscal policy refers to use of government spending program and
government revenue program to produce desirable effects and avoid undesirable
effects on national income, production and employment. While, to Keynes fiscal policy
uses public finance as a balancing factor in the development on the economy.
Fiscal policy therefore, includes government budget decisions regarding government
spending, money raised by the government through taxes and budget deficits or
surpluses. By adjusting overall demand for goods and services through changes in
taxation and government spending, the government hopes to control:
a) Unemployment levels;
b) Price levels/Inflation, which adversely affect the economy's health;
c) Desirable employment level, and;
d) Income distribution
Instruments of Fiscal Policy

The tools of fiscal policy are taxes, Public, expenditure, public debt and a nation’s
budget. They consist of changes in government revenues or rates of the tax structure
so as to encourage or restrict private expenditures on consumption and investment.
1) Public expenditure
During inflation, the government increases its expenditure and reduce taxes so
that unemployment may be decreased and vice versa during deflation.
2) Public debt
In times of inflation the government raises money through public debt
(Treasury Bills and Treasury Bonds) this reduces money in supply and
effectively reduces prices. While in times of deflation the government pays
back the debts to increase money supply.

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3) Public Revenue
In times of inflation the government raises taxes to reduce disposables income
of people, which effectively lowers the prices. In times of deflation the
government reduces taxes to increase the disposable income.
5.11. The Revenue Authority; history, structure and

mandate
Establishment
The Revenue Authority (KRA) was established by an Act of Parliament, Chapter 469
of the laws of Kenya, which became effective on 1st July 1995 to enhance the
mobilization of Government revenue, while providing effective tax administration
and sustainability in revenue collection.
The functions of the Authority are: -
a) To assess, collect and account for all revenues in accordance with specific laws
and the specified provisions of the written laws.
b) To advise on matters relating to the administration of, and collection of revenue
under the written laws or the specified provisions of the written laws,
c) To perform such other functions in relation to revenue as the Cabinet Secretary
to the National Treasury may direct.
Theme
KRA is currently implementing the Sixth Corporate Plan (2015/16 – 2017/18) and is in
the process of coming up with the seventh Corporate Plan (2018/19 – 2020/21) The
current plan’s theme is:

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Vision Statement
"To facilitate Kenya's transformation through Innovative, Professional and Customer-
Focused Tax Administration"
Mission Statement
"Building Trust through Facilitation to foster Compliance with Tax and Customs
Legislation"
Core Values
- Trustworthy - Competent
- Ethical - Helpful
Laws Administered
The Purpose of KRA is, Assessment; Collection; Administration; and Enforcement
of laws relating to revenue. The written laws relating to revenue include, the Income
Tax Act (Cap. 470); the Excise Act, 2015; the East African Community Customs Management
Act (EACCMA); the Value Added Tax Act (Cap. 476); the Road Maintenance Levy Fund Act
1993 (No. 9 of 1993); the Air Passenger Service Charge Act (Cap. 475); the Entertainment
Tax Act (Cap. 479); the Traffic Act (Cap. 403); the Transport Licensing Act (Cap. 404); the
Second Hand Motor Vehicle Purchase Tax Act (Cap. 484); the Widows and Children’s
Pensions Act (Cap. 195); the Parliamentary Pensions Act (Cap. 196); the Stamp Duty Act
(Cap. 480); the Betting, Lotteries and Gaming Act (Cap. 131); the Directorate of Civil Aviation
Act (Cap. 394); the Standard Acts (Cap. 496); and Government Lands Act (Cap 280).
KRA also collects levies for various Government Agencies under the provision of
various Acts. These are: Sugar Development Levy collected under the Sugar Act, Petroleum
Development Fund Act, and Merchant Shipping Act, 2009. The Railway Development Levy
(RDL) introduced in 2013 is now Exchequer Revenue.

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Organizational Governance
KRA’s governance and management structure is organized as per recommended
international best practice for Semi-Autonomous Revenue Authorities (SARA’s). The
Board of Directors (BoD) is the governing Body of KRA as set out in the KRA Act. It
has two ex-officio members from the Government (representative of the Cabinet
Secretary to the National Treasury and the Attorney General), the Commissioner
General and six other members from private sector. The BoD is responsible for the
review and approval of policies and monitoring the functions of KRA.
The day-to-day management of the Authority is the responsibility of the
Commissioner General, assisted by Commissioners in charge of Customs and Border
Control, Domestic Taxes, Investigations and Enforcement, Corporate Support
Services, and Strategy, Innovation and Risk Management departments. Internal Audit
Department reports to the Commissioner General though it is answerable to BoD on
its core mandate. All non-revenue functions relating to road transport have since
become the responsibility of the National Transport and Safety Authority (NTSA). The
Commissioner for Corporate Support Services is also in charge of the regional offices.
In addition, there are three Headquarter Departments (Ethics and Integrity, Legal
Services and Board Coordination and Commissioner General’s Operations Office)
while the Kenya School of Revenue Administration (KESRA) has been elevated to
report directly to the Commissioner General

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Chapter Six: Taxation of Income of Persons
Table of Contents
Chapter Six
6 TAXATION OF INCOME OF PERSONS ................................................................ 2
6.1. TAXABLE AND NON-TAXABLE PERSONS ................................................................ 2
6.2. SOURCES OF TAXABLE INCOMES ............................................................................ 7
6.3. EMPLOYMENT INCOME ............................................................................................ 8
6.3.1. TAXABLE AND NON-TAXABLE BENEFITS ............................................................... 10
6.3.2. ALLOWABLE AND NON-ALLOWABLE DEDUCTIONS ............................................. 20
6.3.3. TAX CREDITS (WITHHOLDING TAX, PERSONAL AND INSURANCE RELIEF,
OTHERS) .............................................................................................................................. 23
6.3.4. INCOMES FROM PAST EMPLOYMENT.................................................................... 27
6.4. BUSINESS INCOME ................................................................................................. 31
6.4.1. SOLE PROPRIETORSHIP .......................................................................................... 38
6.4.2. PARTNERSHIPS (EXCLUDING CONVERSIONS) ...................................................... 39
6.4.3. INCORPORATED ENTITIES (EXCLUDING SPECIALIZED INSTITUTIONS) .............. 42
6.4.4. TURNOVER TAX (TOT) ......................................................................................... 44
6.5. INCOME FROM USE OF PROPERTY - RENT AND ROYALTIES ................................ 46
6.6. FARMING INCOME ................................................................................................. 49
6.7. INVESTMENT INCOME ........................................................................................... 51
6.8. MISCELLANEOUS TAXES AND OTHER REVENUES ................................................ 53
6.8.1. STAMP DUTY .......................................................................................................... 53
6.8.2. CATERING LEVY ..................................................................................................... 55
6.8.3. MOTOR VEHICLE ADVANCE TAX ......................................................................... 55
6.8.4. CAPITAL GAINS TAX (CGT) ................................................................................. 55

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6 TAXATION OF INCOME OF PERSONS
6.1. Taxable and Non-Taxable Persons

Introduction
Section 3(1) of the Income Tax Act (Cap. 470 Laws of Kenya) provides that Subject to,
and in accordance with, the Act, a tax to be known, as income tax shall be charged for
each year of income upon all the income of a person, whether resident or non-resident,
which accrued in or was derived from Kenya.
Definitions
1) “Tax” means the income tax charged under of the Income Tax Act (Cap. 470
Laws of Kenya)
2) “Individual” means a natural person
3) “Company” means a company incorporated or registered under any law in
force in Kenya or elsewhere
4) “Year of income” means the period of twelve months commencing on 1st
January in any year and ending on 31st December in that year
5) “Accounting period”, in relation to a person, means the period for which that
person makes up the accounts of his business
6) “Minister “means the Cabinet Secretary for the time being responsible for
matters relating to finance
7) “Kenya” includes the continental shelf and any installation thereon as defined
in the Continental Shelf Act (Cap. 312)
8) “Resident”, when applied in relation: -
a) To an individual, means: -
(i) That he has a permanent home in Kenya and was present in Kenya for any
period in any year of income under consideration; or
(ii) That he has no permanent home in Kenya but: -

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a. Was present in Kenya for a period or periods amounting in the
aggregate to 183 days or more in that year of income; or
b. Was present in Kenya in that year of income and in each of the two
preceding years of income for periods averaging more than 122 days in
each year of income;
b) To a body of persons, means: -
(i) That the body is a company incorporated under a law of Kenya; or
(ii) That the management and control of the affairs of the body was exercised
in Kenya in a year of income under consideration; or
(iii) That the body has been declared by the Minister, by notice in the
Gazette, to be resident in Kenya for any year of income;
Importance of Residence
- Kenyan resident individuals pay Kenyan income tax on the income derived from
Kenya and worldwide employment while non- resident individuals pay Kenyan
income tax only on incomes derived from Kenya.
- Kenyan resident individuals pay Kenyan income taxes at graduated scale rates.
But non-resident individuals pay Kenyan income taxes on special rates on
specified incomes.
- Withholding tax is deducted at source on all incomes of non-resident individuals
while on resident individuals; withholding tax is on only some specified incomes.
- Kenyan resident companies are taxed at a corporate rate of 30% of their chargeable
income. Whereas non-resident companies with branches in Kenya are taxed at
37.5% of their chargeable income. Non-resident companies with no branches in
Kenya are taxed on certain specified incomes at specified rates.
9) “Director” means: -
a) In relation to a body corporate, the affairs of which, are managed by a board
of directors or similar body, a member of that board or similar body

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b) In relation to a body corporate, the affairs of which, are managed by a single
director or similar person, that director or person,
c) In relation to a body corporate, the affairs of which, are managed by the
members themselves, a member of the body corporate, and includes any
person in accordance with whose directions and instructions such persons
are accustomed to act
10) “Whole time service director” means a director of a company who is required
to devote substantially the whole of his time to the service of such company in a
managerial or technical capacity and is not the beneficial owner of, or able,
either directly or through the medium of other companies or by any other
means, to control more than five per cent (5%) of the share capital or voting
power of such company;
11) “Incapacitated person” means a minor, and any person adjudged under any
law, whether in Kenya or elsewhere, to be in a state of unsoundness of mind
(however described);
A. Taxable Persons (Persons Assessable)

Part VII of the Income Tax Act (Cap. 470 Laws of Kenya) provides for persons
assessable to tax as follows:
a) Income of a person assessed on him.
Where under the Act the income of a person is chargeable to tax, that income shall, be
assessed on, and the tax thereon charged on, that person.
b) Wife's income
The income of a married woman shall be deemed to be the income of the husband
unless where such married woman opts to file a separate return from that of her
husband.
c) Income of Incapacitated person

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The income of an incapacitated person shall be assessed on, and the tax thereon
charged on, that person in the name of his trustee, guardian, committee or receiver
appointed by a court.
d) Income of non-resident person
The income of a non-resident person shall be assessed on, and the tax thereon charged
on, that person either in his name or in the name of his trustee,
e) Income of Deceased person, etc.
The income accrued or received prior to death of a deceased person, which would,
have been assessed and charged to tax on him, shall be assessed on, and the tax
charged on, his executors or administrators for that year of income.
f) Liability of joint trustees
Where two or more persons are trustees, an assessment made on the trustee may be
made on any one or more, but each trustee will be jointly and severally liable for the
payment of tax.
g) Indemnification of representative
Any person responsible for the payment of tax on behalf of another person may retain
out of money coming to his hands, on behalf of that other person to the extent that is
sufficient to pay the tax.
B. Non-Taxable Persons (Income)

First Schedule, Part I of the Income Tax Act (Cap. 470 Laws of Kenya) provides that
income accrued in, derived from or received in Kenya which is exempt from tax
includes the following among others:
(a) The income of: The Tea Board of Kenya, The Pyrethrum Board of Kenya, The Sisal
Board of Kenya, The Kenya Dairy Board, The Canning Crops Board, The Central
Agricultural Board, The Pig Industry Board, The Pineapple Development
Authority, The Horticultural Crops Development Authority, The Kenya Tea
Development Authority, The National Irrigation Board, The Mombasa Pipeline

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Board, The Settlement Fund Trustees, The Kenya Post Office Savings Bank, The
Cotton Board of Kenya.
(b) The income, of an amateur sporting association, whose sole or main object is to
foster and control any outdoor sport; and whose members consist only of
amateurs
(c) The income of any county government. [Act No. 16 of 2014, s. 20.]
(d) The income of any registered pension scheme.
(e) The income of any registered trust scheme.
(f) The income of any registered pension fund.
(g) The income of a registered provident fund.
(h) Pensions or gratuities granted in respect of wounds or disabilities caused in war
and suffered by the recipients of such pensions or gratuities.
(i) Any payment in respect of disturbance, not exceeding three months’ salary, made
in connexion with a change in the constitution of the Government of a Partner
State or the Community to any person who, before such change, was employed
in the public service of any of those Governments or of the Community.
(j) The income of the East African Development Bank and of Corporations
established under Article 71 of the Treaty for East African Co-operation together
with the income of subsidiary companies wholly owned by that Bank or by any
of the said Corporations.
(k) The emoluments of any officer of the Desert Locust Survey who is not resident in
Kenya.
(l) The emoluments of any foreign Government employee resident in Kenya solely
for the purpose of performing the duties
(m) Interest on a savings account held with the Kenya Post Office Savings Bank.
(n) Interest earned on contributions paid into the Deposit Protection Fund
established under the Banking Act (Cap. 488).

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(o) Interest paid on loans granted by the Local Government Loans Authority
established by section 3 of the Local Government Loans Act (Cap. 270).
(p) The income of a registered individual retirement fund.
(q) The income of a registered home ownership savings plan.
(r) Income of the National Social Security Fund provided that the Fund complies
with such conditions as may be prescribed.
(s) The income of the National Hospital Insurance Fund established under the
National Hospital Insurance Fund Act, 1998
(t) Dividends received by a registered venture capital company special economic
zone enterprises, developers and operators licensed under the Special Economic
zones Act. [Act No. 14 of 2015, s. 16(b).]
(u) Interest income on bonds issued by the East African Development Bank. [Act No.
38 of 2016, s. 16.]
(v) Dividends paid by Special Economic Zone Enterprise, developers or operators to
any non-resident person. [Act No. 15 of 2017, s. 15.]
6.2. Sources of Taxable Incomes
Income Chargeable to Tax (Specified Sources)

Section 3(2) of the Income Tax Act (Cap. 470 Laws of Kenya) provides that, the income
upon which tax is chargeable is income in respect of: -
1) Business;
2) Employment, Self-employment & Professional practice;
3) Rent;
4) Investment: Dividends or interest;
5) Incomes from past employment
a) A pension, charge or annuity; and

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b) Withdrawals/payments from, a registered pension fund or a registered
provident fund or a registered individual retirement fund; and
c) Any withdrawals from a registered home ownership savings plan;
6) An amount deemed to be income of a person under the Act or by rules made
under the Act;
7) Gains from disposal of property in accordance with the Eighth Schedule;
8) Net gain from disposal of an interest in a person, if the interest derives twenty per
cent or more of its value, directly or indirectly, from immovable property in Kenya
subject to section 15(5A); and
9) A natural resource income;
Criteria for Charging Income Tax

(a) Income must have accrued in Kenya
(b) Services must have been rendered in Kenya
(c) Payment of services must have been made in Kenya
Exemptions to the above rules are: -
- Where a resident person carries on a business partly within and partly outside
Kenya, the whole of the gains or profits from that business shall be deemed to
have accrued in or to have been derived from Kenya.
- In case of a resident his worldwide employment income is taxable in Kenya
6.3. Employment Income
What is Employment Income?

Section 5(2) of the Income Tax Act (Cap. 470 Laws of Kenya) refers to employment
income as "gains or profits from employment" which includes: -

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a) wages, salary, leave pay, sick pay, payment in lieu of leave, fees, commission,
bonus, gratuity, or subsistence, travelling, entertainment or other allowance
received in respect of employment or services rendered, and any amount
received in respect of employment or services rendered in a year of income other
than the year of income in which it is received shall be deemed to be income in
respect of that other year of income:
b) Unless otherwise expressly provided, the value of benefit, advantage, or facility
whose total value is not less than thirty-six thousand shillings given because of
employment or services rendered;
c) Amounts paid by the employer as a contribution to a pension fund, or a
registered provident fund or scheme;
d) Balancing charge under Part II of the Second Schedule;
e) The value of premises provided by an employer for occupation by his employee
for residential purposes;
f) Amounts paid by an employer as a premium for an insurance on the life of his
employee and for the benefit of that employee or any of his dependants:
Section 2 of the Income Tax Act (Cap. 470 Laws of Kenya) defines “Employer” as any
resident person responsible for the payment of, or on account of, any emoluments to
any employee, and any agent, manager or other representative so responsible in
Kenya on behalf of any non-resident employer.
NB: -All cash allowances are taxable
-Refunds/reimbursements to an employee by his/her employer is not taxable
Tax Rates (Graduated Scale)

Subject to section 34(1) of the Income Tax Act (Cap. 470 - Laws of Kenya), Tax upon
the total income of an individual, excluding wife's employment income, fringe
benefits and the qualifying interest, shall be charged for a year of income at the

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individual rates for that year of income as illustrated below as provided by the third
schedule: -
Rate Tax Band p.a (Kshs) Tax Band p.a (Kshs) Tax Band p.a (Kshs)
Effective January, 2018 Effective January, 2017 Effective January, 2001
10% 147,580 134,165 121,968
15% 139,043 126,403 114,912
20% 139,043 126,403 114,912
25% 139,043 126,403 114,912
30% Over 564,709 Over 513,374 Over 466,704
Illustration
Salmon Okong’o whose annual chargeable pay for the year ended 31st December 2018
is Kshs. 2,249,191.00 will have his PAYE calculated as Follows; -
Solution
Salmon Okong’o
Tax Payable for the year ended 31st December 2018
Item Amount Rate PAYE
On the first Shs.147,580 147,580.00 10% 14,758.00
On the next Shs.139,043 139,043.00 15% 20,856.45
On the next Shs.139,043 139,043.00 20% 27,808.60
On the next Shs.139,043 139,043.00 25% 34,760.75
On all income over Shs.564,709 1,735,818.00 30% 520,745.40
Tax Liability 618,929.20
6.3.1. Taxable and non-taxable benefits

A. Benefits in kind

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(1) Non-Cash Benefits
Where an employee enjoys a benefit, advantage or facility in connection with his/her
employment or services rendered; the value of such benefit should be included in
employee’s earnings and charged to tax. S.5 (2) (b)
The maximum total tax-free value of non-cash benefits is Kshs. 3,000 per month (Kshs.
36,000 per annum) with effect from 1st January 2006. Any total amount that is more
than Kshs. 3,000 is a taxable benefit on the employee. The value is the higher of: -
- The cost to employer or
- Fair market value of the benefit,
These Benefits may include goods/services, travelling tickets, Christmas vouchers, food
stuffs, house helps, Transport to and from work, security, etc.
B. Cash Benefits
Cash benefit compensations are benefits that are considered to have been given out
by the employer in cash. According to the Act, cash benefits are received in three ways:
1. Cash given direct to employees or directors.
2. Employer pays for employee’s or director’s expenditure.
3. Employee or director enjoy a facility/property owned by the employer.
(1) Employment Income
(a) Tax free remuneration: Any individual earning below Kshs. 12,260 p.m.
effective 1st January 2017 is not subject to tax. This amount has been increased
to Kshs. 13,486 p.m. 1st January 2018.
(b) Persons with disability: The first Kshs. 150,000 per month of total income
earned by disabled persons registered with the National Council for Persons
with Disabilities and approved by the Commissioner in not subject to tax.
(c) Bonuses, overtime: With effect from 1st July 2017, Income from employment
paid in the form of bonuses, overtime and retirement benefits employees
whose taxable employment income before bonus and overtime allowances

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does not exceed the lowest tax band (Kshs. 11,180 per month) are exempt from
tax
(2) Per-Diem
Per diems are ‘per day’ allowances normally given for upkeep of staff when on official
travel. W.e.f. 16 June 2006 the first Kshs 2,000 is deemed to be a reimbursement hence
Per diems are ‘per day’ allowances normally given for upkeep of staff when on official
travel. W.e.f. 16 June 2006 the first Kshs 2,000 is deemed to be a reimbursement hence
not taxable, amounts in excess of Kshs 2,000 are taxable and should ideally be
supported preferably with vouchers from arms-length source. S.5 (2) (a) (ii)
(3) School fees paid by employer
School fees paid on behalf of employees and directors for their dependents is a taxable
benefit on the employee. S.5 (4) (d)
However, where the tax is borne by the employer, through addback in the
computation, the benefit will not be taxable on the employee.
(4) Benefits with Commissioner’s prescribed rates
These Benefits are taxable at the higher of cost or fair market value. The Commissioner
has prescribed the value of benefits where the cost to the employer is difficult to
ascertain on the following: -
Commissioner ‘s prescribed benefit rates (Effective from 12th June 2003)
Monthly Rates Annual Rates
A. Services (Kshs) (Kshs)
(i) Electricity (Communal or from a generator) 1,500 18,000
(ii) Water (Communal or from a borehole) 500 6,000
(iii) Provision of furniture, 1% per month of cost to employer (If hired the cost
of hire should be brought to charge)
(iv) Telephone (Landline & Mobile Phones) 30% of bills

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B. Agricultural employees: reduced rates of benefits (Required to reside in the
plantation)
Monthly Rates Annual Rates
(Kshs) (Kshs)
(i) Water 200 2,400
(ii) Electricity 900 10,800
(5) Meals
Previously, meals provided to low income employees (earning less than Kshs 29,316 per
month) W.e.f 13th June 2008 in cafeterias operated or established in company premises
were exempt from taxation. This was irrespective of whether the meals were supplied
by the employer or are outsourced. However, W.e.f 2nd October 2014, all employees
and directors are allowed non-taxable meals benefits up to Kshs. 4,000 per month
which is Kshs. 48,000 per year.
(6) Tax-free remuneration
Sometimes, expatriate employees and directors negotiate for tax free compensation
for their services. Hence, it is the employers who pays the tax. Where employer wishes
to pay employees net of tax, the tax paid by the employer on behalf of employees is in
itself a benefit chargeable to tax.
For PAYE purposes, the Commissioner has given a formula to compute the ‘tax-on-
tax’ effect. The formula is found in Appendix 4C and 4D of PAYE guide (2006). An
employer can also use a calculator to determine the tax due.
(7) Passages
Passages arises when an employer pays for or reimburses the cost of tickets for
passages for expatriate’s employees, directors and their families including leave. S.5
(4) (a)
The value of the passages is a non-taxable benefit of the employee provided:

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1. The employee or director is not recruited from Kenya and is not a Kenyan.
2. The employee or director is in Kenya to work exclusively for the employer.
3. Payments to the employee or director are not made periodically within the year
– it is a one-off payment.
4. Payment to the employee or director is not a one time-off payment for more
than one year.
5. The employee or director is not free to save or use the payment for other
purposes. They must account for the payment by leaving the country.
(8) Medical Benefit
Provision of medical services to all employees/beneficiaries without discrimination is
a non-taxable benefit. S.5 (4) (b)
However, medical benefits are taxable on the employees and directors if:
1. There is no written medical scheme or plan.
2. Employees are paid cash for the medical services.
3. The medical benefits are discriminatory where some employees or directors are
provided with the medical benefit while the rest are not.
Medical benefits provided to a non-whole-time service director, partner and sole
proprietor including their beneficiaries, subject to a maximum value of Kshs. 1 million.
“Beneficiaries” means the full-time employee’s spouse and not more than 4 children
whose age shall not exceed 21 years.
(9) Car Benefits
Vehicle benefit tax was implemented with effective from June 9th, 2005. The following
are some of the factors used to determine whether the use of a vehicle by an employee
or director is a benefit or not.:
1. The type of work the employee or director does for the company.
2. Exclusive use and allocation of a vehicle.

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3. Personal use of the vehicle e.g. to and from work and over the weekends by the
employee or director.
(a) Company owned vehicles: Where the employer provides an employee with a
‘company’ car, the taxable benefit is the higher of: - S.5 (2B) (C)
a. Prescribed monthly rate of 2% per month of the initial cost of the car
W.e.f 1998
b. Fixed Monthly rate determined by the Commissioner. The current
Commissioner’s determined rates for W.e.f 2011 are: -
Prescribed benefit rates of motor vehicles provided by the employer
a) Saloons, Hatch backs, and Estates
CC Rating Monthly (Kshs) Annual (Kshs)
Up-to 1200 3,600 43,200
1201-1500 4,200 50,400
1501-1750 5,800 69,600
1751-2000 7,200 86,400
2001-3000 8,600 103,200
Over 3000 14,400 172,800
b) Pick-Ups and Panel Vans (uncovered)
CC Rating Monthly (Kshs) Annual (Kshs)
Up-to 1750 3,600 43,200
Over 1750 4,200 50,400
c) Land Rovers and Land Cruisers Monthly (Kshs) Annual (Kshs)
7,200 86,400
NB: Range Rovers and vehicles of similar nature are classified as saloons and
their prescribed rates for 2011 is: -
a) 2% of the initial cost of the vehicle or,

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b) Where such vehicle is hired from a third party the employee shall
be deemed to have received a benefit equal to the higher of the
cost of hiring the vehicle and the prescribed rate.
(b) Hired/Leased vehicles: Companies also hire/lease vehicles for specific time
periods. When the hired/leased vehicles are used exclusively by specific
employees or directors, the actual cost of hiring or leasing the vehicles is a
taxable benefit to the employee or director. The use must include personal use.
S.5 (2B) (a) (i)
(c) Restricted use Vehicles: The Commissioner may determine the lower rate of
the benefit depending on the usage of the vehicle. S.5 (2B) (a) (ii)
(d) Company transport services: Where a company provides transport services for
its employees or directors from home to office and back as pooled transport
service, the cost of providing the transport is not a taxable benefit. It may be
treated as a non-cash benefit.
Illustration
Benard Oyang’o an employee who is employed as a Financial Controller of Kenya
Airways is provided with a car (Honda CRV, cc rating 2,400), which was bought in July
2016 for Kshs. 2,500,000.
Solution
The Car benefit is calculated as follows: -
Ø Prescribed rate (2% x Kshs. 2,500,000) = Kshs. 50,000 per month
Ø Commissioner’s fixed rate (cc. rating 2,400) = Kshs. 8,600 per month
The chargeable car benefit is therefore Kshs. 50,000 per month.

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(10) Vehicle mileage claims
Where employees or directors use their personal vehicles to and claim mileage subject
to prove of the same. The mileage claims are allowed and paid for under the following
conditions:
1. When employees use own vehicles on official duty.
2. Vehicle logs are used to record mileage for purposes of reimbursement of
mileage.
3. Receipts and invoices for supplies towards the travel are maintained and
lodged with the company. the expenses must have been incurred in the name
of the company.
The Revenue Authority allows use of the Automobile Association (AA) mileage rates
for mileage reimbursement, which are not taxable benefits.
(11) Housing Benefits
Sometimes companies provide ordinary employees, whole time service directors and
other directors with housing. Such housing benefit is taxable. S. 5 (3) (b) & (d)
(a) House rented by employer: The value of the taxable housing benefit for
ordinary employees and whole-time service directors:
a. If the employer pays rent under an arm’s length agreement, is the higher
of the following, less nominal rent in any:
1. Actual rent paid by employer.
2. 15 % of gains or profits from that employment, excluding housing.
b. If the employer pays rent under a non-arm’s length agreement, is the
higher of the following, less nominal rent in any:
2. The fair market rent value.

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(b) House owned by employer: The value of the taxable housing benefit for
ordinary employees and whole-time service directors is the higher of the
following, less nominal rent in any:
2. The fair market rent value.
In the case of a director of a company, other than a whole-time service director, the
15% is on his/her total income (including incomes from other sources, but for Capital
gains) S. 5 (3) (a)
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 the gains or profits from his
employment. S. 5 (3) (c)
Where:
(i) “plantation” does not include a forest or timber plantation; and
(ii) “agricultural employee” doesn’t include a director other than a whole-time
service director;
NB: If the premises are occupied for part of the year only, the value is 15% of
employment income relative to the period of occupation.
Illustration
Vivianne Adhiambo, a Manager who earns basic salary of Kshs. 30,000 per month plus
other benefits (e.g. Motor Car, House Servants etc.) of Kshs. 15,000 per month is housed
and the employer pays to the Landlord rent of Kshs. 20,000 per month (i.e. Kshs.
240,000 per annum) under an agreement made at arm’s length with the third party.
Calculation for value of quarters (housing benefit)
Solution
Basic Salary = Kshs. 30,000
Add: Benefits = Kshs. 15,000

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Gains or profits from her employment, excluding housing. = Kshs. 45,000
15 % of gains or profits. (Kshs. 45,000 x 15%) = Kshs. 6,750
Rent paid by the employer of Kshs. 20,000 per month is the amount to be brought to
charge and not 15% value of quarters (Kshs. 6,750), since it’s the higher of the two.
(12) Interest free or Low Interest Loan 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 applies and will continue to apply even after the employee or director has
left employment provided the loan remains un-paid.
Following amendment to the law by the 1998 Finance Act which introduced "Fringe
Benefit Tax", the determination of the chargeable benefit is now in two categories:
S.12B
a) Loans provided on or before 11th June 1998 (Low interest benefit); and
b) Loans provided after 11th June 1998 (Fringe benefit).
(a) Fringe benefit: This is the difference between the loan interest rate charged by
employer and the prescribed interest rate (published quarterly) by the
Commissioner on new loans from 12th June 1998. Fringe benefit is not a taxable
benefit on the employees or directors. Fringe benefit tax (FBT) is the tax on the
fringe benefit paid by the employer at the corporate tax rate of 30% every
month and remitted on or before the 10th day of the following month to the Pay-
Master. Fringe benefit tax is payable even where corporation tax is not due by
the employer in question
(b) Low interest benefit: This is the difference between the loan interest rate
charged by employer and the prescribed interest rate (published half-yearly) by
the Commissioner. Low Interest Benefit (LIB) applies old loans taken on or

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before 11th June 1998, the interest is taxed on employees at graduated scale
rates.
Illustration
Loan provided by employer = KShs.1, 500,000
Employer's Loan Interest Rate = 0% (interest free)
Prescribed Rate of Interest =2%
Calculation of Low Interest/fringe benefit:
Difference between loan interest rate & prescribed interest rate (2% - 0%) = 2%
Low Interest/fringe benefit (LIB/FB) (2% x Kshs 1,500,000) = Kshs. 30,000 p.a.
(13) Retirement contributions by non-taxable employers
Where exempt employers contribute for their employee’s or director’s retirement
benefits, any contributions by such employers i.e. Non-Governmental Organization
(NGOs) for employees or directors to non-registered retirement schemes are taxable
benefits on the employees or director. (W.e.f. July 2004). All retirements schemes
should be registered with the Retirement Benefits Authority (RBA) in Kenya.
In addition, any excess contributions, above Kshs. 240,000, to registered schemes are
taxable benefits on the employees or director.
6.3.2. Allowable and non-allowable deductions

A. Retirement Benefit Schemes
(a) Pension Scheme and Provident Fund
Pension and provident funds arise from payments or contributions relating to
retirement period. Whereas a provident fund would cease upon living employment,
pension on the other hand is long term and continues even after employment.
Contribution is in two ways as follows: -
a) Contributory Scheme - Where both the employer and the employee contribute to
the scheme.

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b) Noncontributory scheme - Where only one party contributes to the scheme
Rules Relating to Registration of Schemes/Funds
• Established in Kenya under irrevocable trust
• Money payable to the Scheme/fund should be made in Kenya
• Contributions to the Scheme/fund should be made in Kenya
• Approved by the commissioner of Domestic Taxes
Contributions to the Scheme/Fund
An employee's contributions to registered pension, provident and individual
retirement schemes up to a maximum of Kshs. 240,000 per annum, effective 1st January
2006 is tax allowable. S.22A
The employee's deductible contribution is the lesser of:
► 30% of pensionable pay;
► KShs.240,000 or proportion for the year; or
► Actual contributions.
However, contributions by employers to unregistered schemes or excess contributions
to registered schemes are a taxable benefit on employee, where the employer is not
taxable. S.5 (4) (c)
Benefits of Pension schemes/ Provident funds
• Employer’s contribution on behalf of the employee is not taxed on the employee
• Employee’s contribution is an allowable deduction against employee’s income
• Employer’s contribution on behalf of the employee to a registered scheme is an
allowable deduction against employer’s taxable income
(b) National Social Security Fund (NSSF)
Contributions made to the National Social Security Fund (NSSF) qualify as a
deduction with effect from 1st January 1997. Where an employee is a member of a
pension scheme or provident fund and at the same time the National Social Security

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Fund (NSSF) the maximum allowable contributions should not exceed Kshs.20, 000
per month in aggregate.
Illustration
Mr. Victor Ouma, an employee of Strathmore University in the year 2017 earned a
Kshs. 30,000 P.m. He contributed to a pension fund Kshs. 6,000 p.m.
Calculate his deduction for pension contribution and his tax liability.
Solution
Ø Actual pension contribution ═ {Kshs. 6,000*12 Months} = Kshs. 72,000
Ø Upper Limit = Kshs. 240,000
Ø 30% of pensionable pay = 30% of [Kshs. 30,000*12 Months] = Kshs. 108,000
Hence deductible amount is Kshs. 72,000
Total taxable income (Kshs. 360,000 - Kshs. 72,000) = Kshs. 288,000
B. Other Contributions
(a) Mortgage interest
This is available to owner occupier residential home owners (purchase or
improvement of premises) who seek finance from the following institutions:
a) A bank or financial institution or mortgage finance company licensed and the
Banking Act (Cap. 488).
b) An insurance company licensed under the Insurance Act (Cap. 487).
c) The Kenya Reinsurance Corporation established by the Reinsurance
Corporation Act.
d) A building society registered under the Building Societies Act (Cap. 489).
The tax-deductible interest is capped at Kshs. 300,000 per annum with effect from 1st
January 2017. No claim for more than 1 residence. S .15 (3) (b)

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(b) Home ownership savings plan (HOSP)
A depositor to a registered home ownership savings plan qualifies for a deduction of
up to Kshs. 48,000 for the first 10 years. Interest earned on deposits of up to Kshs. 3
million is also tax exempt.
(c) Non-reimbursed costs to disable persons
Subject to the satisfaction of the Commissioner, non-reimbursed hospital admission
costs, drugs treatment, cost of disability related assisting devices, and home care
services for disabled persons registered with the National Council for Persons with
Disabilities and approved by the Commissioner, a deduction not exceeding Kshs.
50,000 p.m. be considered when determining total taxable income. Validity of such
exemption is 5 years if granted. L/N 36 of 2010
6.3.3. Tax credits (withholding tax, personal and insurance relief,

others)
1. Resident Personal Reliefs
The third schedule to the Act, provides for two categories of personal relief’s namely:
a) Personal relief; and
b) Insurance relief.
(a) Personal Relief
Section 30 of the Act provides that, a resident individual in receipt of taxable income
is entitled to a tax relief referred to as personal relief, which is a uniform deduction
granted against tax due from all individuals irrespective of their marital status or level
of income of Kshs. 1,280 per month (i.e. Kshs. 15,360 per annum) with effect from 1st
January 2017 as provided by the third schedule. This has further been increased by
10% to Kshs. 16,896 per annum. Individuals serving several employers qualify for
personal relief from only one employer (i.e., main employment).

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(b) Insurance Relief
Section 31 (1) of the Act provides that, a resident individual who can proves that; -
(a) He has paid insurance premium on his life, or the life of his wife or his child; or
(b) His employer paid insurance premium on the life and for the benefit of the
employee which has been charged to tax on that employee; or
(c) Both employee and employer have paid premiums for an education policy with
a maturity period of at least 10 years.
(d) Health insurance with effect from 1st January 2007.
is entitled to a personal relief referred to as the insurance relief, which is a deduction
granted against tax due from such individuals 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). with effect from 1st January 2007.
2. Pay as You Earn (PAYE)
Section 37 (1) of the Act, appoints an employer paying emoluments to an employee to
deduct therefrom, and account for tax (PAYE) thereon. Once deducted at source it is
used to reduce tax payable when filling personal returns at the end of the year.
3. Withholding Tax (WHT)
This is a method whereby, on Agency basis, the payer of certain incomes deducts tax
at source from payments due to certain payees and then remits the tax so deducted to
the Commissioner, Domestic Taxes on or before the 20th day of the following month.
Withholding Tax is mainly subjected to payment made to irregular earners and non-
payroll earners.
Section 34 (2) of the Income Tax Act (Cap. 470 - Laws of Kenya) provides that, tax
upon the income of a non-resident person not having a permanent establishment in
Kenya. Withholding Tax is levied at varying rates (3% to 30%) on a range of payments
to residents and non-residents. Resident WHT is either a final tax or creditable against
tax payable. Non-resident WHT is a final tax.

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Payments Resident WHT rate (%) Non-resident WHT rate (%)
Dividend > 12.5% voting power Exempt 10
Dividend < 12.5% voting power 5 10
Interest:
Bearer instruments 25 25
Government bearer bonds (maturity ≥ 2 yrs.) 15 15
Bearer bonds (maturity ≥ 10 years) 10 N/A
Other 15 15
Qualifying interest:
Housing bonds 10 N/A
Bearer instruments 20 N/A
Other 15 N/A
Royalty 5 20
Winnings from gaming and betting (1) Varied Varied
Management or professional fees 5 20
Consultancy fees - Citizen of EAC member states 5 15
Training (including incidental costs) 5 20
Rent/leasing:
Immovable property N/A 30
Others (other than immovable) N/A 15
Pension/retirement annuity Varied (2) 5
Contractual fees 3 20

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Payments Resident WHT rate (%) Non-resident WHT rate (%)
Sale of property or shares in oil, mining, or mineral

10 20
prospecting companies
Notes
1. The taxation of the betting, lottery, and gaming sector has undergone
significant change in Finance Bill, 2017.
2. This will vary depending on the payments paid out.
Oil and gas sector WHT rates
WHT rates applicable on payments to non-residents in the oil and gas sector are
shown in the table below:
Payments Non-resident (oil and gas) WHT rate (%)
Dividends 10
Interest 15
Natural resource income 20
Management or professional fees 12.5
Illustration
Salmon Okong’o is employed as the Head of Finance, Wananchi (K) Ltd. His annual
chargeable pay for the year ended 31st December 2018 is Kshs. 2,249,191.00 out of
which, his employer deducted Kshs. 373,814 PAYE and remitted to the Revenue
Authority. He paid insurance premium of Kshs. 84,000 in 2018 towards his child’s
education for 10 years.
Required:
Calculate Salmon Okong’o’s taxable income and tax payable for the year ended 31st
December 2018.
Solution

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Salmon Okong’o
Tax Payable for the year ended 31st December 2018
Item Amount Rate PAYE
On the first Shs.147,580 147,580.00 10% 14,758.00
On the next Shs.139,043 139,043.00 15% 20,856.45
On the next Shs.139,043 139,043.00 20% 27,808.60
On the next Shs.139,043 139,043.00 25% 34,760.75
On all income over Shs.564,709 1,735,818.00 30% 520,745.40
Tax Liability 618,929.20
Deduct: Tax Credits
PAYE (Paid) 373,814
Personal Relief 16,896 15,360
Insurance Relief 12,600 (403,310.00)
Tax Payable 215,619.20
6.3.4. Incomes from Past Employment

A. Lump Sum Payment
a) Compensation for loss office
Section 5(2) (c) of the Income Tax Act (Cap. 470 Laws of Kenya) provides that, an
amount received as compensation for the termination of a contract of employment or
service, whether provision is made in the contract or not for the payment of that
compensation is taxable.
(i) 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 of the contract;
Illustration
A contract for five (5) years is terminated on 31st December 2015 after it has run
for 3 years. Compensation of Kshs.1, 100,000 were paid.

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The amount is to be spread evenly and assessed in the remaining period of 2
years as follows: -
Year Taxable Amount (Kshs)
2016 550,000
2017 550,000
(ii) Where the contract is for an unspecified term and provides for compensation
on the termination thereof, the compensation shall be deemed to have accrued
in the period immediately following the termination at a rate equal to annual
rate of remuneration from the contract immediately prior to;
Illustration
A contract for an unspecified term provides for payment of Kshs. 700,000 as
compensation in the event of termination. It is terminated on 31st December
2014 and the employee's rate of earning was Kshs. 300,000 per annum. The
amount is spread as follows
Year Taxable Amount (Kshs)
2015 300,000
2016 300,000
2017 100,000
(iii) Where the contract is for an unspecified term and does not provide for
compensation on the termination thereof, any compensation paid on the
termination of the contract shall be deemed to have accrued evenly in the three
years immediately following such termination;
Illustration
A contract is for an unspecified term with no provision for payment of
compensation. The contract is terminated on 31st December 2014 and Kshs.
1,500,000 compensation is paid.

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The amount is to be spread forward and assessed evenly in three years as
follows: -
Year Taxable amount (Kshs)
2015 500,000
2016 500,000
2017 500,000
NB: Use the current rates of tax (i.e. 2017) until subsequent years’ rates are enacted.
Personal Relief is not granted in advance before commencement of any year of
income.
b) Gratuity/Bonuses
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. However, where the year of accrual is earlier than four (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. S. 5 (2) (a) (i)
Illustration
Billian Rachael left employment in September 2017 after 30 years of service and was
paid severance pay/service gratuity of Kshs. 660,000; three months’ notice pay Kshs.
90,000 and Kshs.25, 000 for his 20 leave days not taken for the year 2016.
Solution
- ► 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.

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Breakdown of Lump sum payment
Year Taxable Amount Kshs
2017 Notice Pay 90,000+22,000
2016 Gratuity/Leave pay 22,000+25,000 = Kshs.47, 000
2015 Service gratuity 22,000
2014 Service gratuity 22,000
2013 Service gratuity 660,000-22,000 = Kshs.572, 000
NB: To calculation tax on lump Sum, aggregate: total taxable pay for the year and
lump sum amount for that year then calculate tax chargeable on the revised
total taxable income
If termination of employment occurs during the year, the portion of lump sum
payment for that period is taxable in that year.
Calculate the tax for each year using annual rates of tax and then add up tax for all the
years involved to arrive at total tax to be deducted from the lump sum payment. It
should be noted that any lump sum payment relating to the year of income 2011 and
prior years is assessable in 2012 being the 5th year prior to the year of receipt (2017)
B. Pension
a) Commutation from a Fund
According to section 8 (5) (a) of the Income Tax Act (Cap. 470 Laws of Kenya) in the
case of a lump sum commuted from a registered pension or individual retirement
fund, the first six hundred thousand shillings (Kshs. 600,000) is not chargeable to tax
this takes place at normal retirement, ill health or if one has been a pensionable
member of a fund for fifteen years or more.
b) Withdrawal/ Payment from Fund
According to section 8 (5) (b) & (c) of the Income Tax Act (Cap. 470 Laws of Kenya) in
the case of a withdrawal from a registered pension or individual retirement fund upon

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termination of employment, the first six hundred shillings (Kshs. 600,000) is not
chargeable to tax if pensionable service is ten years or more, but where the period is
less than ten years an amount of sixty thousand shillings per year (Kshs. 600,000 p.a.)
of pensionable service is tax free.
NB: Monthly or lump sum pension granted to a person who is sixty-five (65) years
of age or more is TAX-FREE
Past Paper Questions: Q2 June 2011, Q1(c) December 2013
6.4. Business Income
Introduction
Section 2 of the Income Tax Act (Cap. 470 Laws of Kenya) defines a “business” to
includes any trade, profession or vocation, and every manufacture, adventure and
concern in the nature of trade, but does not include employment.
A business will involve the buying and selling of goods and services but the mere
activity of selling of goods and services may not constitute a business. The following
are some of the common Indices of trade: -
a) Profit Seeking Motive: This is a prima facie evidence of a business activity. It is
more pronounced in companies and partnerships, which are formed mainly for
carrying out profitable operations as specified by their memorandum of
Association and partnership agreements. For an individual it is not easy to rule
out an isolated transaction is a trading venture without getting other facts
(indicators) associated with the transaction.
b) Mode of acquisition: This refers to the way the asset was acquired, it is therefore
easy to conclude that trading has taken place where an asset was purchased and
then sold thereafter as opposed to where it was inherited and then sold, making
the latter sale likely non-trading venture.

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c) Nature and Quantity of Asset: This can be a pointer to trading say where a person
purchases an asset (say a tractor) that is not used privately (say for enjoyment
purposes) or from an investment point and sells it later. Any gains arising are
likely to be trade profit given that such a transaction would be mainly motivated
by commercial speculation. In addition, dealing in large quantity of goods is a
pointer to a scheme with a profit motive.
d) Length of Time Asset is Held: The shorter the interval between purchase and
sale of an asset, the higher the likelihood that the acquisition was motivated by
profit in contrast, when an asset is acquired, held for a longer period and used
(say for residential purposes or to earn rent) it is easy to deduce trade granted the
use it was put in by the buyer before selling it.
e) Treatment of Asset while Held: This is an important pointer especially where it
is repaired, blended, reconstructed or renovated so as to enhance its value and
fetch a higher price when sold. These acts are motivated by profit motive.
f) Number of Transaction: Where they are numerous, serial or carried out
methodically; they are likely to be pointers of trading venture. However, courts
have also held that a single isolated transaction could constitute a trade or a piece
of business.
g) Business Interest in the same Field: Where one engages in related or connected
activities, the second line of activity is likely to be trading i.e. A Motor vehicle
dealer engaging in spare part sale of insurance brokerage for vehicles.
h) Method of Financing: A purchaser who buys goods and pays for them from sales
proceeds from a previous sale or borrows money to buy goods and then sells them,
is likely to be engaged in a trade.
i) Destination of Proceed: This may also be a trading indicator where such proceeds
are used to acquire a similar asset, unless the asset was held as an investment and
then sold and replaced by a similar investment.

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j) Sale organization: This is a pointer to trading where a person organizes his selling
system can determine whether trading is going on or not granted that the sale
may be promoted by advertising or engaging a sales person.
Having looked at the ten factors, one can tell whether trading is going on or not, which
is easy to detect in case of an ordinary business but not so for borderline cases.
However, it is important to note that these factors must be looked at in entirety and
not singularly, each case must also be dealt with on its own merit/facts.
Income Tax Computation of Business Income

For the purposes of section 3(2)(a)(i) of the Income Tax Act (Cap. 470 Laws of Kenya)
where a business is carried out or exercised partly within and partly outside Kenya
by a resident person, the whole of the gains or profits from such business will be
deemed to have accrued in or been derived from Kenya and is taxable. However, any
loss in the business is carried forward to be offset against the profit in the following
period up to 10 years. The accounting net profit/loss from a business must be adjusted
for income tax purposes.
Allowable and Non-Allowable Deductions

1. Allowable Deductions
Pursuant to section 15(1) of the Income Tax Act (Cap. 470 Laws of Kenya), for
ascertaining the total income of a person for a year of income there shall, be deducted
all expenditure incurred in that year of income which is “expenditure wholly and
exclusively incurred” by him in the production of that income.
Where under section 27 (Accounting Periods not coinciding with year of income) any
income of an accounting period ending on some day other than the last day of that
year of income is, for ascertaining total income for that year of income, taken as income
for that year of income, then the expenditure incurred during that period shall be

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treated as having been incurred during that year of income. Examples of Allowable
deductions may include: -
(a) Any cost an employee incurs in running or maintaining a car to enable him to
perform his duties
(b) Any costs an employee incurs on traveling for performing his duties
(c) Cost of living away from home necessitated by employment
(d) Cost of tools and implements if the employee provides his own
2. Disallowable Deductions
Section 16 (2) of the Income Tax Act (Cap. 470 Laws of Kenya), provides that,
notwithstanding any other provision of the Act, no deduction shall be allowed in
respect of the following: -
(a) Expenditure incurred by a person in the maintenance of himself, his family or
establishment or for any other personal or domestic purpose including the
following: -
(a) Entertainment expenses for personal purposes; or
(b) Hotel, restaurant or catering expenses other than for meals or
accommodation expenses incurred on business trips or during training
courses or work-related conventions or conferences, or meals provided to
employees on the employer’s premises;
(c) Vacation trip expenses except those customarily made on home leave as
provided in the proviso to section 5(4) (a)-Passages;
(d) Educational fees of employee’s dependents or relatives; or Club fees
including entrance and subscription fees except as provided in section
15(2(v)-paid by employer.
(b) Expenditure or loss which is recoverable under any insurance, contract, or
indemnity;

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(c) Income tax or tax of a similar nature including compensating tax paid on income;
except foreign tax in respect of which a claim is made under section 41(Special
Arrangements for relief from double taxation.), a deduction shall be allowed in
respect of income tax or tax of a similar nature paid on income which is charged
to tax in a country outside Kenya to the extent to which that tax is payable in
respect of and is paid out of income deemed to have accrued in or to have been
derived from Kenya.
(d) Premium paid under an annuity contract;
(e) Expenditure incurred by a non-resident person not having a permanent
establishment within Kenya.
Adjustment Rules for Net Profit/Loss

a) Add back disallowable expenses if already deducted i.e. Personal salaries, personal
expenses, capital expenses, and Depreciation & general provisions for bad
debts etc.
b) Add any assessable income, which has been omitted.
c) Deduct the allowable expenses, if not already deducted i.e. expenses wholly and
exclusively incurred in the production of that income, this includes capital
deductions.
d) Deduct any in assessable income if already included.
Illustration
Anna-Marie posted the following figures for the year ended 31st December 2018.
Kshs. Kshs.
Sales 800,000
Cost of sales
Opening stock 100,000
Purchases 600,000

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700,000
Less: Closing stock (150,000) (550,000)
Gross profits 250,000
Other Incomes
Dividends (BAT) 50, 000
Interest (KCB) 50, 000 100, 000
Total income 350, 000
Sundry expenses (200,000)
Net Profit 150,000
In the sundry expenses the following were included: Purchase of computer 60,000;
Personal salary 20,000; Stationary 10,000; Electricity 20,000
Required
Calculate his taxable income
Solution
Kshs. Kshs.
Accounting net profit 150,000
Add: Purchase of computer 60,000
Personal salary 20,000 80,000
Deduct: Dividends (BAT) 50,000
Interest (KCB) 50,000 (100,000)
Taxable Profits 130,000
Past Paper Questions: Q5(c) September 2015
Income from Management and Professional Fees

A profession is the exercise of and skill obtained through specialized training; such
profession may be exercised independently through self-employment. In case of such
self-employed professionals, returns of income will be made based on fees earned
during that accounting period. Expenses may be claimed against the incomes of the

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same principal as for a normal trading concern. That is the expenses to be allowed
must have been incurred, wholly and exclusively in earning that income. In addition
to the normal expenses the following are also allowable: -
(a) Cost of replacing existing/obsolete books.
(b) A proportion of car expenses and W&T deductions may be allowed to the
extent that the car was used for professional services.
(c) A proportion of rent if dwelling house is used as office may be deducted.
(d) Professional subscriptions made by a self-employed professional are allowable.
(e) Payment by local branches to the head office are disallowed as business
expenses
The Income Tax Act (Cap. 470 Laws of Kenya), recognizes the following professions:
a) Medical: Any person who is registered as a medical practitioner under the
Medical Practitioners and Dentists Act
b) Dental: Any person who is registered as a dentist under the Medical Practitioners
and Dentists Act
c) Legal: Any person who is an advocate within the meaning of the Advocates Act
d) Surveyors: Any person licensed as a surveyor under the Survey Act.
e) Architects & Quantity Surveyor: Any person who is registered as an architect or
a Quantity surveyor under the Architects and Quantity Surveyors Act
f) Veterinary Surgeons & Veterinary: Any person who is registered or licensed as
a veterinary surgeon under the Surgeons Act
g) Engineers: Any person who is registered under the Engineers Registration Act
h) Accountants: Any person who is registered as an accountant under the
Accountants Act
i) Certified Public Secretaries: Any person who is registered under the Certified
Public Secretaries Act of Kenya (Sec 133)

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6.4.1. Sole Proprietorship

A sole proprietorship is simply a business structure operated and owned by one
person. The person remains solely liable to all the losses and returns of the business.
Starting a business as a sole proprietor is cheaper and easier to set up compared to
limited company. This legal structure for a business gives more control to the
entrepreneur over decision making in all different parts of the business.
Taxation of Sole Proprietorship
Sole proprietorship businesses are not entirely required to file for taxes as a business
to Kenya Revenue Authority, rather they can do this through Income Tax Return as
an individual every June 30th. If Sole proprietor charges VAT on his or her
products/services, then they are required by law to make monthly returns before 20th
of every month.
Advantages of Sole Proprietorships
1. Ease of formation: Becoming a sole proprietor is as simple as buying newspapers
and selling on the street, one only needs to develop an idea, set goals and then
develop it into a profitable operation. The simplicity of a sole proprietorship makes
this form of business structure attractive to small entrepreneurs.
2. Tax benefits: As an individual, owners of sole proprietorships file individual tax
returns and list down the figures and information in their individual returns. This
saves extra costs of accounting and tax filling. The business is therefore taxed at
the rate of personal income instead of 30% as a corporation.
3. Decision-making: The owner has control of all decisions and makes them alone.
This makes it easy to make business decisions.
4. Secrecy: The owner alone handles the whole business and one person knows most
of the business secrets. The owner can maintain high standards of secrecy of profits
or special techniques.

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Disadvantages of Sole Proprietorships
1. Unlimited liability: The business owner will be held directly responsible for any
losses or debts coming from the business.
2. Lack of continuity: The continuity or permanence of a sole proprietorship is
difficult to maintain. If the owner dies or is incapacitated and there is no suitable
successor, the business will not continue.
3. Difficulty in raising funds: The volatile nature of sole proprietorship makes it
difficult for other investors to put their money into such a business. This is
especially when the business needs to grow.
6.4.2. Partnerships (excluding conversions)

A partnership is a relationship that subsists between two or more people carrying on
business together with a view to making profits. Gains or profits from a partnership
are assessed on the partners and not the partnership. The profits/losses arising from
the partnership is added to the partner’s total income from another source. A
partnership is usually established by an agreement known as a “partnership deed”
which outlines the following: -
(a) Amount of capital to be contributed by each partner
(b) Salaries to be paid to partners
(c) Interest to be charged on drawings by partners
(d) Interest to be paid on capital contributed by partners
(e) The profit-sharing ratio
In the absence of a deed it is assumed that, there is no interest paid on capital, no
interest charged on drawings, no salaries payable to partners and that, profits & losses
will be shared equally
Taxation of Partners
The income of the partnership is taxed on the partners.

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The net profits/losses of a partnership must be adjusted for taxation of purposes, this
includes adding back disallowable expenses if already deducted and deducting non-
taxable incomes if already included. These adjustments are: -
(a) Expenses to be allowed must have been expended wholly and exclusively in
the production of that income.
(b) Capital expenses are not allowable
(c) Personal expenses are not allowable
(d) Salaries to partners are not allowed
(e) Interest on capital to partners is not allowable
(f) Interest paid by partners on drawings is not taxable
(g) Wife’s salaries are not allowable
(h) Drawings are not allowable
(i) Disposal of fixed assets is not taxable
After these adjustments, net amount is then distributed to the partners as per the deed
Illustration
Hazel & Grace are in partnership and share profits/losses equally in the year of income
2018 when they posted a loss of Kshs.65, 000. Their accounts were as follows: -
Incomes Kshs
Dividends (KCB) 40,000
Interest (BIDCO) 50, 000
Sales 600,000
Disposal of delivery van 20,000
Refund of income tax 65,000
Sales of Grace’s Shamba 250,000
Expenses:
Purchases 300,000
Salaries: - Hazel 40,000

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- Grace 50,000
Interest on capital: - Hazel 20,000
- Grace 20,000
Commission to Hazel 40,000
Purchase of van 400,000
Advertising 100,000
Workers’ salaries 20,000
Electricity 100,000
Required
a) Adjusted partnership profit/loss
b) Distribution of the partnership profit/loss
Solution
Adjustment of net loss Kshs Kshs
Loss as per accounts (65, 000)
Add:
Salaries to Hazel & Grace 90, 000
Interest on capital to Hazel & Grace 40, 000
Commission to Hazel 40, 000
Purchase of van 400, 000 570, 000
Less:
Dividends (KCB) 40, 000
Interest (BIDCO) 50, 000
Disposal of delivery van 20, 000
Refund of income tax 65, 000
Sales of Grace’s Shamba 250, 000
WTD-M/V (25% 0f 400,000) 100,000 (525, 000)
Adjusted profit (20, 000)

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Computation of Partner’s Taxable Income
Item Hazel Grace Total
Salaries 40, 000 50, 000 90, 000
Interest on capital 20, 000 20, 000 40, 000
Commission 40, 000 Nil 40, 000
Balance (shared in PSR) (95, 000) (95, 000) (190, 000)
Taxable Income 5, 000 (25, 000) (20, 000)
Past Paper Questions: Q1(c) May 2012
6.4.3. Incorporated Entities (excluding specialized institutions)

Corporation tax is charged at 30% for residents and 37.5% for non-residents on
company incomes after the adjustment of the same in the same manner as discussed
under 1.4.
However, the following items should be allowable.
(a) Director’s fees paid out wholly and exclusively to produce the income.
(b) Director’s salaries are allowable
(c) Payments made between two associated companies are allowable.
Deductions not allowable are:
(a) Bad debts related to loans advanced to Directors
(b) Formation expenses
(c) Dividends and other distribution from profits
(d) Corporation tax
(e) Interest/penalties on arrears on corporation tax
Illustration
Lake Nakuru Ltd. posted the following accounts in the year 31st December 2018.
Incomes Kshs. Kshs
Gross profits 2,000,000

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Deposit interest 50,000
Dividends 400,000
Discounts received 50,000
Total income 2,500,000
Expenses
Salaries and wages 120,000
Rent & rates 130,000
VAT 100,000
Electricity 10,000
Insurance 30,000
Office expenses 50,000
Dividends paid 200,000
Neon sign post 180,000
Directors holiday payment 100,000
Corporation tax 120, 000 1, 040,000
Net Profits 1, 460,000
Solution
Adjustment of net Profit
Incomes Kshs. Kshs
Net profit as per accounts 1,460,000
Add:
VAT 100,000
Dividends paid 200,000
Corporation tax 120,000
Directors holiday payment 100,000
Neon sign post 180,000 700,000
Less:

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Dividends 400,000
Deposit interest 50,000 (450,000)
Adjusted profits for tax purposes 1,710,000
Past Paper Questions: Q4(b) November 2017
6.4.4. Turnover Tax (TOT)

Turnover tax was introduced vide Finance Act of 2006 through the provision of the
Income Tax Act (Cap. 470 Laws of Kenya), under Section 12C and become operational
on 1st January 2008 until it was replaced by Presumptive tax by the Finance Act, 2018.
The applicable rate is 3% of the gross income from business, no expenditure or capital
allowances is granted. TOT is a final Tax
Interpretation
A. “Income from Business” - Includes gross receipt, gross earnings, revenue,
takings, yield, proceeds or other income chargeable to tax under section 12c.
B. “Person” - includes partnerships, individuals
C. “Tax period” - Means every three calendar months commencing 1st January
every year
Eligibility, Registration & Administration of TOT
Persons whose income from business exceeds Kshs 500,000 but not more than Kshs
5,000,000 in any year of income is be liable to pay turnover tax, unless such a person
elects not to be subject to turnover tax by notice in writing to the commissioner. In
which case the person shall be liable to pay corporate tax, however turnover tax shall
not apply to: -
- Rental income and management or professional or training fees
- Income of incorporated companies
- Any income which is subject to a final Withholding tax i.e. Interest & Dividends
received by individuals

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A registered person is issued with a certificate (TOT2) and shall be required to keep
records including: -
a) Cashbooks
b) Sales receipts and invoices
c) Daily sales summary (TOT 4)
d) Purchase invoices
e) Bank statements
Where a business is in possession of an Electronic Tax Register (ETR) records as
provided under the VAT Act (ETR) Regulations, 2004, those records shall be sufficient.
Turnover Tax is due on or before the 20th day of the month following the end of the
quarter/tax period. However, one may remit tax due on monthly basis and offset the
tax paid in the tax return. Failure to submit a return or submits the return and fails to
pay the tax due is liable to pay a default penalty of two thousand shillings.
Benefits of Turnover Tax
(i) Easier tax procedure and simplifies tax computation
(ii) Makes return filling easier and simplifies record keeping
(iii) Reduces cost of compliance
Update: Imposition of presumptive income tax

Eligibility: Presumptive tax is only be applicable to persons whose turnover from
business does not exceed KES 5,000,000 per annum, who are issued a single business
permit by the County Governments and is not applicable to the following:
1) management and professional services; or
2) rental business; or
3) incorporated companies

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Rate: The rate of the presumptive tax is 15% of the single business permit fee, is final
tax and is payable at the time of payment of the single business permit or renewal of
the same.
Deregistration: A person may opt out of the presumptive tax upon notifying the
Commissioner, after which the person will be liable to tax on his/her income in the
normal way.
Analysis: The success of this measure will depend on its implementation and will
require collaboration with the county governments.
While the introduction of presumptive tax appears to collect less tax as compared to
turnover tax, the ease of its implementation and administration will enhance its reach
and expand the tax base. It may also be used to enroll new taxpayers for ease of
follow-up should the government decide to increase the tax rate in future.
6.5. Income from use of Property - Rent and Royalties
A. Income from Occupation of Property (Rent Income)

Rental Income is taxable under section 3(2)(a)(iii) of the Income Tax Act (Cap. 470
Laws of Kenya). It refers to the payment received by a person from his tenant for the
occupation of his property. In addition, rent on non-residential buildings (Commercial)
is taxable under Value Added Tax Act, 2013.
Any rental income below KES144, 000 per annum is EXEMPT from residential income
tax. Effective 9 June 2016.
In determining taxable rent income all costs incurred wholly and exclusively in
earning such rent income are deducted, some of these costs include: -
(a) Specific bad debts and rental losses
(b) Reasonable advertising and promotional costs
(c) Legal costs and stamp duty on acquiring a lease for less than 99years.

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(d) Water rates and land rates
(e) Repairs and renewals to maintain the existing rent amount.
(f) Management cost of land or agent i.e. Telephone, rent collection costs.
(g) Insurance premium of the building
(h) Wages for staff and security working in the premises
(i) Heating and lighting
(j) Reasonable amount in respect of diminution in value of implements or similar
articles used in a building
(k) Industrial building allowance (IBD)
(l) Alteration to the premise which is done to maintain the existing rent
Assessment of Rental income may be made at any time prior to the expiry of seven (7)
years after the year of income; (Section 79(1) of the Income Tax Act, Cap 470)
NB: Any amount incurred with the aim to increase the rent will be disallowed
Any cost in respect of extension or replacement of the premise is disallowed
All costs of capital nature are also disallowed
Illustration
Mr. Gabriel owns a block of four (4) flats let out at Kshs. 2,000 pm per flat in the year
2017. He incurred the following costs in the year 2018.
Rates to Nairobi County Government 4,000 p.a.
Gardener wages 4,000 p.m.
Watchman 360 p.m.
Insurance 800 p.a.
Repair of fence 900 p.a.
Rent collection fees 10% of gross rent
Addition of servant quarters 10,000
He had rented out part of the servant quarters for 5,000 in December of 2018.

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Required:
Calculate his taxable rental income
Solution
Kshs. Kshs.
Rental income - Flats (Kshs 2,000*12 Months) 4 96,000
- Servant quarters 5,000
Total Rental Income 101,000
Expenses
Rates to NCG 4,000
Wages (4000x12) 48,000
Watchman (360x12) 4,320
Insurance 800
Fence repairs 900
Rent collection 10% 10,100 (68, 120)
Taxable Rental Income 32, 880
B. Royalty Income
This is a payment made as a consideration for the use of or right to use the following
intellectual properties like: -
- Literature, artistic, or scientific copyright
- Cinematograph including film and tapes used in radio cassettes or any other form
of broadcasting
- Any industrial, commercial or scientific equipment or information concerning
industrial, commercial or scientific equipment
Taxation of Royalty Income
Expenses will be allowed if they were incurred wholly and exclusively incurred to
generate that income. Expenses incurred prior to commencement will not be allowed

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i.e. research and development. Royalty on an individual is taxed bases on the
graduated scale while that of a corporate is taxed at corporate tax rate.
6.6. Farming Income
Profits arising from farming activities are subject to tax just as trade and professions
except hobby farming. Expenses incurred in earning such profits are also allowable
Hobby Farming: If farming is carried on without a view to the realization of profits it
may be exempted from taxation this will arise if the owner of the firm consumes a bigger
proportion of the farm produce. Income from such ventures is not taxable.
Treatment of Capital Expenditure
(a) Any expenditure of capital nature that is incurred in prevention of soil erosion is
allowable.
(b) Capital expenditure incurred in clearing of land or clearing and planting
permanent or semi-permanent crops are also allowable.
(c) A farmer is also entitled to farm work deductions.
Illustration
Bob Marshall is a farmer, he decides to sell off his cows and purchase pigs. His income
for the year 2018 was as follows: -
Incomes: Kshs Kshs.
Disposal of cows 156,000
Income from camping site 62,000
Sale of farm produces 200,000
Expenses:
Purchase of pigs 100,000
Clearing bush to plant 10,000

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Planting potatoes 20,000
Construction of pig sty 30,000
Interest paid on bank loan 20,000
Works to stop soil erosion 20,000
Purchase of fertilizer 30,000
Donation to local church 20,000
Subscription to Kogelo sports club 10,000
Court fine 30,000
Required:
Calculate his taxable income
Solution
Bob Marshall
Taxable income for the year ended 31st December 2018
Item Kshs Kshs
Disposal of cows (156,000 - 100,000) 56,000
Income from camping site 62,000
Sale of farm produces 200,000
Total Income 318,000
Less:
Clearing bush to plant 10,000
Planting potatoes 20,000
Interest paid on bank loan 20,000
Works to stop soil erosion 20,000
Purchase of fertilizer 30,000 (100,000)
Taxable Farming Income 218,000

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6.7. Investment Income
A. Dividend Income
Dividend refers to the distribution of profits of a company to its shareholders.
Dividend is considered in the year in which it is paid to the shareholders
a) Qualifying Dividends
These are dividends, which are taxed at the point they are paid to the shareholders.
This tax is called withholding tax, and dividends subject to this WHT are not taxed
again. All dividends received by a resident will be qualifying dividends
b) Dividends not paid in Cash
(a) When a company issues debentures or redeemable preference shears to any of
its shareholders and receives no payment from the shear holder, the issue of
such debentures or redeemable preference shares shall be deemed to be
payment of dividends. The value of such dividends shall be the nominal value
or redeemable value whichever is higher.
(b) Where a company issues debentures or redeemable preference shares to its
shareholders at a sum or amount less than the nominal value the issue of the
debentures or redeemable preference shares shall be deemed to include a
payment of dividend equal to the difference provided that if the sum paid for
such debentures or preference shares is 95% or more of the nominal value then
there is no dividend.
Item A (Kshs) B (Kshs) C (Kshs)
Nominal 100 100 120
Value
Amount Paid 95 75 75
Value of NIL 25 45
Dividend

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Illustration
In the year 2018 Mr. Kukuboh who is a resident earned the following incomes: -
o Salary 30,000 p.m.
o House allowance 7,000 p.m.
o Car allowance 8,000 p.m.
He lived in the company house and paid rent of Kshs 5,000 p.m. to the employer and
received dividends of 20, 000 in December from BIDCO.
Required:
Calculate the taxable income.
Solution
Taxable income - Cash Benefits {12(30,000+7,000+8,000)} = 540,000
- Non-Cash Benefits {[15% of 540, 000]-[5, 000x12]} = (21,000)
= 561, 000
Notes:
- Dividends received from sources outside Kenya are not taxable.
- Distribution of profits of a company that is voluntary closing down is dividends
- Dividends received by a resident company are not considered to be income
(taxable) unless the company receiving such dividend controls less than 12.5% of
the shares of the paying company.
- Debentures and preference shears that are redeemable are dividends when issued
to the shareholders without any payment.
- Dividends paid by corporative societies are not qualifying dividends except
dividends paid by a savings and credit cooperative society
B. Interest Income
This is a payment received by a person from another person for money lent. Money
can be lent in the form of loan deposit in the bank or debt. Interest also includes any
premium or discount received by way of interest.

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a) Qualifying interest income
This is interest income received by individuals. It’s taxed at the point of payment
hence not taxable again.
NB: Qualifying interest income only relates to individuals
Qualifying interest for building society is restricted to Ksh.300, 000 p.a. any amount
above that is added back when getting total taxable income.
Illustration
Calculate the taxable income for Mr. Weunda for the year of income 2017
o He owns shares in Unga Ltd. And has received dividend of 5, 000
o He earned interest of 3, 000
o He owns a house which he has let out from 1st April to 31stDecember at 5, 000 p.m.
o He paid 4,000 for his daughters’ school fees.
o His employment income was 15,000 p.m.
o He paid 10% of gross rent as rent collection fees
Solution
Income
o Salary (5,000x12) 180, 000
o Rent (5,000x9) 45, 000
o Rent collection fees (4, 500) (40,500)
Taxable Pay 220,500
6.8. Miscellaneous Taxes and other Revenues
6.8.1. Stamp Duty

Stamp duty is tax levied on various transactions such as transfer of properties, shares
and stocks. It is collected by the Ministry of Lands, which has seconded the function

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to Kenya Revenue Authority (KRA). KRA in turn contracts commercial banks to
collect the money at a commission.
The instruments that are required to be stamped include:
1. Lease/Transfer
3. Charge/Discharge
4. Mortgage/Re-conveyance of mortgage
7. Insurance policy
8. Debenture; and
9. Memorandum and Articles of Association
Stamp duty is major revenue earner for the government, regulated by Stamp Duty Act
(Chapter 480 Laws of Kenya). Stamp Duty rates are shown below:
Activity Stamp duty rate
Transfer of immovable property:
Urban 4%
Rural 2%
Creation or increase of share capital 1%
Registration of a company (nominal share capital) 0%
Transfer of unquoted shares or marketable securities 1%
Transfer of quoted shares of marketable securities Exempt
Registration of a debenture or mortgage:
Collateral security 0.05%
Supplemental security KES 20 per counter part
Lease:

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Activity Stamp duty rate
Period of three years and under 1% of annual rent
Period over three years 2% of annual rent
6.8.2. Catering Levy

Catering Training and Tourism Development Levy” means the levy imposed under
section 16 of The Hotels and Restaurants Act, (Chapter 494 Laws of Kenya)
The Levy is paid by Hotel and Restaurant owners at the rate 2 % of the gross receipts
derived from the sale of food and drinks and in the case of a hotel, the provision of
accommodation and other services supplied during each month.
6.8.3. Motor Vehicle Advance Tax

Section 12A of the Income Tax Act (Cap 470) was introduced by the Finance Act. 1995,
and came into force with effect from 1st January 1996. It provided for the payment of
a tax “to be known as Advance Tax”, in respect of commercial vehicles that are
licensed to operate on Kenyan roads.
Third schedule prescribes the rate of advance tax under section 12A as follows:
a) For vans, pick-ups, trucks, prime movers, trailers and lorries: Kshs. 1,500 per
ton per year or Kshs. 2,400 per year, whichever is the higher;
b) For saloons, station-wagons, mini-buses, buses and coaches: Kshs. 60 per
passenger capacity per month or Kshs. 2,400 per year, whichever is the higher.
NB: Tractors or trailers used for agricultural purposes are Exempt
6.8.4. Capital Gains Tax (CGT)

Introduction
CGT Was re-introduced by Finance Act of 2014 after 30 years, since its suspended-on
13 June 1985. It amended the Eighth Schedule of the Income Tax Act (Cap. 470 Laws

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of Kenya), providing for tax on gains accruing to a company or an individual on the
transfer of property situated in Kenya effective 1st January 2015.
The amendment also introduced the taxation of gains in the extractive industry i.e., a
firm acquiring more than a 50% stake in a “mineral block” will pay the capital gains
tax on the net gain of the transaction after deducting certain attendant costs while one
having lesser stake shall use a specified formula to calculate the taxable amount.
What is Capital Gains Tax?
CGT is a tax chargeable on 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 the property was acquired before 1st January 2015 or not.
The rate of tax is 5% of the NET GAIN. It is a final tax and cannot be offset against
other income taxes.
Definitions
1. What is property? Property is to include land, buildings and marketable securities
(traded off the exchange).
2. Who is liable to pay the tax? The tax is to be paid by the person (resident or non-
resident) transferring the property, that is, the transferor. The transferor can either
be an individual or a corporate body.
3. What constitutes a transfer? A transfer takes place: -
1) Where a property is sold, exchanged, conveyed or disposed of in any
manner (including by way of gift); or
2) On loss, destruction or extinction of property whether compensation is
received or not; or
3) On the abandonment, surrender, cancellation or forfeiture of, or the
expiration of rights to property

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Determination of Net Gain
The net gain is the excess of the transfer value over the adjusted cost of the property that
has been transferred. It is this excess that is subjected to tax at 5%.
The Transfer value of the property is the amount or value of consideration or
compensation for transfer of the property, less incidental costs on such transfer.
The Adjusted cost is the sum of the cost of acquisition or construction of the property;
expenditure for enhancement of value and/or preservation of the property; cost of
defending title or right over property, if any; and the incidental costs of acquiring the
property.
The adjusted cost can be reduced by any amounts that have been previously allowed
as deductions under Section 15(2) of the Income Tax Act.
Notes:
(a) Where there is concern of related party transactions, the Commissioner will
make necessary adjustments and/or revaluation to determine the market price
(b) This is a transaction-based tax and should therefore be paid upon transfer of
property but not later than the 20th day of the month following that in which
the transfer was made.
(c) When a loss is made, the loss may be carried forward to be offset/deducted
against a gain of a similar nature (that is, a capital gain) at a future date.
Exemptions from Capital Gains Tax
Transfer of property in the following circumstances do not constitute a transfer for
purposes of CGT:
(a) In the case of the transfer of property for the purpose only of securing a debt or
a loan, or on any transfer by a creditor for the purpose only of returning
property used as security for a debt or a loan;

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(b) In the case of the issuance by a company of its own shares or debentures;
(c) By the vesting in the personal representative of a deceased person by operation
of law of the property of that deceased person;
(d) By the transfer by a personal representative of any property to a person as
legatee in the course of the administration of the estate of a deceased person.
(e) Taking under a devise or other testamentary disposition or on an intestacy or
partial intestacy whether he takes beneficially or as a trustee;
(f) By the vesting in the liquidator by an order of a court of the property of a
company under section 240 of the Companies Act (Cap. 486);
(g) By the vesting in the official receiver or other trustee in bankruptcy of the
property of a bankrupt under section 57 of the Bankruptcy Act (Cap. 53);
(h) By the transfer by a trustee of property, which is shown to the satisfaction of
the Commissioner to be subject to a trust, to a beneficiary on his becoming
absolutely entitled thereto;
(i) By the transfer of assets: -
(1) Between spouses;
(2) Between former spouses as part of a divorce settlement or a bona fide
separation agreement;
(3) To immediate family;
(4) To immediate family as part of a divorce or bona fide separation agreement;
or
(5) To a company where spouses or a spouse and immediate family hold 100%
shareholding;
NB: “legatee” includes a person and "immediate family" means
children of the spouses or former spouses.

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Treatment of Extractive Industry
The net gains on disposal of interest in a person owning immovable property in the
mining and petroleum industry is taxable. The applicable rate of tax is 30% for
residents and 37.5% for non-residents with permanent establishments.
The taxable gain is the net gain derived on the disposal of an interest in a person, if
the interest derives its value from immovable property in Kenya.
Immovable property means a mining right, an interest in a petroleum agreement,
mining information or petroleum information.

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Chapter Seven: Capital Deductions
Table of Contents
Chapter Seven
7 CAPITAL DEDUCTIONS ........................................................................................... 2
7.1. RATIONALE FOR CAPITAL DEDUCTIONS ............................................................... 2
7.2. INVESTMENT DEDUCTIONS: ORDINARY MANUFACTURERS ................................ 3
7.3. INDUSTRIAL BUILDING DEDUCTIONS ................................................................. 10
7.4. WEAR AND TEAR ALLOWANCES ........................................................................... 14
7.5. FARM WORKS DEDUCTIONS ................................................................................. 21
7.6. SHIPPING INVESTMENT DEDUCTION ................................................................... 24
7.7. OTHER DEDUCTIONS............................................................................................. 26

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7 CAPITAL DEDUCTIONS
7.1. Rationale for Capital Deductions

Introduction
Capital allowances are akin to a tax-deductible expense. A capital deduction is an
incentive given to investors on capital expenditure incurred on Industrial buildings
and machinery used to produce income. In the case of machinery, capital deductions
are given in respect to wear and tear and in respect to capital expenditure in the case
of Industrial and Hotel buildings
The area of capital allowances is complex; there is no approved list of qualifying items
of expenditure for capital allowances purposes. Entitlement must be established, and
qualifying expenditure must be properly identified by reference to the facts.
Taxpayers must also satisfy several conditions established primarily through case law
and Revenue precedence.
According to the Income Tax Act (Cap. 470. Laws of Kenya), Capital
allowances/deductions are allowances granted to tax payers in respect of capital
expenditures incurred by such persons in the production of taxable income. They are
an example of tax incentives. As a business, you can claim tax allowances called capital
allowances, on certain capital purchases or investments. This means you can deduct a
proportion of these costs from your taxable profits and reduce your tax bill.
Capital Allowances are granted for tax purposes in lieu of depreciation. Examples of
capital allowances/deductions are: Wear and tear allowance; industrial building
allowance; Farm works allowances; Investment deduction; Shipping investment deduction;
Mining allowances, allowance on Telecommunication equipment, allowances on Computer
software et al
Objectives
Capital deductions are granted for the following reasons: -

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1) As a compensation for loss of capital value of an asset repeatedly used in a
business. The loss of value may be caused by wearing out of an asset due to
friction, corrosion and rusting, or obsolescence (change of fashion /technology)
2) To encourage development of industries e.g. manufacturing, tourism,
exportation (through EPZ) etc. They offer incentives to investors who would
invest in capital items such as industrial buildings and industrial machinery.
3) As an incentive to encourage the development of industries outside the main
urban centers of Nairobi and Mombasa.
4) They standardize losses in capital items for income tax purpose. The
depreciation and similar charges are not allowable expenses against taxable
income since they are not objective.
7.2. Investment Deductions: Ordinary Manufacturers
Introduction
Investment deduction (ID) was introduced in 1962 to encourage new industrial
enterprises in East Africa by giving additional deductions. This deduction is an
allowance to an investor who incurs capital expenditure on industrial building and
machinery used for manufacturing. ID is covered under section 24 of the second
schedule of the Income Tax Act (Cap. 470 Laws of Kenya)
Definitions
Building: This includes any building structure and where the building is used for
purposes of manufacture it includes the civil works and structures
deemed to be part of an industrial building
Installation: This means affixing to the fabric of a building in a manner necessary for
and appropriate to the proper operation of the machinery
New: This means not having previously been used by any person, or acquired
or held other than by a supplier in the normal course of trade

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Machinery: This means machinery and equipment used directly in the process of
manufacture, and includes machinery and equipment used for the
following ancillary purposes –
i. Generation, transformation and distribution of electricity;
ii. Cleanups and disposal of effluents and other waste products;
iii. Reduction of environmental damage;
iv. Water supply or disposal; and
v. Workshop machinery for the maintenance of the machinery.
Manufacture: This means the making (including packaging) of goods or materials from
raw or partly manufactured materials or other goods, or the generation
of electrical energy for supply to the national grid but does not extend
to any activities which are ancillary to manufacture, such as design,
storage, transport or administration;
Normal Investment Deduction

The qualifying Cost as per the second schedule is on the cost of: -
(a) Construction of a building and on the purchase and installation of new
machinery, and use of that machinery in that building for the purposes of
manufacture; or
(b) Purchase & installation of new machinery in a part of a building other than a
building or part previously used for the purposes of manufacture, and: -
i) The owner of the new machinery subsequently uses that machinery in that
building for the purposes of manufacture; and
ii) The machinery has not been installed substantially in replacement of
machinery previously in use in an existing business carried on by the
owner of that new machinery;
(c) Construction of a hotel building, which is certified as an industrial building;
(d) Construction of a building or purchase and installation of machinery outside
the City of Nairobi or the Municipalities of Mombasa or Kisumu

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The value of the investment must be more than 200 Million shillings;
(e) Purchase of filming equipment by a local film producer licensed by the
Minister responsible for matters relating to communication,
Investment Allowance (once only at a given percentage) in respect of qualifying Cost of
capital expenditure is administered as follows: -
(a) Hotel sector on the buildings, which are certified as Industrial Building under
the Act; 100%;
(b) Ordinary manufacturing sector on both machinery and buildings; 100%;
(c) Capital Equipment purchased and used by a local film producer; 100%.
(d) Investment in construction of a building or purchase of machinery whether
used for purposes of manufacture or not within satellite towns around major
cities of Nairobi, Mombasa and Kisumu; 150%.
Examples of assets that qualify for ID include, New factory plant & machinery;
Generators; Transformers; Water pumps; Water tanks; Extension to factory building; Parking
areas; Drainage systems; Recycling machines; Perimeter walls & security wall; Air condition
systems, sewerage systems; Conveyer belts affixed to the fabric if not fixed grants; and
Workshop machinery to maintain other machinery
NOTES:
- The deduction is NOT made in the year in which the capital expenditure is
incurred but in the year of income in which the asset is FIRST USED.
- Where, the building is used partly for the purposes of manufacture and partly
for other purposes, the capital expenditure for ID purposes shall be the
apportioned amount; but where the capital expenditure so attributable exceeds
nine-tenths (90%) of the total capital expenditure incurred on the construction
of the building the whole building shall be treated as used for purposes of
manufacture;

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- Where an existing building is extended by further construction, the extension
shall be treated as a separate building for ID purposes;
- Capital expenditure incurred on the construction of a building does not include
capital expenditure on the acquisition of, or of rights in or over, any land;
Sale of an Industrial Building Prior to Use
Where capital expenditure is incurred on the construction of a building and before
that building is used, it is sold: -
a) Expenditure incurred on the construction shall not qualify for the purposes of ID
in the books of the seller; but
b) The purchaser shall be deemed to have incurred capital expenditure on the
construction. In which case, qualifying cost shall be the lower of Cost incurred on
construction of the building or Amount paid But If the building is sold more than
once before it is used, then the qualifying cost shall be the lower of Cost incurred
on the construction of the building or last purchase price
NB: Please note that IBD & WTD are calculated on the residue value after granting ID
Rates
The amount of investment deduction shall be equal to the percentage of the capital
expenditure applicable in accordance with the following table: -
Commencement Date Outside NBO & MBA Within NBO & MBA
1st January 1988 60% 10%
1st January 1989 75% 25%
1st January 1990 85% 35%
1st January 1995 60% 60%
1st July 2000 100% 100%
1st January 2002 85% 85%
1st January 2003 70% 70%
1st January 2004 100% 100%

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1st January 2005 100% 100%
1st January 2006 100% 100%
1st January 2007 100% 100%
1st January 2008 100% 100%
Manufacturing Under Bond [MUB] Investment Deduction

This is a capital deduction due to those who manufacture under bond on capital
expenditure. Manufacturing under bond as per EACCMA, 2004 means, a facility
extended to manufacturers to import plant, machinery, equipment and raw materials
tax free, for exclusive use in the manufacture of goods for export.
Qualifying Cost On or after 1st January 1996
Cost of the purchase and installation of machinery to be used for the purposes of
manufacture under bond
Investment Allowance (given once) in respect of qualifying Cost of capital expenditure
incurred by a business that operates in the Manufacture under bond sector on both
machinery and buildings (Nairobi, Mombasa, Kisumu, Thika, Nakuru, Nyeri or within the
immediate environs of these towns); 100%.
Rates
The amount of investment deduction shall be equal to the percentage of the capital
expenditure applicable in accordance with the following table: -
Commencement Date Outside NBO & MBA Within NBO & MBA
1st January 1988 40% 90%
1st January 1989 25% 75%
1st January 1990 15% 65%
1st January 1995 40% 40%
1st July 2000 Nil Nil
1st January 2002 15% 15%
1st January 2003 30% 30%

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1st January 2004 40% 40%
1st January 2005 Nil Nil
NOTES:
- Please note that this deduction (MUB) is given in addition to ID normal
- If the manufacture under bond ceases within three (3) years then, the amount
of deduction so far awarded shall be treated as a trading receipt. However,
WTD & IBD is granted for the years he has operated
- Capital expenditure incurred in the construction of a building does not include
expenditure incurred on the acquisition of, or of rights in or over, land;
- "Building", "installation", and "new" shall have the meaning ascribed to those
words in ID normal.
Illustration
Gai Ltd. constructed a building on which they installed new machinery for the
manufacture of spoons for exports in Nairobi. The costs were as follows: -
1. Building Kshs. 15Milion
2. Machinery Kshs. 10Million
They commenced manufacturing on 1st January 1997 then stopped manufacturing
under bond on 1st January 1999.
Required:
Compute the capital allowances for the years 1997, 1998, and 1999
Solution
Investment deduction computation
Year Cost ID @60% MUB @40% Value C/d
1997 Kshs. 25Milion Kshs. 15Milion Kshs. 10Milion -

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1998 Kshs. 25Milion - - -
1999 Kshs. 25Milion - - -
Computation of IBD on building
Year Q. cost R.v b/f IBD @2.5% Residue Value
1997 6, 000,000 - 150, 000 5, 850,000
1998 6, 000,000 5, 850,000 150, 000 5, 700,000
1999 6, 000,000 5, 700,000 150, 000 5, 550,000
Computation of WTD on machinery
Year Q. cost R.v b/f WTD @12.5% Residue Value
1997 4, 000,000 - 500, 000 3, 500,000
1998 4, 000,000 3, 500,000 437, 500 3, 062,500
1999 4, 000,000 3, 062,500 382, 813 2, 679,688
Trading receipt 10, 000,000
Less: WTD & IBD (1, 237,500)
Taxable trading receipt 8, 762,500
Export Processing Zones [EPZ] Investment Deduction

EPZ arrangements are government projects for export promotion; however, the
manufacturer writes a bond to cover the goods under manufacturer.
Qualifying Cost On or after 1st January 1992
Capital expenditure incurred on the construction of a building or on the purchase
and installation of machinery for carrying out the business activities for which that
enterprise was licensed as an export processing
Investment Allowance (given once) in respect of qualifying Cost of capital expenditure
is administered at a rate of 100%.
NOTES: ID doesn’t include cost of acquisition of, or of rights in or over, land.

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7.3. Industrial Building Deductions
Introduction
Industrial Building Deduction (IBD) is a capital allowance given where a person
incurs capital expenditure on the construction of an industrial building to be used in
a business carried on by him or his lessee. IBD is covered under section 1 of the second
schedule of the Income Tax Act (Cap. 470 Laws of Kenya)
Definition
What is an Industrial Building?
An industrial building for the purposes of IBD is defined as: -
a) A building in use –
a. For the purposes of a business carried on in a mill, factory or other
similar premises; or
b. For the purposes of a transport, dock, bridge, tunnel, inland navigation,
water, electricity or hydraulic power undertaking; or
c. For the purposes of a business which consists of manufacture of goods
or materials or the subjection of goods or materials to any process; or
d. For the purposes of storage of goods or materials -
i. Which are to be used in the manufacture or other goods or
materials (Raw materials); or
ii. Which are to be subjected, during a business, to any process
(Semi-finished products); or
iii. Which, having been manufactured or produced or subjected, to
any process, have not yet been delivered to any purchaser
(Finished products); or
iv. On their arrival by sea or air into any part of Kenya (Imported
products); or

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e. For a business consisting of ploughing or cultivating agricultural land
or doing any other operation on the land, or threshing the crops of
another person; or
f. For the purposes of a business which may be declared by the CS by
notice in the Gazette;
b) A dwelling house constructed for and occupied by employees of a business;
c) A building which is in use as a hotel or part of a hotel and which the
Commissioner has certified to be an industrial building. A hotel building
includes any building directly related to the operations of the hotel contained
within the grounds of the hotel complex, including staff quarters, kitchens, and
entertainment and sporting facilities;
d) A building used for the welfare of workers employed in the premises.
e) A hostel or an educational building certified by the Commissioner (2007).
f) A building in use as a rental residential building where such building is
constructed in a planned development area approved by the Minister for the
time being responsible for matters relating to housing; (2010)
Qualifying Cost
a) Cost of the Building
b) The following civil works or structures on the premises of the building shall be
deemed to be part of the building where they relate or contribute to the use of
the building -
a. Roads and parking areas;
b. Railway lines and related structures,
c. Water, industrial effluent and sewage works;
d. Communications and electrical posts and pylons and other electricity
supply works;
e. Security walls and fencing.

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Construction of an industrial building includes the expansion or substantial
renovation or rehabilitation of an industrial building, (but does not include routine
maintenance or repair.) Hence is treated as a separate building for IBD computation. But
where: -
(a) Where the building was used for only part of that year of income, the deduction
shall be proportionately reduced;
(b) Where the building is sold, and continues to be an industrial building used by the
purchaser or his lessee, the purchaser continues to get the same deduction;
(c) Where the building also qualifies for investment deduction then the qualifying
amount shall be the net amount after such investment deduction is given.
Non-Qualifying Parts of a Building
- Cost of retail shop
- Cost of showroom
- Cost of office
- Cost of dwelling-house
Where the above costs are not more than one-tenth (10%) of the total capital
expenditure which has been incurred on the construction of the building, the whole
building shall be treated as an industrial building, hence qualify for IBD.
Non-Qualifying Expenditure
- Cost of land (which includes stamp duty and legal fees), or of rights in or over land
- Cost of machinery or on an asset which has been treated as machinery.
Sale of An Industrial Building Prior To Use
Where capital expenditure is incurred on the construction of a building and before
that building is used, it is sold: -
a) Expenditure incurred on the construction shall not qualify for the purposes of
IBD to the seller; but

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b) The purchaser shall be deemed to have incurred capital expenditure on the
construction. In which case, qualifying cost shall be the lower of Cost incurred
on construction of the building or Amount paid by him
Where the building is sold more than once before it is used, then the qualifying cost
shall be the lower of Cost incurred on the construction of the building or last purchase
price
However, if a building is sold by a person who carries on business as a builder, and
the sale made in the course if his trade, then the qualifying cost shall be that amount
paid to the builder. While, where sale is made by such a builder but changes hands
more than once before its put into use then the qualifying cost shall be the lower of
Price paid to the builder or Amount paid by the person who puts the building into
first use.
Rates
Industrial Building Allowance is provided for (on straight line) in respect of capital
expenditure on:
(a) Educational Buildings, Hostels and Training facilities: - 50% w.e.f. 1st January
2010. (2 Years)
(b) Other Industrial Buildings - 10% w.e.f 1st January 2010. (10 Years)
(c) Straight-line deduction of the expenditure on machinery and structures such
as roads, bridges and similar infrastructure over the concession period (e.g. Rift
Valley Railways).
(d) Commercial buildings where the cost of roads, sewage, power and social
infrastructure are borne by the Investor; 25% W.e.f 1st January 2010. (4 Years)
The table below compares the above rates against the current rates:
Industrial building allowances: Current Rates
Factories - (2.5% up to 2009) 10% from 1st January 2010

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Prescribed hotels - (up to 2006 was 4%) 10% from 1st January 2010
Prescribed low-cost residential housing developments 5% from 1st January 2008
Approved educational building - (10% from 2007) 50% from 1st January 2010
Commercial Buildings 10% up to 31st December 2012
Commercial Buildings with services 25% up to 31 December 2012
Residential Buildings with services 25% from 1st January 2010
NOTES: For any year of income during which a taxpayer owned and used the
building only for part of the year, IBD is apportioned.
7.4. Wear and Tear Allowances
Introduction
Wear and Tear Deduction (WTD) is granted as a compensation for loss of value of
fixed assets repeatedly used in a business. It is granted instead of depreciation, which
is considered arbitrary. For this purpose, the income tax authority seeks to standardize
the charge in respect of losses in capital items by granting uniform capital allowances
in respect of capital expenditures.
Any capital expenditure loss, diminution, exhaustion of capital such as depreciation,
amortization, loss on sale of fixed assets, obsolescence, provision for replacement of an asset
are not allowable expenditures against income.
However, the Income Tax Act (Cap. 470 Laws of Kenya) recognizes the loss of value
of assets used in business through usage, passage of time or obsolescence and so the
second schedule grants the wear tear allowance.
WTD is allowed on a reducing balance basis and is granted for the whole year
irrespective of when the asset was bought provided the business traded for the whole
year.

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Classification
For WTD, machineries are put into distinct pools/classes/categories. Each of the pools
is granted wear and tear on a given percentage. The categories are: -
Class I (37.5%) This is a class for heavy earth moving equipment and heavy self-
propelling (Producing own power to move) machineries or
equipment
Examples include: - Tractors, Combined Harvesters, Lorries of Load Capacity Of 3 Tons and
Over, Tippers, Buses, Loaders, Graders, Bulldozers, Mobile Cranes, Minibus, Trailer Engine
Heads, Trucks, Mobile Cranes, Jumbo Jets, Caterpillars Etc.
Class II (30%) This is a class for electronic office machineries and equipment
bought on or after 1st January 1992
Examples include: - Computers, Printers, Electronic Calculators, Electronic Tax Registers,
Adding Machines, Photocopiers, Duplicating Machines, Electronic Type Writers, Photo
Scanners, Peripheral Computer Equipment Etc.
Class III (25%) This is a class for light self-propelling machineries
Examples include: - Saloon Cars, Aircrafts, Pick-Ups, Motor Cycles, Lorries of Less Than 3
Tons Load Capacity, Helicopters, Vans Etc.
Class IV (12.5%) This is a class for all other machinery or equipment necessary for
the proper operation of the business
Examples include: - Factory Plant And Machinery, Ships, Furniture, Fixtures And Fittings,
Bicycles, Partitions (Temporary Or Movable), Carpets, Office Cabinets, Curtains, Shop
Counters And Shelves, Safes, Manual Typewriters, Fax Machines, Televisions, Shredders,
Ploughs, Milking Machines, Train Coaches, Conveyor Belts, Lawn Mowers, Wheel Barrows,
Lifts, Elevators, Water Pumps, Carts, Cash Registers Sign Boards, Fridges, Freezers, Phones
(Mobile And Landline), Advertisement, Billboards, Stands, Escalators, CCTVs, Etc.

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For telecommunication equipment purchased and used by a telecommunication
operator, other than machinery specified in class IV above, the amount of wear and
tear for a year of income shall be 20% of the amount of expenditure incurred.
Computer soft wares are allowed on a straight line at 20% on the amount of
expenditure incurred.
Purchase or acquisition of an indefeasible right to use a fiber optic cable by a
telecommunication operator, 20%
Qualifying Cost
The qualifying cost for wear and tear in each class is computed as follows:
a) Historical cost or purchase price on the first year. While for thee subsequent
years, the NBV.
b) Other incidental costs incurred before the machinery is brought into use i.e.
installation and transport charges
c) If an asset is acquired without any payment or consideration, then the fair
market value is acceptable
d) If the asset acquired is traded in, then the value of the asset traded in plus any
additional amount paid
e) For hire purchase transactions, the cash price is considered while the H.P
interest is expensed
f) For machinery that also gets investment deduction, then the amount after
investment deduction shall be considered
g) Where the machinery is sold at a price other than that which it would have
fetched if sold in the open market, then, the open market value is considered.
(Non-arm length transactions)
NOTES: Qualifying cost = [WDV b/d at the beginning of the year + additional
machinery during the year (at cost) - disposals during the year.]

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Class I Class II Class III Class IV
Balance B/F x x x x
Additions x x x x
Disposal (proceeds) (x) (x) (x) (x)
Qualifying cost xx xx xx xx
WTD (x) (x) (x) (x)
Balance C/F xx xx xx xx
Expenditure on Private Vehicles

Capital expenditure on vehicles other than a commercial vehicle, are restricted as
shown below: -
On or after the 1st January 1961, Kshs. 30,000
On or after the 1st January 1998, Kshs. 1,000,000
On or after the 1st January 2006, Kshs. 2,000,000
NB: Where the vehicle is sold, the sale, price shall be restricted if the cost was
restricted.
Restricted Amount X Selling Price
Cost price
Application to Lessors
Where machinery is let upon terms that the burden of the wear and tear falls directly
upon the lessor, WTD shall apply in relation to him as if the machinery were, during
the period of the letting, in use for the purposes of a business carried on by him.
Disposal Value
(a) Sales proceeds

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(b) For traded in, then the value of the asset traded in.
(c) Where an asset is destroyed, the insurance claim is taken.
(d) For non-commercial vehicles, whose value is over 2M, restrict the sales proceeds
NOTES:
- If the business has run for the whole year, WTD is given in full for assets in the
business at the end of the year irrespective of the date of acquisition or use.
- If the business has run for less than 12months WTD is apportioned.
- Where asset is used both for business carried on by him and for personal use,
then WTD is apportioned.
- Where business changes hand, by shares, the written down value left by the
previous owner is inherited.
- Where business changes hands by purchase of Assets, market value of the
assets shall be used for WTD purposes
Profit or Loss on Disposal of Assets
A. Continuing Business
(a) If assets are sold for a higher value than the WDV the gain thereof is known as
a Trading Receipt and is taxable.
(b) If assets are sold for a value less than the WDV the loss thereof is known as a
Trading loss and is allowable for taxation purposes.
B. Non-Continuing Business
(a) If assets are sold for a higher value than the WDV the gain thereof is known as
a Balancing Charge and is taxable.
(b) If assets are sold for a value less than the WDV the loss thereof is known as a
Balancing Deduction and is allowable for taxation purposes.
Illustration
Babu Ltd. incurred the following costs prior to commencement of manufacturing: -

Page 185
Item Kshs
Purchase of land 5 Million
Construction of industrial building 2 Million
Production machinery 1.5 Million
Transportation of machinery to site 0.5 Million
Two Lorries of 10 tones each 2 Million
Furniture 0.2 Million
Computers 0.07 Million
They commenced manufacturing on 1st January 2015
The industrial building includes an ultra-modern office costing Kshs. 150,000
Required:
Calculate the capital allowances for the year of income ended 31st December 2015
Solution
Computation of WTD
Item I @37.5% II @30% III @25% IV @12.5%
Balance b/f as at January 2014 - - - -
Two Lorries 2,000,000 - - -
Computers - 70,000 - -
Production machinery - - - 2,000,000
Furniture - - - 200,000
Total 2,000,000 70,000 - 2,200,000
WTD for the year 2014 (750,000) (21,000) - (275,000)
WDV Balance C/f to 2015 1, 250,000 49,000 - 1,925,000
WTD for the year 2015 (468,750) (14,700) - (240,625)
WDV Balance C/f to 2017 781, 250 34, 300 - 1, 684,375

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Computation of IBD
Item Cost IBD @10% Residue Value
Industrial building 2,000,000 200, 000 1, 800,000
Total Capital deductions
WTD 1, 046,000
IBD 200,000
Total 1,246,000
Illustration
Mr. Ekale purchased the following items on 1st January 2001
Item Kshs
Tractor 1 Million
Lorry over 3 tones 2 Million
Saloon car 2 Million
Computer 0.4 Million
Plant & machinery 2 Million
They disposed the saloon car for Kshs. 800, 000 in the year.
Required:
Compute WTD for the year ended 31st December 2001.
Solution
Computation of WTD
Item I @37.5% II @30% III @25% IV @12.5%
WDV Balance B/F January 2001 - - - -
Tractor 1,000,000 - - -
Lorry 2,000,000 - - -
Saloon car - - 1,000,000 -
Computer - 400,000 - -

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Plant & machinery - - - 2,000,000
Total 3, 000,000 400, 000 1, 000,000 2, 000,000
Disposals
Saloon car - - (400,000)* -
WDV 3, 000,000 400, 000 600, 000 2, 000,000
WTD for the year 2001 (1,125,000) (120,000) (150, 000) (250,000)
WDV Balance C/F to 2002 1,875,000 280,000 450,000 1,750,000
*Disposal value for WTD = Restricted Amount X Selling Price
Cost price
1,000,000 X 800,000
2,000,000 = Kshs. 400,000
7.5. Farm Works Deductions
Introduction
Farm Works Deductions (FWD) is a capital allowance granted to a farmer who incurs
capital expenditure on the construction of farm works. FWD is covered under
Paragraphs 22 and 23 of the second schedule of the Income Tax Act (Cap. 470 Laws of
Kenya). It is granted to encourage capital expenditure in agriculture sector
Definitions
“Agricultural land” means land occupied wholly or mainly for the purposes of a
trade of husbandry;
“Farm works” means farmhouses, labour quarters, and any other immovable
buildings necessary for the proper operation of the farm, fences,
dips, drains, water and electricity supply works other than
machinery, windbreaks, and other works necessary for the
proper operation of the farm.

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"Husbandry" This is not defined in the Act but as per case laws it means all
farming/agricultural activities on agricultural land;
Qualifying Cost
Capital expenditure in incurred on: -
(a) Farmhouse, one-third (1/3) of the only expenditure on one house qualifies.
(b) Employee houses.
(c) Assets other than a farmhouse, being an asset, which is to serve partly the purpose
of husbandry and partly other purposes, then apportion.
Non-Qualifying Cost
- Cost of clearing the land and planting permanent & semi-permanent crops
- Plant and machinery, as they are granted WTD
- Cost of prevention of soil erosion
NOTES:
- If the owner transfers land in the year of income, then such deductions will be
apportioned between the new and the old owner usually on time basis.
- If an incoming tenant makes any payment to the outgoing tenant, then its
considered to be a transfer of tenancy and the incoming tenant is entitled to the
whole deduction in that year of income.
Rates
Farm Works Allowance is calculated (on straight line basis) in respect of capital
expenditure incurred on a farm at the rate of 100% W.e.f 1st January 2011. Previous
rates were as follows: -
Period Rate
Up to 1984 20% for five (5) years
From 1st January 1985 to 31st December 2006 30% for three (3) years

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From 1st January 2007 to 31st December 2010 50% for two (2) years
From 1st January 2011 to date 100% for One (1) year
Illustration
Ms. Jeruto incurred the following costs in 2010 for her husbandry business.
Item Kshs
Cattle dip 750,000
Fence 600,000
Gabions 300,000
Farm house 1,500,000
Generator 500,000
Tractor 1,000,000
Combined harvester 2,000,000
Labour quarters 90,000
Required:
Calculate capital deductions for the year ended 31st December 2010 and 31st December
2011
Solution
FWD computation
Year Cost Value B/F FWD (@ 50% or 100%) Value C/F
2010 (w1) 1,940,000 1, 940,000 970,000 970, 000
2007 (w1) 1,940,000 970,000 970,000 Nil
Working 1: Qualifying Cost for FWD
Cattle dip 750, 000
Fence 600, 000
Farm house * 500, 000
Labour quarters 90, 000

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1,940,000
*Farm house (⅓ x 1,500,000) = 500, 000
7.6. Shipping Investment Deduction
Introduction
Shipping Investment Deduction (SID) is granted where a resident person carrying on
the business of a ship-owner. SID is covered under Paragraph 25 of the second
schedule of the Income Tax Act (Cap. 470 Laws of Kenya).
Qualifying Cost
It is granted on the following capital expenditure: -
a) On the purchase of a new and hitherto unused power-driven ship of more than
495 tons gross; or
b) On the purchase, and subsequent refitting for the purposes of that business, of a
used power-driven ship of more than 495 tons,
Rates
Shipping investment deduction is allowed ONCE at a rate of 40% of cost of ship
NOTES:
- Not more than one shipping investment deduction shall be allowed in respect
of the same ship;
- A ship in respect of which a shipping investment deduction has been given, is
sold within a period of five (5) years from the end of the year of income in which
the deduction was given, the deduction shall be withdrawn and treated as
income of the vendor for the year of income in which the sale takes place.
However, Compensation by way of wear and tear allowance will be granted.

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Illustration
Mr. Mulindi acquired a new ship of more than 495Tonnes on 1st January 2000 at a cost
of Kshs. 3.2 Million. It was sold in the year 2003 for Kshs. 3 Million.
Required:
Calculate the capital allowances for the year ended 31st December 2000, 31st December
2001, 31st December 2002 & 31st December 2003
Solution
Computation of SID
Awarded in the first year (40% of Kshs. 3.2 Million) = Kshs. 1,280,000
Computation of WTD
Year Q. cost Residue Value B/F WTD @12.5% Residue Value
2000 1,920,000 - 240,000 1,680,000
2001 1,920,000 1,680,000 210,000 1,470,000
2002 1,920,000 1,470,000 183,750 1,286,250
2003 1,920,000 - - -
Computation of WTD for Withdrawn Amount
WTD for the year 2003
Value Withdrawn 1,280,000
WTD for the year 2000 (160,000)
WDV Balance C/F to 2001 1,120,000
WDV Balance C/F to 2002 980,000
Residue Value 857,500
Income 1,820,000
Less: WTD (422,500)
Taxable trading receipt 857,500

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7.7. Other Deductions

A. Diminution in Value of Loose Tools
Introduction
Section 15(2)(g) the Income Tax Act (Cap. 470. Laws of Kenya), provide that, the
amount considered by the Commissioner to be just and reasonable as representing the
diminution in value of any implement, utensil or similar article, not being machinery or
plant in respect of which a deduction may be made under the Second Schedule, employed in the
production of gains or profits shall be an allowable deduction.
Diminution allows decrease in value of loose tools and implements that do not qualify
for wear and tear as an allowable expense against taxable income.
Qualifying Cost
One of the main features of loose tools and implements is that they are usually
susceptible to loss and breakage however; the definition of loose tools and implements
depends on the nature of the business i.e.
a) In a farm engaged in agriculture, which is also claiming formworks deduction,
loose tools include pangas, slashers, rakes, forks, shears etc.
b) In a workshop where vehicles and machinery are repaired loose tools include
spinners, screwdrivers, bolts, nuts, clamps, mallet and hammers
c) In a hotel building loose tools include a kettle, utensils, cutlery, crockery etc.
Rate
The rate for computation in diminution in value is 33⅓ % p.a on a straight-line basis.
The qualifying cost is written off over a period of three years.
B. Other Deductions
- Expenditure of a capital nature on scientific research;

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- Expenditure of a capital nature incurred by owner or occupier of farm land for
prevention of soil erosion;
- Expenditure of a capital nature incurred by a person on legal costs and stamp
duties in connection with the acquisition of a lease, for a period not in excess of,
or expressly capable of extension beyond, ninety-nine years;
- Expenditure of a capital nature incurred by owner or tenant of agricultural land,
on clearing that land, or on clearing and planting thereon permanent or semi-
permanent crops;
- Expenditure of a capital nature incurred by a person on legal costs and other
incidental expenses relating to the authorization and issue of shares, debentures
or similar securities offered for purchase by the public;
- Expenditure of a capital nature incurred by a person, on legal costs and other
incidental expenses, for the purposes of listing on any securities exchange
operating in Kenya, without raising additional capital.
- Expenditure of a capital nature incurred by a person on rating for the purposes
of listing on any securities exchange operating in Kenya;
- Expenditure of a capital nature incurred, with the prior approval of the
Minister, by a person on the construction of a public school, hospital, road or
any similar kind of social infrastructure.

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Chapter Eight: Administration of Income Tax
Table of Contents
Chapter Eight
8 ADMINISTRATION OF INCOME TAX ................................................................. 2
8.1. REGISTRATION AND DEREGISTRATION OF TAX PAYERS ...................................... 2
8.2. ASSESSMENTS AND RETURNS ................................................................................. 4
8.3. OPERATIONS OF PAYE SYSTEMS: PREPARATION OF PAYE RETURNS,
CATEGORIES OF EMPLOYEES ............................................................................................... 6
8.4. STATUTORY DEDUCTIONS (NSSF & NHIF) ....................................................... 13
8.5. NOTICES, OBJECTIONS, APPEALS AND RELIEF FOR MISTAKES .......................... 16
8.6. TAX DECISIONS; OBJECTIONS AND APPEALS ...................................................... 19
8.7. COLLECTION, RECOVERY AND REFUND OF TAXES .............................................. 21
8.8. ADMINISTRATIVE PENALTIES AND OFFENCES .................................................... 23
8.9. APPLICATION OF ICT IN TAXATION: ITAX ......................................................... 25

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8 ADMINISTRATION OF INCOME TAX
8.1. Registration and Deregistration of Tax Payers

A. Registration of Tax Payers
This entails the recruitment of persons liable to tax but not registered with the
Commissioner of Domestic Taxes. The Taxpayer Recruitment Programme Division
handles this function. The objective is to bring all eligible persons not paying tax as
required into the tax net. KRA does this through public recruitment drives but this
can be further enhanced through third party information.
The Tax procedures Act, 2015 Section 8 (1) (a )makes it mandatory for Anyone who
has accrued a tax liability or who expects to accrue a tax liability under the Income
Tax Act to apply to the Commissioner to be registered.
Personal Identification Number (PIN)
This is a unique computer-generated Personal Identification Number assigned to
every person who applies for registration. It identifies a person for purposes of
transacting business with Kenya Revenue Authority, other Government agencies and
service providers. It is processed by Domestic Tax Department.
NB: Person includes both an individual as well as an artificial person (i.e. company,
club, Trust, etc.)
Importance of a PIN
Under the 13th schedule of the Income Tax Act, transactions requiring PIN include,
among others, the following: -
(a) Registration of title, stamping of instruments by the Commissioner of Lands,
and payment of Land Rent.
(b) Approval of plans, payment of water deposits, application for a business
permit, payment of Land Rent by Local Authorities.
(c) Registration of Motor Vehicles.

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(d) Registration of Business Names and Companies.
(e) Trade licensing by the Ministry of Commerce.
(f) Application for Value Added Tax registration.
(g) Underwriting policies by Insurance Companies.
(h) To facilitate importation of goods.
(i) Power connections at Kenya Power and Lightning Co. Ltd.
(j) To facilitate all contracts for supply of goods and services to all Government
Ministries and Public bodies.
Taxpayer Recruitment by Kenya Revenue Authority
Taxpayer Recruitment is key in revenue collection hence besides several other
initiatives the revenue framework is built around broadening the tax base through an
enhanced taxpayer recruitment effort.
According to KRA’s 6th Corporate Plan (2015/16-2017/18), KRA’s objective was to raise
the number of active taxpayers to 4 million by 2018.
B. Deregistration of Tax Payers

The Tax procedures Act, 2015 Section 10 (1) allows any person who ceases to be
required to be registered for the purposes of a tax law to apply to the Commissioner
for deregistration under the Income Tax Act (Cap 470 Laws of Kenya).
However, Section 10 (5) of the same Act permits the Commissioner to deregister
anyone when satisfied that the person is eligible for deregistration, including the
following:-
(a) Death of natural person,
(b) Liquidated company, or
(c) Any other person that has otherwise ceased to exist.

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8.2. Assessments and Returns
A. Assessments
An assessment refers to the determination of the taxable pay and tax payable. There
are various types of assessment as discussed below: -
1. Self-Assessment
Every individual/company chargeable to tax should furnish the Commissioner a
return of income, (self-assessment) from all sources of income. The return of income
together with the declared self- assessment of tax on the declared income is done
on i-Tax and is calculated by reference to the appropriate relief and rates of tax in
force.
2. Default Assessment (Estimated/Provisional)
Where a taxpayer has failed to submit a tax return for a reporting period, the
Commissioner may, based on information available and to the best of his or her
judgement, make an assessment (referred to as a “default assessment”)
3. Advance Assessment
The Commissioner may, based on the available information and to the best of his
or her judgement, make an assessment (referred to as an “advance assessment”) of
the tax payable by a taxpayer before the date on which the taxpayer’s return for
the period is due.
4. Additional Assessment
Where the commissioner is of the opinion that the taxpayer has an assessment
showing either a lesser income or tax, he may issue an assessment on the additional
income or tax known as additional tax.
5. Installment Assessment
If a taxpayer who is to pay installment tax fails to do so the commissioner may to
the best of his knowledge make an assessment in respect of such installment tax,
such an assessment is known as installment assessment.

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Time Limits for Making Assessments
An assessment may be made at any time prior to the expiry of seven years after the
year income to which the assessment relates, except –
(a) Where fraud or gross or willful neglect has been committed in which case the
assessment in relation to that year of income may be made at any time;
(b) In the case of an assessment made upon the executors or administrators of a
deceased person, the assessment shall be made prior to the expiry of three years
after the year of income in which that deceased person died.
B. Returns
All registered persons are required to submit a return in the approved form and in
the manner prescribed by the Commissioner i.e. iTax not later than the last day of the
sixth month following the end of his year of income. The Commissioner my upon
application extend this time.
The Commissioner may require a taxpayer during a reporting period to submit a tax
return under the following circumstances:
a) Bankruptcy, winding up or liquidation proceedings have been instituted
against a taxpayer;
b) The Commissioner has reason to believe that a taxpayer is about to leave Kenya
permanently; or
c) A taxpayer has ceased, or the Commissioner has reason to believe that a
taxpayer will cease, carrying on any business in Kenya; or
d) A taxpayer has died.

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8.3. Operations of PAYE Systems: Preparation of PAYE

Returns, Categories of Employees
Introduction
"Pay as You Earn" is method of deducting income tax from salaries and wages applies
to all income from any office or employment. Thus "Pay as You Earn" applies to
weekly wages, monthly salaries, annual salaries, bonuses, commissions, directors'
fees (whether the director is resident or non-resident), pensions paid to pensioners who
reside in Kenya, where the amount from a registered pensions fund exceeds Kshs.
180,000 per annum, and any other income from an office or employment. The system
applies to all cash emoluments and all credits in respect of emoluments to employees'
accounts with their employers, no matter to what period they relate.
It includes the value of housing where the employer supplies this. It does not include
earnings from "casual employment" which means any engagement with any one
employer, which is made for a period of less than one month, the emoluments of
which are calculated by reference to the period of the engagement or shorter intervals.
Regular part-time employees and regular casual employment where the employees
are employed casually but regularly are not considered to be casual employees.
Employer's Duty
It is the employer's statutory duty to deduct income tax from the pay of his employees
whether or not he has been specifically told to do so by the Revenue Authority. The
normal P.A.Y.E. year runs from 1st January to 31st December. The necessary P.A.Y.E.
Stationery is issued to Employers before commencement of the year.
The Employer is to file monthly PAYE returns and generate payment E-slip through
KRA Online Services.
Every individual in receipt of income liable to tax is entitled to a relief, known as
"Personal Relief", granted against tax payable and is not refundable to Taxpayer.

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Unutilized personal relief can be carried forward from one month to another within
the same calendar year but not from one year to another.
Definitions
(a) Employer For "Pay as You Earn" purposes the term "employer" is to be taken, when
necessary, to include:
a) Any person having control of payment of remuneration;
b) Any agent, manager or other representative in Kenya of any employer who is
outside Kenya;
c) Any paying officer of Government or other public authority;
d) Any trust or insurance company or other body or person paying pensions.
(b) Employee This word is defined as inclusive of any holder of an appointment of
office, whether public, private or calling, for which remuneration is payable.
"Employee" should be read as including, for example, Cabinet Secretary, Chief, any
public servant, company director (resident or non-resident), secretary, individuals
working for any Religious Organization etc., in addition to those more commonly
known as employees. It includes an employee who retires on pension and stays in
Kenya where pensions received from a registered pension fund exceed Kshs. 15,000
per month (Kshs. 180,000 per annum).
(c) Paying Point is the place at which remuneration is paid. If a non-resident
employer calculates remuneration abroad and remits the remuneration direct to the
employee, then such remuneration should be notified to the Department through the
employer’s local representative and P.A.Y.E. tax operated on the remuneration
accordingly.
PAYE Operation
(a) Monthly Personal Relief
A resident who is a recipient of taxable income is entitled to a personal relief deducted
from the tax payable.

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(b) Calculation and Deduction of PAYE
The employer is expected to calculate tax on the taxable income and recover PAYE
from employees’ emoluments with reference to the graduated tax scales and
considering monthly personal relief. Unutilized relief can be carried from one month
to another within the same calendar year but not from one year to another. In arriving
at the taxable income, the employer must consider the following: -
a) Employees’ contribution to a registered pension fund and provident fund, A
maximum of Kshs. 240, 000 p.a is allowable
b) Interest paid on owner occupied property. Maximum allowable is Kshs.
150,000 p.a.
c) An amount deposited with a registered HOSP. A maximum allowable amount
is Kshs. 48, 000 p.a
(c) PAYE Filing Procedure (iTax platform)
Step 1: Download the PAYE excel sheet from iTax (similar to the one from the old tax-
payer software/ ITMS).
The PAYE excel sheet that you need to download is found under the “Returns” menu
item. You have to pretend that you are doing an actual return to actually get the
required files.
So, go to Returns >> File Returns >> Income tax – PAYE >> Download File.
The PAYE spreadsheet is available in both Excel format and Open Document Format
(for Open Office). For the smooth operation, a Windows machine.
Step 2: Fill out the details of the excel sheet and generate the output – zip file.
The PAYE excel sheet has various tabs and you need to fill out all the relevant ones.
When you are done, validate the spreadsheet – if it has any errors, the validation will
let you know otherwise it will prompt you to generate a zip file that you will upload
onto iTax.
Save the zip file on your machine where you can easily access it for uploading.

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Step 3: Upload the zip file onto iTax.
Using your company PIN and iTax password, log onto your iTax account then under
“Returns” on the two-menu item, select “File Return”.
This will take you to the “e-Returns” page. The type of “e-Return” and “Taxpayer
PIN” will already have been filled out for you so proceed to select the “Tax
Obligation”. In this case, it is the “Income Tax – PAYE” obligation.
Fill out the “Income tax – PAYE form” by selecting the “Return Period From”, the
“Return Period To” will automatically be filled out as the system only expects you to
do a return for one month at a time. Click the upload button to upload the zip file onto
iTax. Only click the Add File button if there is more than one file you want to upload,
otherwise, proceed to check the Terms and Conditions and “Submit” the form.

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If your uploaded file was correctly filled out, the system will successfully submit it
and give you a “Returns Receipt”. Otherwise, you will get an error message telling
you what you had done wrong.
If you get an error message, simply go back and correct the PAYE spreadsheet then
validate and save it a new. You do not need to use the “File Amended Return” menu
item, as technically, you had not successfully submitted the first time. Repeat the
process and you will be fine.
The “‘Returns Receipt” is in the form of a download link that you can click and
download for your filing. Note, you are not DONE with the process…all you have
done is successfully submitted the Income Tax – PAYE form.
Step 4: Generate payment slip for the just submitted PAYE liability.
What now needs to happen is that you need to generate a payment slip for the tax
obligation? The payment slip is what is used to make a payment for this liability at the
bank.

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Proceed to click the Payment button.
A lot of the details on the e-Payment Registration form will already be filled out
proceed and fill what isn’t. That should be as indicated in the image below.
Confirm the “Liability Details” as this indicates what you are meant to pay. When all
is good, select that liability entry and click the “Add” button.
The “Add” button from above adds the liability details to the “Payment Details”. This
should then give you the total that you are meant to pay (there could be more than one
liability that you are paying for).
Proceed to select the “Mode of Payment”; Cheque, Cash or RTGS and finally select the
“Receiving Bank” – this should be the bank where you intend to make your payment
from. Chances are, it is the bank that you bank with as a company. “Submit” the
payment details.

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A successful submission gives you back a “Payment Slip”‘ as indicated below. Click
the download link to access it.
Step 5: Pay the PAYE at your local bank
Final step is to print the “Payment Slip” in 2 copies and take both to your local bank
with a cheque for the amount indicated on the payment slip.
The bank will keep one of those copies as an indication of your payment while the
other one will be stamped and given back to you as your receipt for your own books.
This is a very important document as it’s actually shows that you have paid your
liability. In case the bank has an issue with their systems and miss to register your
payment, you can always fall back to this document as evidence for the payment.
iTax also sends you a confirmation email when you have made a payment and you
can always check your “General Ledger” on iTax for verification of the payment entry.
(d) Remittance of PAYE
The total PAYE for the month in respect of all employees should be remitted to the
account of the Paymaster General at CBK. The following is the sequence of payment:

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The employer is to remit PAYE to the PMG through their own banks using PAYE
payment slips, which is presented to the bank with a check or cash payment. The
minimum PAYE to the bank is Kshs. 100. If in any month PAYE is less than Kshs. 100
the employer should submit nil return. The due date for PAYE remittance is the ninth
(9th) day after the payroll month. Late remittances will be subject to penalty.
(e) PAYE Offences
Where a corporate body which is required to make a deduction fails to remit the
deducted amount, every director and every officer of the corporate body concerned
with the management thereof, shall be guilty of an offence, unless: -
a) He proves to the satisfaction of the court that he did not know, and
b) Could not reasonably be expected to know that the deducted amount had not
been remitted
c) That he took all reasonable steps to ensure that the offence was not committed.
The Commissioner may impose a penalty if an employer fails; -
(i) To deduct tax upon payment of emoluments to an employee
(ii) To account for tax deducted (on or before the 9th of the month)
(iii) To supply the Commissioner with a certificate prescribed under PAYE Rules.
The penalty is at the rate of 25% of the amount of tax involved or Kshs. 10,000
whichever is greater
8.4. Statutory Deductions (NSSF & NHIF)
Section 19(1) of the Employment Act empowers employers to deduct from employee’s
salary, any amount as a contribution to any fund or scheme approved by the
commissioner for labor to which the employee has agreed to contribute to.
Simply put, this is the statutory deduction. While an employee can opt out of any
voluntary deductions, contribution to the statutory deductions is a legal requirement.
Among them are NSSF & NHIF.

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National Social Security Fund
National Social Security Fund (NSSF) is the statutory retirement benefits scheme and
operates as a public trust. It provides retirement benefits for employees in the formal
and informal sectors. The deducted amount must be remitted by the 15th day of the
following month.
The National Social Security Fund (NSSF) ACT No. 45 of 2013 was assented on 24th
December 2013 with the effective date of commencement being 10th January 2014.
Consequently, new contribution rates for the purposes of the Act are:
1) The Upper Earning Limit (UEL) is KES. 18,000 whiles
2) The Lower Earnings Limit (LEL) is KES 6,000.
The pension contribution now made of 12% of the pensionable wages made up of two
equal portions of 6% from the employee and 6% from the employer subject to an upper
limit of KES 2,160 for employees earning above KES 18,000.
The contributions relating to the earnings below the LEL of the earnings (a maximum
of KES. 720) is credited to what is known as a Tier I account while the balance of the
contribution for earnings between the LEL and the UEL (up to a maximum of KES
1,440) is credited to what is known as a Tier II account.
National Hospital Insurance Fund
National Hospital Insurance Fund (NHIF) is a state parastatal which provides limited
in-patient medical insurance cover at accredited health facilities to eligible members
from both the formal and informal sectors. The deducted amount must be remitted by
the 9th day of the following month.
The medial benefits from the scheme is limited and most companies provide
employees with private medical insurance. NHIF Contribution Rates are as follows:

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Salary Contribution Rate
KSh 5,999 KSh 150
KSh 6,000 – 7,999 KSh 300
KSh 8,000 – 11,999 KSh 400
KSh 12,000 – 14,999 KSh 500
KSh 15,000 – 19,999 KSh 600
KSh 20,000 – 24,999 KSh 750
KSh 25,000 – 29,999 KSh 850
KSh 30,000 – 34,999 KSh 900
KSh 35,000 – 39,999 KSh 950
KSh 40,000 – 44,999 KSh 1,000
KSh 45,000 – 49,999 KSh 1,100
KSh 50,000 – 59,999 KSh 1,200
KSh 60,000 – 69,999 KSh 1,300
KSh 70,000 – 79,999 KSh 1,400
KSh 80,000 – 89,999 KSh 1,500
KSh 90,000 – 99,999 KSh 1,600

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Salary Contribution Rate
KSh 100,000 & Above KSh 1,700
Self-Employed KSh 500
Failure to Deduct
Any employer who fails to make such deductions, will be committing an offence and
shall on conviction be liable to a fine not exceeding Kshs. 100,000 or to imprisonment
for a term not exceeding two (2) years, or to both
8.5. Notices, Objections, Appeals and Relief for

Mistakes
Notice, Objections, & Appeals

A taxpayer who disputes or who does not agree with an assessment for any year of
income has a right to lodge an objection against such an assessment. Such an objection
is referred to as a “Notice of Objection” and for the objection to be a valid notice of
objection it must: -
a) Be in writing
b) State the grounds of objection
c) Be made within 30days after the date of service of the notice of assessment, that
is within 40days (30days of notice + 10days of service)
The return of income and any supporting schedules must be submitted before the
appeal is accepted. A taxpayer will dispute or will not agree with a notice of
assessment because of mistakes or errors relating to: -
(a) Amount of income/loss assessed
(b) Amount of tax payable

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(c) Allowance or deduction made or omitted to be made in computing chargeable
income/loss
(d) Imposition of interest penalties under section 72 of the ITA
(e) Relief granted or omitted
(f) Rates of tax used
(g) Assessment being time barred (limit of 7 years)
Late Notice of Objection

Where a taxpayer who disputes an assessment fails to object to an assessment within
the required time frame, he/she can lodge a notice of late objection, which must: -
a) Be in writing
b) State the grounds of objection
c) State the reasons for objecting late
The Commissioner may accept the late notice of objection under the following
circumstances: -
1. Return of income for the year, and accounts where applicable have been submitted
to The Commissioner.
2. If the lateness is due to the taxpayer being absent from Kenya, being sick, or other
reasonable cause e.g. death in a family sickness in the family etc. The
Commissioner would require proof of this.
3. There is no unreasonable delay on the part of the taxpayer in lodging the late
objection e.g. the notice was lost at post office.
4. Tax due is paid together with any late payment interest. The Commissioner can
waive this condition if he is satisfied that the tax due is excessive.
Late objection becomes valid notice of objection if accepted, if rejected, the notice of
assessment objected to remains in force.

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Processing a Valid Notice of Objection

The Commissioner would deal with the objection where a taxpayer has lodged a valid
notice of objection against an assessment for any year of income in any of the following
ways: -
(a) Amend (change) the assessment to be in accordance with the objection i.e. The
Commissioner agreeing with the grounds of the objection.
(b) Amend the assessment in the light of the objection (with some adjustments)
(a) If the taxpayer or the person objecting agreeing to the adjustments. An
agreed amended assessment would be issued by CIT.
(b) If the taxpayer or the person objecting not agreeing to the adjustments. The
Commissioner would issue a non-agreed amended assessment.
(c) Refuse to amend (change) the assessment and issue a notice to the taxpayer
confirming the disputed assessment.
Note: A taxpayer who is aggrieved by the manner in which an objection against an
assessment has been cleared by CIT may lodge an appeal to the local
committee, tribunal and finally to high court and court of appeal in the manner
described under 1.6
Relief of Mistake
Section 90 (1) of the Income Tax Act (Cap 470 Laws of Kenya) provides that, Where
for any year of income, a person who, having made a return of income, has been
assessed to tax under section 73(2)(a) or having submitted a self-assessment return of
income under section 52B and alleges that the assessment was excessive by reason of
some error or mistake of fact in the return, then he may, not later than seven years
after the expiry of that year of income, make an application to the Commissioner for
relief.
Section 90 (2) of the Income Tax Act (Cap 470 Laws of Kenya) states that, On receiving
an application the Commissioner shall inquire into the matter and, after taking into

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account all relevant circumstances, shall give such relief by way of repayment as is
reasonable and just; but no relief shall be given in respect of an error or mistake as to
the basis on which the liability of an applicant should have been computed where the
return of income was in fact made on the basis or in accordance with the practice
generally prevailing at the time the return of income was made.
8.6. Tax Decisions; Objections and Appeals
A. Tribunal
The Tax Procedures Act 2015 provides under section 52 (1) that, a person who is
dissatisfied with an appealable decision may appeal the decision to the Tribunal in
accordance with the provisions of the Tax Appeals Tribunal Act, 2013. In so doing, A
notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer
has paid the tax not in dispute or entered an arrangement with the Commissioner to
pay the tax not in dispute under the assessment at the time of lodging the notice.
B. High Court
Section 53 of the Tax Procedures Act 2015 allows a party to proceedings before the
Tribunal who is dissatisfied with the decision of the Tribunal in relation to an
appealable decision may, within thirty (30) days of being notified of the decision or
within such further period as the High Court may allow, appeal the decision to the
High Court in accordance with the provisions of the Tax Appeals Tribunal Act, 2013.
C. Court of Appeal
Section 54 of the Tax Procedures Act 2015 provides an avenue for any party to
proceedings before the High Court who is dissatisfied with the decision of the High
Court in relation to an appealable decision may, within thirty (30) days of being
notified of the decision or within such further period as the Court of Appeal may
allow, appeal the decision to the Court of Appeal.

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NB: In any Appeal case, the burden shall be on the taxpayer to prove that a tax
decision is incorrect
An appeal to the High Court or to the Court of Appeal shall be on a question of law
only.
Appeal Procedure
The Tax Appeals Tribunal Act, 2013 (TATA), which was assented to on 27th November
2013 and replaced by repealing section 32 of the Value Added Tax Act 1989 (Cap 476),
section 82 and 83 of the Income Tax Act (Cap 470) and section 127E of the Customs
and Excise Act (Cap 472) offers a framework of tax appeals through the tax appeals.
Part III of the Act provides that, A person who disputes the decision of the Commissioner
on any matter arising under the provisions of any tax law may, subject to the provisions of the
relevant tax law, upon giving notice in writing to the Commissioner, appeal to the Tribunal
after paying a non-refundable fee of twenty thousand shillings.
1. A notice of appeal in writing to be submitted to the Tribunal shall within thirty
(30) days upon receipt of the decision of the Commissioner.
2. The appellant submits, within fourteen (14) days from the date of filing the notice
of appeal (unless extended by the Tribunal), enough copies, as may be advised by
the Clerk, of the following documents: -
(a) A memorandum of appeal;
(b) Statements of facts; and
(c) The tax decision.
3. The appellant serves a copy of the appeal on the Commissioner within two days
(2) after giving notice of appeal to the Tribunal.
4. The appellant, unless the Tribunal orders otherwise, be limited to the grounds
stated in the appeal to which the decision relates.
5. The Tribunal shall hear and determine an appeal within ninety (90) days from the
date the appeal is filed with the Tribunal.

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He shall be liable to a fine of not less than ten thousand shillings but not more than
two hundred thousand shillings or to imprisonment for a term not exceeding two
years or to both.
8.7. Collection, Recovery and Refund of Taxes
A. Collection of Taxes from A Ship Owner
The Commissioner may, in a case where tax recoverable on the income of a person
who carries on the business of ship-owner, charterer or air transport operator, issue
to the proper officer of Customs by whom clearance may be granted a certificate
containing the name of that person and the amount of the tax due and payable and on
receipt of that certificate the proper officer of Customs shall refuse clearance from any
port or airport in Kenya to any ship or aircraft owned by that person until the tax has
been paid.
B. Collection of Taxes Through an Agent
The commissioner may appoint a person to recover tax on his behalf. This may include
the following: -
(a) Employer, to recover taxes on salaries and wages
(b) Banks, to recover taxes from defaulter who bank with them
(c) Provident funds/pension funds, to recover taxes from persons leaving
employment
(d) Tenants, to recover taxes from non-resident landlords from rent payable
(e) Insurance companies, to recover taxes on commissions paid to brokers and
agents
(f) Financial institutions, to recover taxes on dividends and interest payable
Failure to comply with such appointment can result to the tax being recovered from
the agent as if the tax was due and payable by the agent.

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C. Collection of Taxes from Persons Leaving Kenya
Where the Commissioner has reason to believe that a person who has been assessed
is about to leave Kenya without having paid the tax; or has left Kenya without having
paid the tax and his absence is unlikely to be only temporary, he may, whether or not
the due date for the payment of that tax has arrived, by notice in writing served on
the person assessed, require -
(i) That payment of the whole tax assessed be made within the time specified in
the notice; or
(ii) That security to his satisfaction is given for the payment.
D. Collection of Taxes from Guarantor
Where security has been given which consists of a form of guarantee under which, in
default of payment of tax in terms of the security, a person (guarantor) is obliged to
pay that tax.
E. Collection of Taxes from Deceased Persons
If one dies then tax charged in an assessment made upon him or executors has not
been paid, the amount of tax unpaid or charged, in the assessment shall be a debt due
and payable out of his estate.
F. Recovery of Taxes Through Suits
This is where one is sued in the court of law for taxes, which remain unpaid after the
due date. Collection of such taxes is dependent on the ruling of the court.
G. Recovery of Taxes Through Distrait
The Commissioner may, instead of suing for the tax, recover it by distress, upon the
goods and chattels of the person from whom the tax is recoverable, at the cost of the
person from whom the tax is recoverable, employ such servants or agents as he may
think necessary to assist him in the execution of the distress. The cost of distrait;
including cost of agents, storage and transportation are met by the defaulter.

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Refund of Taxes
Tax paid in excess of the amount payable, is to be refunded, together with any interest
payable. The taxpayer will be advised when it is necessary to carry out an audit before
payment of the refund claim.
The person can opt to have the refund or request for the amount to be utilized to clear
a tax liability in another year or a tax liability in any other Kenya Revenue Authority
Department and must inform the Commissioner in writing of the preferred option.
Refunds are processed within 120 days from the day of processing the return where
the return is for the immediate past year of income and 30 days where the return is
for a year of income other than the immediate past year of income.
8.8. Administrative Penalties and Offences
The Tax Procedures Act 2015 provides under section 80 (1) that, A person shall not be
subject to both the imposition of a penalty and the prosecution of an offence in respect
of the same act or omission in relation to a tax law.
Section 80 (2) provides that, if a person has committed an act or omission that may be
liable under a tax law to both the imposition of penalty and the prosecution of an
offence, the Commissioner shall decide whether to make a demand for the penalty or
to prosecute the offence.
Penalties
All persons are required by law to submit their returns to the Commissioner of
Domestic Taxes within 6 months after the end of the Accounting period. The balance
of tax not paid through installments is payable on or before the last day of the 4th
month after the end of the Accounting period. Failure to comply results in statutory
penalties being charged which include fines and/or imprisonment
The following penalties will be charged for the following offences: -

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(i) For failure to furnish by the due date, a return of income in relation to any year,
additional tax equal to five per cent of the normal tax.
(ii) For omitting from any return of income any amount of income which should have
been included therein, a penalty equal to double the difference between the tax
chargeable according to the return made and the normal tax properly chargeable
in respect of the total income assessable.
(iii) For negligence or disregard of the law by a person who is an Authorized Tax
Agent, and as a result, income is omitted as at (2) above. The Authorized Tax Agent
shall be penalized to the extent of one half of the penalty at (2) above but in any
case, not less than Kshs. 1,000 and not in excess of Kshs. 50,000 with respect to each
return.
(iv) For furnishing a return of income after due date: Additional tax equal to 5% of
the normal tax, or Kshs. 10,000 in case of Non-Individual Taxpayers and Kshs.
1,000 in case of Individuals whichever is higher, for each period of 12 months or
part thereof in which the delay occurs;
(v) For failure to deduct or remit withholding Tax, a penalty equal to 10% of amount
of tax involved is levied subject to a maximum penalty of Kshs. One million.
(vi) For underpayment of installment tax: -
a. A penalty of 20% chargeable on the difference between the amount of the
installment tax payable in respect of a year of income and the installment
tax actually paid.
b. Where any amount of tax remains unpaid after the due date, a penalty of
20% is charged and shall immediately become due and payable.
The 20% penalty shall not apply to matters arising under Withholding tax or PAYE
1. For failure to deduct PAYE, account for it or to supply the Commissioner with a
certificate: A penalty equal to 25% of the amount of the tax involved or Kshs. 10,000
whichever is greater.

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2. Personal Identification Number (PIN) related offence attracts Kshs. 2,000/= per
offence - e.g. not indicating PIN on return for proper identification.
3. Turnover Tax (TOT) payers who fail to submit the quarterly Returns pay a default
penalty of Kshs. 2,000/=
8.9. Application of ICT in Taxation: iTax
i-Tax is an Online Electronic system that was developed to replace the KRA Online
system (ITMS). It is a web-enabled and secure application system that provides a fully
integrated and automated solution for administration of domestic taxes.
i-Tax enables taxpayer internet-based PIN registration, returns filing, payment
registration to allow for tax payments and status inquiries with real-time monitoring
of accounts.
i-Tax was introduced with the view to:
a) Simplify tax processes and make it easy for Taxpayers to comply.
b) Shorten time taken to extract data and information on revenue.
c) Reduce time taken by Taxpayers when dealing with the KRA.
d) Re-engineer business processes for effectiveness and efficiency.
e) Enhance the ability of taxpayers to account for taxes.
f) Improve the accuracy of taxpayers to calculate for taxes.
Returns completed and filed through the i-Tax system include: -
a) All monthly VAT returns,
b) All monthly PAYE returns (for those who are registered),
c) Withholding tax payments,
d) Quarterly TOT (Turnover tax – for those who are registered),
e) Excise duty returns,
f) Installment taxes,
g) Advance taxes,

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h) Standards levy,
i) Individual self-assessment tax returns/Company and partnership tax returns,
j) Land rates,
k) Stamp duty on land transfers, and
l) Increase and issuance of share capital and any penalties and interest on any tax
Any payments to be made require one to complete an E-slip online before relevant
Cheques can be submitted through one of the Authorized banks. It is also mandatory
for individuals with only employment income to complete and submit the Annual
Self-Assessment Return online on i-Tax from the year of income 2014. However, the
i-Tax system requires data input to update your individual or company details, which
is also compulsory.
Due to the complexity and expansion of the system, the amount of time required to
collect all the correct data to update and the slow speeds experienced on the i-Tax web
page, i-Tax registration may be time consuming, hence taxpayers are urged to exercise
patience.

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Chapter Nine: Administration of Value Added Tax
Table of Contents
Chapter Nine
9. ADMINISTRATION OF VALUE ADDED TAX .................................................... 2
9.1. INTRODUCTION AND DEVELOPMENT OF VAT...................................................... 2
9.2. REGISTRATION AND DEREGISTRATION OF BUSINESSES FOR VAT ..................... 5
9.3. TAXABLE AND NON-TAXABLE SUPPLIES ................................................................ 8
9.4. PRIVILEGED PERSONS AND INSTITUTIONS .......................................................... 14
9.5. VAT RATES ............................................................................................................ 15
9.6. VAT RECORDS ....................................................................................................... 16
9.7. VALUE FOR VAT, TAX POINT ............................................................................... 17
9.8. ACCOUNTING FOR VAT ........................................................................................ 20
9.9. VAT RETURNS ....................................................................................................... 27
9.10. REMISSION, REBATE AND REFUND OF VAT ........................................................ 28
9.11. RIGHTS AND OBLIGATIONS OF VAT REGISTERED PERSON .............................. 30
9.12. CHANGES TO BE NOTIFIED TO THE COMMISSIONER .......................................... 32
9.13. OFFENCES FINES, PENALTIES AND INTEREST ...................................................... 32

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9. ADMINISTRATION OF VALUE ADDED TAX
9.1. Introduction and Development of VAT

History
The history of VAT dates back to the days after the end of the First World War when
European governments found it necessary to raise large sums of money quickly and
a number of them introduced tax on business turnovers. The taxes were calculated as
a small percentage of gross sales at each stage in the production and distribution
chain. This meant that every trader who bought and sold the goods had to pay tax on
a value, which included not only the buying price plus the margin, but also the tax,
which he had paid when he made the purchase.
In calculating the margin, one had to take into account the tax paid on capital items
purchased for the business and tax paid on the chargeable services provided to by
other traders. Because of this “Tax on tax” effect these taxes become known as
“Cumulative” or “Cascade” taxes. It was the French who helped developed VAT from
these “Cascade” taxes starting with a production tax charged at a single stage on
transactions in goods; chargeable goods for use as materials in manufacture were not
taxed.
Introduction and Development of VAT in Kenya
VAT was introduced in 1990, to replace sales tax, which was in operation since 1973.
The VAT Act was initially cited as the Value Added Tax Act, 1989 and it come into
operation as from 1st January 1990. It was later incorporated as chapter 476 of the laws
of Kenya. It was introduced as a measure to increase Government revenue through the
expansion of the tax base, which hitherto was confined to sale of goods at
manufacturing and importation level under the sales tax system.

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Sales tax was a reliable source of revenue but as the economy continued to grow and
become more sophisticated, the limitations of the system become more pronounced.
As a reform measure, it was found necessary to introduce a fairly simple and basic
Value added Tax System for flexibility and more revenue. At inception, the VAT
system was limited to manufactures, importers and selected services like land and
building surveyors, fire and marine surveyors, loss adjuster’s services supplied by
architects and brokers. Only items of jewelry were designated. There were 15 rates of
tax above the general rate, which was 17% then as inherited from its forerunner.
a) There were ad valerian rates, i.e. rates applicable to luxury goods such as TVs,
large cars, cosmetics, spirits, household electronic goods among others ranging from
5% to 210%;
b) Items like Beer and Petroleum products had specific rates expressed in shillings
per liter;
c) Natural gas in gaseous state & petroleum bitumen were expressed in cents per Kg;
d) Cinematograph film in cents meter; and
e) Electric energy in cents per Kwh
VAT today is levied on consumption of taxable goods and services supplied or
imported into Kenya and are collected by registered persons at designated points who
then remit it to the Commissioner. Registered persons only act as VAT agents in
collecting and paying the tax since the tax is borne by the final consumer of goods and
services.
Limitations in Sales Tax System Vs. VAT System
(a) Sales tax was confined to goods only hence narrow coverage/limited tax base; while
VAT is charged on goods and services, which ensures wider tax base.
(b) Sales Tax was only charged at manufacturing and importation level-tax burden
resting on a few while; VAT is charged at all points of sale hence tax burden
distribution.

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(c) Under sales tax system, refunds claims were lodged separately leading to cash flow
problems while; VAT operates on an Input/output tax system in place
(d) Sales tax system had no consideration for zero rating apart from exports by registered
persons while; VAT system allows for zero rating and hence promotes vital sectors
(e) No remission was given to investors under the sales tax system which is provided
for in the VAT system thus encouraging investors
(f) Sales tax system charged tax on tax {cascading Effect} while; VAT system does not
(g) The VAT system as opposed to the sales tax system is easy to manage due to its self-
policing nature and also creates a valuable alternative source of revenue to the Kenyan
government at relatively low administrative and compliance cost.
The VAT Law
The basic law was contained in the Value Added Tax Act, Cap 476 of the Laws of
Kenya and the Regulations stemming from it. From financial year 2011, the
Government of Kenya made various attempts to overhaul the VAT Act governing
administration and enforcement of VAT in the country through the VAT Bills 2011,
2012 and VAT Act 2013 which successfully went through parliament. The intention of
the overhaul was to: -
a) Increase government revenues,
b) Simplify VAT administration,
c) Reduce compliance costs, and
d) To deal with the ever-increasing burden of VAT refunds which presents an
administrative challenge to the Kenya Revenue Authority (“KRA”).
The VAT Bill 2013 was approved by parliament on Monday August 06th 2013, assented
on 14th, August 2013 making it an Act of Parliament, Gazetted on 16th August 2013 and
come into force on 2nd September 2013. This Act is cited as the “Value Added Tax Act,
2013”

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9.2. Registration and Deregistration of Businesses for

VAT
The threshold for registration was Kshs. 200, 000 per year as inherited from sales tax.
This was increased to Kshs. 3.6M and later reduced to Kshs. 3M W.e.f 1st October 2002;
it is now Kshs. 5M W.e.f 1st January 2007. This is determined by the economy and the
policy legislation deemed necessary by the government
A. Registration
Section 34 (1) of The Value added Tax act, 2013 outlines the conditions for registration
and one who meets such conditions must, within thirty days of becoming liable,
apply to the Commissioner for registration. The condition are as follows: -
- Has supplied taxable goods or taxable services or expects to supply taxable
goods or taxable services or both, valued at Kshs. 5,000,000 or more in a period
of twelve months; or,
- Is about to commence supplying taxable goods or taxable services or both
which, in the opinion of the Commissioner, will exceed Kshs. 5,000,000 in a
period of twelve months.
An application for registration is submitted on Form VAT 1 and where the
Commissioner is satisfied that a person is required to be registered issues a certificate
on Form VAT 2 on receipt of a proper application.
Effective Date of Registration
(a) For timely applications, registration is deemed to be effective from the date on
which the applicant receives the certificate, if the certificate is sent by registered
mail, it shall be deemed to have been received within seven days after posting.
(b) For late applications, registration is be deemed to be effective from the 30th day
from the date the person becomes a taxable person.

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Display of Certificate
A registered person must display the certificate of registration at a visible place in his
business premises; and in case of more than one place of business, certified copies of
the certificate should be displayed at each of these places failure of which attracts a
default penalty of twenty thousand shillings and, in addition, shall be guilty of an
offence and liable to a fine not exceeding two hundred thousand shillings or to
imprisonment for a term not exceeding two years or to both.
Types of Registration
i. Normal Registration - This occurs when a trader who meets registration
requirements applies for registration and is duly registered and given registration
certificates
ii. Voluntary Registration - This occurs when a trader who is not qualified for
registration applies for such so as to enjoy the benefits of a registered person i.e.
claiming input tax
iii. Compulsory Registration – This occurs when a trader who qualifies to register
fails to do so. If such a trader is identified he is issued with a certificate without
his application. Tax can also be demanded from him on any sales he has made in
the past.
iv. Temporary Registration - This is where a trader, who is not registered, applies to
be registered to enable him carry out certain transactions. He is provided with a
temporary registration number
Change of Particulars
A registered person should notify details to the Commissioner within twenty-one
days of any of the following changes occurring -
a) Whenever the address of the place of business is changed; or
b) Additional premises are used, or will be used, for purposes of the business; or

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c) Premises used for the business ceased to be so used;
d) The name, or trading name, of the business is changed; or
e) In the case of a limited company, an interest of more than thirty per cent of the
share capital has been obtained by a person or group of persons; or
f) The person authorized to sign returns and other documents is changed; or
g) The partners in a partnership are changed; or
h) A change occurs in the trade classification of the goods or services being
supplied.
NB: Where a person dies, becomes insolvent, or is legally incapacitated, the
executor, liquidator, or other person conducting the business, as the case may be, must
notify details to the Commissioner without delay.
B. De-Registration
This is the process of removal of a registered taxpayer name from the VAT register.
Any trader wishing to be deregistered for various reasons may apply to the
commissioner reasons for deregistration, which may be on grounds of: -
1) Closure of business
2) Sale of business
3) Death of a trader
4) Legal incapacitation
5) Insolvency
6) Change of status to a limited company
7) When turn over falls below the prescribed limit
However, before deregistration any tax outstanding must be remitted. Once the
taxpayer is deregistered, he’s notified of the effective date of deregistration and the
original registration certificate surrendered to the commissioner. Such a person
should cease from charging VAT from the effective date of registration henceforth.

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9.3. Taxable and Non-Taxable Supplies
Charge to Tax
According to the Value Added Tax Act, 2013, section 5, a tax, to be known as value
added tax, shall be charged on: -
a) A taxable supply made by a registered person in Kenya;
b) The importation of taxable goods; and
c) A supply of imported taxable services.
Definitions
a. Taxable Person This is any person liable to apply for registration, but does not
include an export processing zone enterprise
b. Tax Period This means one calendar month
c. Supply means a supply of goods or services. A supply is deemed to have taken
place in the following circumstances: -
“Supply of goods” means –
a) A sale, exchange, or other transfer of the right to dispose of the goods
as owner; or
b) The provision of electrical or thermal energy, gas or water;
“Supply of services,” means anything done that is not a supply of goods or
money, including –
a) The performance of services for another person;
b) The grant, assignment, or surrender of any right;
c) The making available of any facility or advantage; or
d) The toleration of any situation or the refraining from the doing of any
act;
d. Tax Amnesty This is a tax waiver on additional tax, penalties and fines on tax
arrears.

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1. Non-Taxable Supplies
Exempt Supplies
These are supplies of goods and services [specified in the First schedules of the VAT Act,
2013] which are not subject to tax and whose input tax is not deductible. The
following goods among others are exempt after the Finance Act, 2018:
a) Live animals, fish and birds;
b) Unprocessed meats and milk
c) Fertilizer;
d) Fruits, vegetables and cereals;
e) Taxable supply (excluding vehicles) for use in the construction of power
generating plant;
f) Supplies to be used in Geothermal, oil or mining prospecting or exploration
g) Pharmaceutical products;
h) Wheat, maize flour, infant food, rice and bread;
i) Various seeds (wheat & meslin) and (barley);
j) Plant and machinery exclusively used for the manufacture of goods;
k) Cereal straw and husks, unprepared, whether or not chopped, ground, pressed
or in the form of pellets;
l) Specialised equipment for the development and generation of solar and wind
energy, including deep cycle batteries which use or store solar power(wind
energy equipment was not previously exempt);
m) Parts imported or purchased locally for the assembly of computers (previously
this exemption was restricted to school laptops but has now been extended to
all computers to align with the incentives under the Big 4 agenda to encourage
computer assembly in Kenya);
n) Taxable good for the direct and exclusive use for construction of specialized
hospitals with a minimum bed capacity of fifty, approved by the Cabinet
Secretary (CS) upon recommendation by the CS responsible for health;

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o) Equipment for the construction of grain storage, upon recommendation by the
Cabinet Secretary for the time being responsible for agriculture;
p) Alcoholic /non-alcoholic beverages supplied to the Kenya Defence Forces
Canteen Organisation;
q) Goods imported/purchased locally for direct and exclusive use in the
implementation of projects under a special operating framework arrangements
with the Government;
r) Hearing aids, excluding parts and accessories; and
s) One personal motor vehicle, excluding buses and minibuses of seating capacity
of more than eight seats imported by a public officer returning from posting in
a Kenyan mission abroad and another motor vehicle for his spouse.
The VAT Act, 2013 reduced the number of services, which are exempt from VAT
making the exempt list largely similar with internationally accepted principles on
services that ought to be exempt. The list now includes among others: -
a) Financial services
b) Insurance and reinsurance
c) Education services
d) Medical services
e) Plant and animal husbandry
f) Transportation of passengers
g) Burial and cremation services
h) Sale, renting, leasing, hiring, letting of land or residential premises
i) Insurance agency and brokerage services, stock, tea and coffee brokerage
services
j) Betting, gaming and lotteries
k) Hiring, leasing and chartering of aircraft

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l) Accommodation and restaurant services provided within the premises listed
in the second schedule by the proprietors of such premises
m) Community, social and welfare services provided by National Government,
County Government or any Political Sub-division thereof
n) Conference services conducted for educational institutions as part of learning
where the Ministry approves such institutions for the time being responsible
for Education.
o) Car park services provided by National Government, County Government,
and any Political Sub-division thereof or by an employer to his employees on
the premises of the employer.
p) The supply of airtime by any person other than by a provider of cellular mobile
telephone services or wireless telephone services
Illustration
Miss. Olive purchased materials worth Kshs. 100,000 and paid VAT on them, he
produced commodity X and sold it for Kshs. 150,000, which is tax exempt.
Required
Show her VAT position.
Solution
No VAT is payable since the trader deals in exempt supplies.
2. Taxable Supplies
These are supplies, other than an exempt supply, made in Kenya by a person in the
course or furtherance of a business carried on by him/her, including a supply made in
connection with the commencement or termination of a business
(a) Taxable
These are taxable supplies that are taxable at 16%. Some of the items (goods and services)
that were previously zero-rated or exempt, which are now subject to tax, include: -

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a) Taxable services provided to oil exploration companies;
b) Medical equipment;
c) Books
d) Newspapers
e) Computers and software
f) Mobile phones
g) Processed milk
h) Cooking gas
i) Prime movers and passenger mini-buses and buses
j) Tour operation and agency services;
k) Airport landing and parking fees
l) Transportation of tourists
m) The sale of commercial buildings
n) Credit Reference Bureau services
o) Supply of taxable services in respect of goods in transit
p) Supply of taxable supplies to ships
(b) Zero Rated
Zero-rated supply means a supply listed in the Second Schedule of VAT Act, 2013,
they are taxable supplies that are taxable at 0%. Hence the tax on them is ZERO but is
treated as taxable supplies in all aspects, when a person makes a zero-rated supply,
he collects KES 0 VAT.
However, such a person will be entitled to claim all his input tax unlike in the case of
exempt supplies. The zero-rated supplies limited to: -
a) Export of goods and taxable services
b) Supply of goods and taxable services to EPZ enterprises
c) Ship stores to international airlines or ships
d) Supply of coffee and tea for export to tea and coffee auction centers

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e) Transportation of passengers by air carriers on international flights
f) Supply of taxable services to international sea or air carriers on international
voyages
g) Goods purchased from duty free shops by passengers departing to places
outside Kenya.
h) Supply of taxable services in respect of goods in transit.
i) Inputs or raw materials (either produced locally or imported) supplied to
pharmaceutical manufacturers in Kenya for manufacturing medicaments.
j) The supply of goods or taxable services to a special economic zone enterprise.
k) The supply of maize (corn) flour, ordinary bread and cassava flour, wheat or
meslin flour and maize flour containing cassava flour more than 10% in weight.
Illustration
Mr. Malewish a manufacturer of Bolts and Nuts; bought metal rods worth Kshs.
500,000 on which he paid VAT. He made Bolts and Nuts and sold them as follows: -
Local sales Kshs. 600,000
Exports Kshs. 40,000
Required
Calculate his VAT payable; Note that the prices quoted do not include taxes payable.
Solution
Stage: 1 Input Tax
Metal rods 500, 000
VAT @ 16% 80, 000
580, 000
Stage: 2 Output Tax
Local sales 600, 000
VAT @ 16% 96, 000
696, 000

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VAT payable
Output tax 96,000
Input Tax 80,000
16,000
Samples of Taxable Goods
Where taxable goods are given out as samples, they are not liable to tax, and for goods
to be treated as such, they should: -
(a) Be distributed for free by a registered person for furtherance of his business;
(b) Have a value of less than KES 2,000 for each sample;
(c) Are freely available; and
(d) Not limited in distribution to less than 30 people in any one calendar month.
9.4. Privileged Persons and Institutions
These are persons or institutions who if supplied with taxable supplies, such suppliers
shall be zero-rated when so supplied by a registered person before the imposition of
tax or if imported before clearance through the customs subject to the limitations
specified in the Second Schedule Part B.
They include: -
1) Supply to Commonwealth and other Governments
2) Supply to Diplomat or First Arrivals Persons
3) Supply to donor agencies with bilateral or multilateral agreements
4) Supply to international and regional organizations
5) Supply to the War Graves Commission
6) Supply to National Red Cross Society and St. John Ambulance
7) Supply of protective apparel, clothing accessories and equipment

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9.5. VAT Rates
(a) Rates of Tax

Section 5 (2) of the Value Added Tax Act, 2013 provides the rates of tax as: -
(i) In the case of a zero-rated supply, zero percent (0%); or
(ii) In any other case, sixteen percent (16%) of the taxable value of the taxable
supply, the value of imported taxable goods or the value of a supply of
imported taxable services.
The Finance Act, 2018 introduced a new VAT rate of 8% on petroleum products. This
is a reduction from the rate of 16% that was effective from September 2018. The taxable
value excludes excise duty, fees and other charges.
The introduction of VAT on petroleum products generated heated debate, with the
8% rate being the compromise position adopted by government. Given the revenue
constraints facing the government and the maturing debts that it needs to pay, the tax
was inevitable even though it will negatively affect key industries such as
transportation and the agricultural sector whose supply is exempt.
(b)Liability of Tax
Section 5 (3) bestows the Tax on a taxable supply to be a liability of the registered
person making the supply and, is due at the time of the supply. Section 5 (4) provides
that the amount of tax payable, if any, is recoverable by the registered person from the
receiver of the supply, in addition to the consideration.
Reverse Tax
Contrary to the provisions of Section 5 (3), section 5 (6) bestows the Tax on the supply
of imported taxable services to be a liability of the registered person receiving the
supply and, subject to the provisions of the Act relating to accounting and payment,
shall become due at the time of the supply. A system referred to as “Reverse Tax”

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9.6. VAT Records
Section 43 (1) of the Value Added Tax Act, 2013 requires every registered person to
keep in the course of his business, a full and true written record, whether in electronic
form or otherwise, in English or Kiswahili of every transaction he makes. The record
must be kept in Kenya for a period of five years from the date of the last entry was
made.
Section 43 (2) lists down the records to be kept under subsection (1) to include the
following: -
(a) Copies of all tax invoices and simplified tax invoices issued in serial number
order;
(b) Copies of all credit and debit notes issued, in chronological order;
(c) Purchase invoices, copies of customs entries, receipts for the payment of
customs duty or tax, and credit and debit notes received. to be filed
chronologically either by date of receipt or under each supplier's name;
(d) Details of the amounts of tax charged on each supply made or received,
sufficient written evidence to identify the supplier/recipient, and to show the
nature & quantity of services supplied, time, place, consideration for the
supply, among others;
(e) Tax account showing the totals of the output tax and the input tax in each
period and a net total of the tax payable or the excess tax carried forward, as
the case may be, at the end of each period;
(f) Copies of stock records kept periodically as the Commissioner may determine;
(g) Details of each supply of goods and services from the business premises, unless
such details are available at the time of supply on invoices issued at, or before,
that time; and
(h) Such other accounts or records as may be specified, in writing, by the
Commissioner.

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The said records must, at all reasonable times, be availed to an authorised officer for
inspection and The Commissioner may, in accordance with the regulations, require
any person to use an electronic tax register, of such type and description as may be
prescribed, for the purpose of accessing information regarding any matter or
transaction which may affect the tax liability of the person.
9.7. Value for VAT, Tax Point
(a) Taxable Value

This is the value of a supply on which VAT is due. It’s the consideration given in
exchange for a supply, which may be in money or in kind. Taxable Value is: -
a) In the case of a supply provided by the registered person to an independent
person dealing at arm’s length, the price for which the supply is provided;
b) In case of non-arm’s length transaction, the price at which the supply would
have been provided by a registered person to an independent person dealing at
arm’s length;
c) In the case of taxable goods imported into Kenya, the sum of the following
amounts-
- The value of taxable goods ascertained for the purpose of customs duty; and
- The amount of the duty of customs, if any.
d) In the case of a taxable service imported into Kenya the price at which the supply
is provided.
In calculating the price of any goods, the following shall be included: -
a) Any wrapper, package, box, bottle or other container in which the goods
concerned are contained;
b) Any other goods contained in or attached to such wrapper, package, box, bottle
or other container; and

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c) Any liability the purchaser has to pay to the seller in addition to the amount
charged as price i.e. provision for, advertising, financing, servicing, warranty,
commission, transportation, erection or any other matter.
NB:
- If a discount is offered, the taxable value shall be the selling price less the
discount
- If consideration is it wholly money, the taxable value shall be that
consideration
- If consideration is not in money or partly in money and partly in kind, the
taxable value shall be the consideration a person would pay if money were the
only consideration.
Illustration
Mr. Wanyiri a textile trader bought the following items, 20 Rolls of cloth at Kshs. 6
each; 6 Sewing threads at Kshs. 10 each; & 70 Buttons at Kshs. 2 each. He was given a
trade discount of 25%.
Required
How much is his Output VAT? (Taxable value and tax)
Solution
20 Rolls (20X6) Kshs. 120
6 Threads (6X10) Kshs. 60
70 Buttons (70X2) Kshs. 140
Total Kshs. 320
Discount @ 25% Kshs. (80)
Taxable value Kshs. 240
Output VAT @ 16% Kshs. (38)

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(b)Tax Point
This is also referred to as “Time of Supply”; it is the time when a supply is deemed to
have taken place. It is the point when tax becomes due and payable. VAT is accounted
for in the tax period in which the tax point occurs. Tax point is the earliest of: -
a) The goods and services have been supplied to the purchaser; or
b) 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; or
c) An invoice is issued in respect of the supply; or
d) Payment is received for all or part of the supply;
Tax Point in Special Situations

1) For goods taken for personal or non-business use, tax point is the time when such
goods are taken or set aside for such use or purpose
2) For imported goods, the tax point shall be as follows: -
a) In the case of imported taxable goods cleared at the port of importation, at the
time of customs clearance either for home use or an Inland station;
b) In the case of taxable goods removed to a licensed warehouse subsequent to
importation, at the time of final clearance from the warehouse for home use.
c) In the case of taxable goods removed from an export processing zone at the time
of removal for home use;
3) For imported services, the tax payable shall be due and payable at the time when-
a) The taxable service is received; or
b) An invoice is received in respect of the service; or
c) Payment is made for all or part of the service, whichever time shall be the earliest.
4) For construction industry, the tax point shall be the earliest of: -
a) Provision of service such as design, advisory or supervision
b) Issue of a fee note
c) Receipt of any payment

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5) For goods sold on condition, the tax point shall be: -
a) When the buyer indicates that he wishes to retain the goods; or
b) An invoice is issued; or
c) Payment is received
6) Where supplies are made on a continuous basis, or by metered supplies, tax shall
become chargeable on the first meter reading and subsequently tax shall become due
and payable at the time of each determination or meter reading.
9.8. Accounting for VAT
After charging and collecting VAT the registered taxpayer is supposed to account for
the tax as well. VAT legislation stipulates ways in which a registered taxpayer should
account for VAT: -
1. Issuing a tax invoice
2. Input tax deduction
3. Partial exemption
4. Keeping of records (As discusses under paragraph 6.10.6)
5. Submission of returns (As will be discusses under paragraph 6.10.9)
6. VAT account
A. Issuing a Tax Invoice

A tax invoice is a sales document, which is the most important instrument of VAT
control. It is a transaction voucher that is issued by a registered trader when he makes
a taxable supply. The tax invoice (voucher) contains prescribed details for the supply
as follows: -
a) The name, address, VAT registration number and personal identification
number of the person making the supply;
b) The serial number of the invoice;

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c) The date of the invoice;
d) The date of the supply, if different from the invoice date;
e) The name, address, VAT registration number, if any, and Personal Identification
Number of the person to whom the supply was made, if known to the supplier;
f) The description, quantity and price of the goods or services being supplied;
g) The taxable value of the goods or services, if different from the price charged;
h) The rate and amount of tax charged on each of those goods and services;
i) Details of whether the supply is a cash or credit sale and details of cash or other
discounts, if any, that apply to the supply;
j) The total value of the supply and the total amount of VAT charged;
k) The logo of the business of the person issuing the invoice; and
l) The identification number of the register.
Where cash sales are made from retail premises, a registered person may issue a
simplified tax invoice immediately upon the payment for the supply, which quotes
price VAT inclusive, hence to get the VAT element: - [t / (1+t)] X Tax inclusive amount
B. Input Tax Deduction

(a) Input Tax
This is the tax paid or payable by a registered person on Purchases or importation of
goods or services.
(b) Output Tax
This is tax due or charged on taxable supplies (sales). A registered person is entitled
to claim input tax, from the tax payable by him on supplies by him (referred to as ‘output
tax’) in that tax period, except where the law prohibits these as non-deductibles.
The basis of claiming input is in possession of a tax invoice or a customs entry (C63)
duly certified by the proper officer in case of imported goods. No input tax however
can be deducted more than six (6) months after the input tax become due and payable.

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Section 17 (4) of the Value Added Tax, 2013 provides that, a registered person shall
not deduct input tax if the tax relates to the acquisition of: -
a) Passenger cars or mini buses, and the repair and maintenance thereof including
spare parts, unless the passenger cars or mini buses are acquired by the registered
person exclusively for the purpose of making a taxable supply of that automobile
in the ordinary course of a continuous and regular business of selling or dealing in
or hiring of passenger cars or mini buses; or
b) Entertainment, restaurant and accommodation services unless –
(i) The services are provided in the ordinary course of the business carried on by
the person to provide the services and the services are not supplied to an
associate or employee; or
(ii) The services are provided while the recipient is away from home for the
purposes of the business of the recipient or the recipient’s employer.
Tax Paid on Stock, Assets or Building Before Registration.
When a person on the date he becomes registered has in stock goods on which tax has
been paid or has constructed a building, civil works or has purchased assets for use in
making taxable supplies, he may, within thirty days, claim relief from taxes paid on
such goods, buildings, civil works or assets; Provided they were
constructed/purchased within twelve months prior to registration, or within such
period, not exceeding twenty-four months, as the Commissioner may allow. The
Commissioner may, authorize the registered person to make an appropriate
deduction of the relief claimed from the tax payable on his next return if satisfied that
the claim for relief is justified.
C. Partial Exemption
Section 17 (6) (c) of the Value Added Tax Act, 2013 provides that, deduction of input
tax attributable to both taxable supplies and exempt supplies, the amount of input
VAT allowed is restricted according to the following formula unless the ratio of

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taxable sales to total sales is over 90% in which case the taxpayer is allowed a full
deduction of the input tax: - A/C x B
Where: -
A is total amount of input tax payable during the tax period on acquisitions that
relate partly to making taxable supplies and partly for another use;
B is the value of all taxable supplies made by the registered person; and
C is the value of all supplies made by the registered person.
NB: If the ratio of taxable sales to total sales is less than 10% the registered person
shall not be allowed any input tax credit for total amount of input tax
Please note that “value of all taxable supplies” includes Zero Rated supplies and
“value of all supplies” includes Exempt Supplies
Illustration
Supplies @16% Kshs. 2,000
Zero rated supplies Kshs. 2,000
Exempt supplies Kshs. 2,000
Total Amount of input tax Kshs. 500
Required
Calculate deductible input tax
Solution
Value of all taxable supplies {2,000+2,000} = Kshs. 4,000
Value of all supplies {2,000+2,000+2,000} = Kshs. 6,000
Ratio of taxable sales to total sales {4,000/6,000} = 66.67%
Deductible input tax {(500/6,000)*4,000 = Kshs. 333.33
Past paper Questions: Q 2(b) August 2009

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D. VAT Account
This is a summary (“T-Account”) of the taxpayers’ monthly transactions showing the
total of output tax and input tax in each period and the net tax payable or refundable
at the end of the period. Where, Tax (VAT) Payable is the amount of tax a trader
remits to the commissioner of DTD. It’s the difference between the output tax charged
and the input tax paid.
That is: -
Tax payable = Output tax - Input tax
INPUT OUTPUT
Input tax xx Output tax xx
Add: Over Declaration xx Add: Under Declaration xx
Debit Note Received xx Debit Note Issued xx
Less: Returns Outwards xx Less: Returns Inwards xx
Discount Received xx Discount Allowed xx
Credit Note Received xx Credit Note Issued xx
Total Input Tax XX Total Output Tax XX
Total Input Tax (XX)
VAT Payable XX
Withholding VAT
Introduction
Withholding VAT was introduced in Kenya W.e.f 1st October 2003. It was not a new
tax but a reinforcement measure to ensure that all the VAT charged reaches the
Government. Prior to this some suppliers were tempted to suppress declaration of the
VAT due for payment. The Value Added Tax (Tax withholding) Regulations, 2004
come into operation on the 11th June 2004. In this Regulation, a ‘Supplier’ means a

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person who receives a payment for taxable supplies from a tax-withholding agent;
and a ‘Tax withholding agent’ means a person who has been appointed as such under
section 25A of the Value Added Tax Act, 2013. Which include: -
- Government Ministries
- Government Departments and Agencies
- Other persons appointed by the Commissioner
What Is Withholding VAT
This is a system, which involves the declaration of VAT by both the supplier and his
customer who have been appointed as a withholding VAT Agent. Under this system,
upon making payment to a supplier the tax withholding agent deducts tax there from,
keep records; and furnish the supplier with an acknowledgement of the payment
(WHT-Certificate VAT 32A).
Withholding VAT System
As mentioned above, when a taxpayer (trader) supplies and invoices an appointed
withholding VAT Agent the payment for supply is made less VAT charged or that
which ought to have been charged. The Agent withholds VAT irrespective of whether
the supplier is registered for VAT or not. The Agent issues a withholding VAT
certificate to the supplier indicating the VAT withheld. This certificate entitles the
trader to claim back the withheld VAT to avoid double taxation since the same tax is
declared and paid by the trader through a VAT 3 return.
Supplies Liable to Withholding VAT
Only taxable goods and services are liable to withholding VAT. No VAT is withheld
on exempt goods, exempt services and Zero-rated supplies. Any VAT withheld in
exempt and Zero-rated supplies is treated as tax paid in error and therefore refundable
by the Commissioner.

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Submission of Withholding VAT Returns
Withheld VAT is remitted by appointed withholding VAT Agents to the
Commissioner on weekly basis unless the Commissioner has accepted an alternative
method taxes but where no tax is withheld in any period, he should furnish a nil
return. The payments are made against VAT 32. A taxpayer whose VAT has been
withheld is still required to submit a VAT 3 return and pay the tax charged
irrespective of whether the tax has been or will be withheld. The same case applies
irrespective of whether the Supplier has been paid or not.
Currently, the potion of VAT that is withheld is 6 % out of the 16 % VAT. The VAT
withholding agents remit the withheld VAT on behalf of the suppliers to KRA by the
20th day of the following month.
VAT withholding agents are specific persons who have been appointed by KRA as
VAT withholding agents. Currently, the persons fall under any of the following
categories.
1. Government ministries and departments.
2. Government corporations.
3. County governments.
4. Other public bodies.
5. Banks and financial institutions.
6. Insurance companies and brokers.
7. Hospitals.
8. Cooperative societies.
9. All companies under Large Taxpayers Office (LTO).
10. Some companies under Medium Taxpayers Office (MTO).
The Commissioner has powers to appoint any person as a withholding VAT agent.
However, no person should withhold VAT unless they are appointed VAT
withholding agents.

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Refund of Excess Credit

A taxpayer is authorized to claim back the withheld VAT on subsequent VAT 3
return(s) provided he is in possession of withheld VAT certificate (s). Where the excess
arising from the system becomes a perpetual feature, the taxpayer has a right to claim
it from the Commissioner by lodging a claim on form VAT 4.
Offences Under Withholding VAT System

Offences under the System are as Follows: -
• Failure by the appointed Agents to withhold VAT
• Failure to remit the withheld VAT or to Submit a return where there is no
payment to make.
• Failure to issue withholding VAT certificates.
• Purporting to be a withholding VAT Agent.
A withholding VAT Agent who commits the above offences is liable to a penalty of
Kshs 10,000 or 10% of the Tax due whichever is higher.
9.9. VAT Returns
Due Date
Section 44 (1) of the Value Added Tax Act, 2013 requires, every registered person to
submit VAT return (on form VAT3), monthly. The return is submitted on or before the
due date, that is the 20th day of the month succeeding that in which the tax became
due, provided that where the 20th day of the month falls on a public holiday, Saturday
or Sunday, the return together with the payment of tax due, shall be submitted on the
last working day prior to that public holiday, the Saturday or Sunday.
Extension of Time
Section 44 (2) allows a registered person to, apply to the Commissioner for extension
of time to submit a return before the due date for submission of the return.

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Electronic Filling
Section 39 (1) empowers the Commissioner to establish and operate an electronic
system of filing tax returns or other documents by registered persons and electronic
service of notices and other documents by the Commissioner (iTax).
NB: ANY person who fails to submit his/her return as required is liable to a penalty
of Kshs. 10,000 or 5% of the amount of tax payable under the return, whichever
is higher.
Types of Return
(a) Payment Return occurs when output tax is more than input tax and it’s accompanied
by a payment to the commissioner. All payments return should be made to the
CBK or any other approved Commercial bank
(b) Credit Return occurs the amount of input tax deductible exceeds the amount of output
tax due; the excess shall be carried forward to the next tax period.
(c) Nil Returns occurs where no business has taken place and hence nothing to declare.
9.10. Remission, Rebate and Refund of VAT
A. Remission of VAT
Section 2 of the repealed Customs and excise Act, Chapter 472, had defined
"remission" to mean the waiver of duty or refrainment from exacting of duty; The
dictionary meaning is to cancel or reduce debt payable while according to VAT law,
remission refers to the waiver by the commissioner or refrainment from imposing tax
(VAT) which would have been collected on taxable goods and taxable services but is
foregone wholly or partly if he is satisfied that it is in the public interest to do so or on
additional tax where such remission is justified but must be approved by the minister
if such remission is over Kshs. 1,500,000.

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Where remission is granted under a certain condition then that tax shall become
payable in the event of breach of such condition as: -
- Official Aid funded projects
- Diplomats and other international organizations
- Agricultural input material
- Exports
- Privileged persons and bodies i.e. British Council, Common Wealth and other
Nations etc.
However, for control purposes remissions are not automatic, there are procedures to
be followed and an application has to be made. Remission are not be granted in respect
of Stocks in trade, Consumables, Office furniture, Typewriters, Copying equipment,
Stationery, Kitchenware, Crockery, Linen, Draperies, Carpets (in single pieces), Safes,
and Refrigerators
B. Rebate of VAT
Section 2 of the repealed Customs and excise Act, Chapter 472, had defined "rebate"
to mean a reduction or diminishment of charge for duty; therefore, rebate in line with
the VAT law unlike remission, rebate is the reduction of VAT payable.
C. Refund of VAT
Section 2 of the repealed Customs and excise Act, Chapter 472, had defined "refund"
to mean the return or repayment of duties already collected; hence in line with VAT
law, a refund refers to return, or repayment of VAT already paid, such circumstances
include: -
a) Taxable goods manufactured in or imported into Kenya and before being used,
those goods have been subsequently exported under customs control; or
b) Any tax has been paid in error (Claim within 12 Months); or
c) Making zero-rated supplies; or

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d) Tax withheld by appointed tax withholding agents; or
e) Physical capital investments where input tax deducted exceeds one million
shillings provided that the investments are used in making taxable supplies; or
f) Bad debts (Claim within 5yrs); or
g) Inventory/asset in stock (Claim to be done in 30 days); or
h) In the opinion of the Minister, it is in the public interest to do so.
But for the refund to be payable (apart from [f]&[g]), a registered person must lodge a
claim for the amount payable within twelve months from the date the tax became
payable, or such longer period, not exceeding twenty-four months, as the
Commissioner may allow. Every application however, for a refund of an amount
exceeding one million shillings must be accompanied by an auditor's certificate.
NB: No refund is payable unless the registered person is up-to-date in submitting
all VAT returns on Form VAT 3 together with the appropriate tax.
Where any tax has been refunded in error, the person to whom the refund has
been erroneously made shall, on demand by the Commissioner, pay the
amount erroneously refunded.
Any fraudulent claim for a refund of tax attracts a penalty of an amount equal
to two times the amount of the claim.
9.11. Rights and Obligations of VAT Registered Person
A. Rights of A Registered Person

A taxpayer has a wide range rights including the following among others: -
a) To claim input tax for the furtherance of a registered business

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b) To claim all types of refunds where applicable
c) To get VAT information
d) To be treated fairly and impartiality
e) Privacy and confidentiality
f) Courtesy and consideration
g) Presumption of honesty
h) To object to any disputed assessment
i) To demand identification of any visiting KRA officers
B. Obligations of A Registered Tax Payer

a) Register for VAT if qualified to do so
b) Display the VAT registration certificate in a conspicuous place within the
business premises
c) Charge VAT on all taxable supplies made
d) Issue serially numbered tax invoices or cash sale receipts (ETR generated and/or
supported by ETR receipt) on every sale made
e) Disclose and avail any relevant information, records or documents demanded
by an authorized officer
f) Declare true and correct VAT returns and file the same within the stipulated
period
g) Accord full cooperation to authorized officers
h) Pay immediately any undisputed assessment raised
Should one fail to fulfill the above obligations, he’ll be liable to penalties stipulated in
the VAT law and his records subjected to an audit and any assessment made
demanded with interest

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9.12. Changes to be Notified to the Commissioner
The Tax Procedures Act, 2015 Sec.9 provides that every person carrying on a business
must, within thirty (30) days of the occurrence of the following changes, notify the
Commissioner of any changes:
(a) in the place of business, trading name and registered address;
(b) in the case of:
a. A company, of the persons with share-holding of 10% or more of the issued
share capital;
b. A nominee ownership, to disclose the beneficial owner of the shareholding;
c. A trust, the full identity and address details of trustees and beneficiaries of
the trust;
d. A partnership, the identity and address of all partners; or cessation or sale
of the business, all relevant information regarding liquidation or details of
ownership.
9.13. Offences Fines, Penalties and Interest
(a) Fraud in Relation to Claims for Tax Refund

Any person who fraudulently makes a claim for a refund of tax is liable to pay a
penalty of equal to two times the amount of the claim.
(b)False Statements
Any person who makes any false statement, produces any false document or
information, or makes any false return is guilty of an offence and liable to a fine not
exceeding four hundred thousand shillings or double the tax evaded, whichever is the greater
or to imprisonment for a period not exceeding three years, or to both.

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(c) Visible Display

Any person who does not display the certificate or other required forms of
identification in such form and in a clearly visible place is liable to a default penalty of
twenty thousand shillings and, in addition, shall be guilty of an offence and liable to a
fine not exceeding two hundred thousand shillings or to imprisonment for a term not
exceeding two years or to both.
(d)Late Registration
Any person who applies for registration after the time limit is liable to a default penalty
of twenty thousand shillings.
(e) Failure to Issue an Invoice

Any person who fails to issue a tax invoice is liable to pay a default penalty of not less
than ten thousand shillings but not exceeding two hundred thousand shillings person and
shall be guilty of an offence and any goods in connection with which the offence was
committed shall be liable to forfeiture.
(f) Failure to Keep Records

Any person who fails to keep records is liable to pay a default penalty of not less than ten
thousand shillings but not exceeding two hundred thousand shillings.
(g) Failure to Submit Return

Any registered person who fails to submit a return within the allowed period is liable
to a penalty of ten thousand shillings and two percent per month compounded of the tax
due.
(h) Failure to Comply with ETR Regulations
Any person who fails to comply with these regulations is guilty of an offence and shall
be liable to a fine not exceeding five hundred thousand shillings or to imprisonment for a
term not exceeding three years or to both.

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(i) General Penalty
Any person guilty of any offence for which no other penalty is provided is liable to a
fine not exceeding five hundred thousand shillings or to imprisonment for a term not exceeding
three years or to both.

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Chapter Ten: Customs Taxes and Excise Taxes
Table of Contents
Chapter Ten
10. CUSTOMS TAXES AND EXCISE TAXES ........................................................... 2
10.1. CUSTOMS PROCEDURE ............................................................................................ 2
10.2. IMPORT AND EXPORT DUTIES................................................................................. 8
10.3. PROHIBITIONS AND RESTRICTION MEASURES.................................................... 10
10.4. TRANSIT GOODS AND BOND SECURITIES ........................................................... 14
10.5. PURPOSES OF CUSTOMS AND EXCISE DUTIES ..................................................... 14
10.6. GOODS SUBJECT TO CUSTOMS CONTROL ........................................................... 15
10.7. IMPORT DECLARATION FORM, PRE-SHIPMENT INSPECTION, CLEAN REPORT OF
FINDINGS ............................................................................................................................ 17
10.8. EXCISABLE GOODS AND SERVICES ....................................................................... 17
10.9. APPLICATION FOR EXCISE DUTY (LICENSING) ..................................................... 20
10.10. USE OF EXCISE STAMPS ..................................................................................... 21
10.11. OFFENCES AND PENALTIES ............................................................................... 22
10.12. EXCISABLE GOODS MANAGEMENT SYSTEM ................................................... 23

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10. CUSTOMS TAXES AND EXCISE TAXES
10.1. Customs Procedure

Introduction
An Act of Parliament established the Customs & Border Control department,
(previously known as Customs and Excise Department, then Customs Services
Department) of the Kenya Revenue Authority in 1978. It is the largest of the four
revenue departments in terms of manpower, revenue collection and countrywide
operational network. The primary function of the Department is to collect and account
for import duty, Excise duty, VAT on imports and other levies.
Customs Area
The East African Customs Community Management Act, 2004 defines “Customs
area” to mean any place appointed by the Commissioner under section 12 for carrying
out customs operations, including a place designated for the deposit of goods subject
to customs control (Amended 17th February 2011).
They include: -
a) Airports
b) Seaports
c) Lake ports
d) Inland Container Deports (ICD)
e) Customs and Bonded warehouses
f) Transit shades
Customs Warehouse
This is any place approved by the Commissioner for the deposit of un-entered,
unexamined, abandoned, detained, or seized, goods for the security thereof or of the
duties due thereon. They owned by the government.

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Bonded Warehouse
This is any warehouse or other place licensed by the Commissioner for the deposit of
dutiable goods on which import duty has not been paid and which, have been, entered
to be, warehoused. They are privately owned.
Import clearance into Kenya

A. Documentation Required
(a) Import declaration form (IDF) This must be applied for and obtained from the
Kenya Revenue Authority for any Import. The Importer is responsible for
applying for the IDF but may use an agent to consult or input this into the
ORBUS system. IDF contains the following key information: -
i. Value. This is what is used for tax calculation. Note that values may be
disputed by customs and cargo may be verified to solve any disputes.
ii. Quantity. Should be as detailed and correct as possible. Every slightly
different type of goods should have specified quantity rather than
grouping similar items.
iii. Quality. Whether the items are New, Used or otherwise
iv. Standards. This should also be backed up by inspection reports by other
government agencies i.e. Kenya Bureau of Standards, Public Health,
Agriculture (KEPHIS). etc. to ascertain if the expected standards have
been met. In case of suspicion, Tests may be carried out and
v. Certificates/Permits. Test Certificates from accredited bodies (In the
country of Origin) may be required.
vi. Classification (HS Code): This is the unique code that identifies an item,
different HS codes attract different taxes and tax rates.
(b) Certificate of Conformity (if applicable) Kenya Bureau of Standards has
appointed certain agents (INTERTEK, SGS, Bureau VERITAS) to carry
conformity inspection of certain commodities.

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These agents issue shipper/supplier with a Certificate of Conformity and the
test results.
(c) Bill of lading (sometimes abbreviated as B/L or BoL) is a document issued by a
carrier, which details a shipment of merchandise and gives title of that
shipment to a specified party. When issuing the bill of lading, the shipping line
should take care of the following: -
i. Consignee. The consignee column on the BL should read "Name & Full
address of actual receiver". This is carried over into the customs system
and identifies the taxpayer
ii. Notify Party. This is merely someone that needs to be notified about the
arrival of the cargo covered in the bill of lading. His Name, address and
contact information
iii. Place of delivery. This is the Country and port of destination
iv. Description. This is the description of cargo imported. It should always
mention the actual number of packages imported e.g. the BL should read
"1x 40' STC 456 packages of Tiles
v. CFS consigning. This is the inland Container Deport where the
consignment will the cleared from once offloaded at the port of
Mombasa.
(d) Packing List Description of goods on the packing list must match with the
details mentioned on the Bill of Lading and the Commercial Invoice. Packing
List must indicate the package number, description, weight in metric ton,
length in meter, width in meter, height in meter and cubic measurement of all
packages where applicable.
(e) Commercial Invoice must be detailed (as per the packing list) and the total CIF
value of the consignment must be indicated. It is preferable to have the exact
details reflected on the packing list copied and paste on the commercial invoice

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and values indicated in the adjacent column, and a total CIF value indicated at
the bottom of the document (Items cost, freight charges and insurance amount must
be duly broken down on each Commercial Invoice).
(f) Exemption letter (if applicable) Charitable organizations, government
projects, governmental organizations etc. may apply for exemption of duties
and/or VAT where applicable. Such beneficiary does this by writing to the
National Treasury. Exemption letters are usually granted for specific
consignments, which have to be exactly described in the application.
NB: Dispatch of documents should be done in good time so as to reach the
Consignee/Notifying party or Clearing agent at least 7 days prior to arrival of
the vessel at the port of Mombasa to avoid delays in processing paper work.
B. Customs Clearance Procedure
(a) Customs Declaration Prior to actual vessel arrival date in Mombasa, the
shipping line lodges its online manifest with customs (iCMIS) and the port
authorities (KWATOS). The manifest number pertaining to the concerned
shipment on board of the vessel is advised by the shipping line.
Special attention has to be given to the place of clearance (port or CFS) as this
may differ depending on: -
a) Nature of the cargo (dangerous cargo); or
b) Import regime (Transit or Home use); or
c) Request from the importer as stated on the bill of lading; or
d) Granted by the ports authorities
Against the uploaded manifest, a Customs Entry (Form C63) is lodged in the
Simba System by the importers clearing agent.
Parallel to this, once the shipping line uploads the manifest, the original Bill of
Lading duly endorsed by the consignee (or the telex release) is submitted to the

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shipping line for issuance and release of a delivery order. This is done after
settlement of the local shipping line charges. The shipping line has to ensure
the delivery order is also uploaded online.
Uploaded entries are passed after either payment of duties or confirmation of
exemption by means of the exemption letter code in the customs system.
(b) Other Customs Formalities The clearing agent prepares a customs folder,
including ALL the documents and presents it to customs where the documents
are endorsed after verification by customs. Endorsed documents are
dispatched to the point of final clearance, i.e. Port of Mombasa (KPA) or
nominated CFS to the resident customs officers.
At the point of clearance, the mode of verification is assigned by customs and
executed i.e. sight and release, direct release, normal verification, 100%
verification, scanning, etc.
(c) Customs Verification and / or Scanning: Scanning of container is done by
passing a loaded truck through the scanning machines either in the port or at
the CFS. If the scanned image shows any irregularities, customs will usually
proceed to do verification.
Verification is done by having the placed containers down and opened. If
verification is to be performed at a CFS, all cargo has to be transferred to the
respective CFS by the CFS operator.
A verification report, which must tally with the customs declaration, is input
in the Simba system by the Customs Officer. If the results of the designated
verification procedure indicate any abnormalities, then the customs will
usually proceed for 100% verification. Any discrepancies on value-quality-
quantity or the finding of any undeclared items will lead to customs raising an

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offence for which the outcomes are varied and guided by the East Africa
Customs Management Act, 2004.
If cargo was not verified / scanned or if the results of this was a clean bill,
customs can issue a customs release order once it is confirmed that the delivery
order obtained earlier is available online
(d) KPA Pick Up Order or CFS Release order for all consignments cleared within
the port of Mombasa, A pick up order is generated via the “KWATOS” system,
this pick-up order is attached to the set of documents (which includes the
delivery order, passed customs entry, customs release order) and presented to
CDO (Customs Documentation Office) at Port. Port Charges are then paid usually
by deducting the agents running account with the port after which Cargo can
then be allowed out of the port. Allocated truck and trailer must be booked via
“KWATOS” for loading purposes.
For CFS clearance, the principle is the same that the process though issuance of
release orders and payment of CFS charges can differ from one CFS to another
(some are manual, some electronic, some require bankers’ Cheques, others can give
credit). Once charges are secured and paid, a gate pass is issued for collection
of cargo and loading purposes.
C. Removal of Goods from the Port or CFS
(a) Containers: Containers are usually loaded on standard semitrailer trucks to
either the final destination or an intermediate staging area. Since the cargo is
fully customs cleared at this stage, it can be delivered to any storage area or
destination site not under customs control.
(b) Direct delivery of bulk / project cargo in the case of bulk/project cargo, direct
delivery from the vessel can be requested from the ports authority bypassing
any discharge into the port or CFS. For this to be granted the actual clearance

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has to be completed in advance and any special requests by customs have to be
adhered to.
i. Discharge Operations Once the vessel begins discharging, trucks
(standard semitrailers or low-loaders/modular trailers if required) will be
driven alongside the vessel and an independent surveyor can be present
if required. Approval for trucks to enter and exit the port with details of
the trucks and cargo on the vessel has to be processed in advance.
ii. Special Road Permit Application If required, the agent and/or the
transporter applies for the special road permit for all Out of Gauge cargo
– which implies that each particular load is duly weighed at a certified
weighbridge and physically checked and sighed by a representative of
the Ministry of Roads and Public Works. These permits are issued at the
discretion of the authorities and sometimes take time to process, even
longer if the item is out of gauge.
10.2. Import and Export Duties
Definitions
a) "Import" means to bring or cause to be brought into the Partner States from a
foreign country; [EACCMA, 2004] but the repealed Customs and Excise Act Cap
472 defined "import” to mean to bring or cause to be brought into Kenya from a
foreign country;
b) "Import duties" means any customs duties and other charges of equivalent effect
levied on imported goods; [EACCMA, 2004] while the repealed Customs and
Excise Act Cap 472 defined "import duty" to mean duty imposed on goods
imported into Kenya;
c) "Duty" includes any Cess, levy, imposition, tax, or surtax, imposed by any Act;
[EACCMA, 2004] while the repealed Customs and Excise Act Cap 472 defined

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"duty" to include excise duty, import duty, export duty, levy, Cess, imposition,
tax or surtax imposed on goods under this Act;
d) "Export" means to take or cause to be taken out of the Partner States;
e) "Export duties" means Customs duties and other charges having an effect
equivalent to customs duties payable on the exportation of goods;
Categories of Imports
a) Home use: - These are good imported for local consumption within Kenya
b) Transit: - These are goods passing through Kenya to destinations outside Kenya
c) Warehousing: - These are goods imported for storage awaiting further action
d) Use in EPZ: - These are goods imported for the production of goods for export
e) Use in Bonded factory: - These are goods imported for production of goods for
export
f) Temporary Imports: - these are goods imported for repairs or trade fair
Categories of Exports
a) Domestic Exports
b) Temporary Exports
c) Re-Exports
d) Transshipment
a) Domestic Exports: There are five (5) types of exports namely: -
i. Direct exports of home-produced goods using local raw materials i.e. Tea.
ii. Direct exports of home-produced goods incorporating imported raw
materials i.e. Tires & Plastics
iii. Direct export of home-produced goods under Export Promotion
Programme Office (EPPO)
iv. Export of home-produced goods under Essential goods production support
Programme (EGPSP) i.e. Medicaments

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v. Direct Export of ship stores i.e. water and other consumables
b) Temporary Exports: These are exports either to be returned in unaltered state i.e.
for trade fair or repairs i.e. machinery
c) Re-Exports: There are four (4) types of Re-exports namely: -
(i) Ex-Warehouse Exports
(ii) Ex-MUB Exports
(iii) EPZ Exports
(iv) Re-Export after temporary importation for repairs or trade fair
d) Transshipment Cargo: "Transshipment" means the transfer, either directly or
indirectly, of any goods from an aircraft, vehicle or vessel arriving in a Partner
State from a foreign place, to an aircraft, vehicle or vessel, departing to a foreign
destination.
10.3. Prohibitions and Restriction Measures
A. Prohibitions
The East African Customs Community Management Act, 2004 defines "Prohibited
goods,” to mean any goods the importation or exportation of which is prohibited
under the Act or any law for the time being in force in the Partner States.
1) Prohibited Imports
1. False money and counterfeit currency notes and coins and any money not being
of the established standard in weight or fineness.
2. Pornographic materials in all kinds of media, indecent or obscene printed
paintings, books, cards, lithographs or other engravings, and any other
indecent or obscene articles.
3. Matches in the manufacture of which white phosphorous has been employed.

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4. Any article made without proper authority with the Armorial Ensigns or Coat
of Arms of a partner state or having such Ensigns or Arms so closely resembling
them as to be calculated to deceive.
5. Distilled beverages containing essential oils or chemical products, which are
injurious to health, including thijone, star arise, benzoic aldehyde, salicyclic
esters, hyssop and absinthe.
6. Narcotic drugs under international control.
7. Hazardous wastes and their disposal.
8. All soaps and cosmetic products containing mercury.
9. Used tires for light Commercial vehicles and passenger cars.
10. Some Agricultural and Industrial Chemicals.
11. Counterfeit goods of all kinds. (Amended in L.N. EAC/13/2008 dated 30/6/2008)
12. Plastic articles of less than 30 microns for the conveyance or packing of goods.
(Amended in L.N. EAC/7/2007 dated 18/6/2007)
13. Worn underwear garments of all types (Inserted by L.N. EAC/15/2010 Dated
19/06/2010)
2) Prohibited Exports
1. Ivory and Rhino horns and all other products related to endangered species
2. Human Bones
3. Fire arms and ammunitions of all types exported by post
B. Restrictions
The East African Customs Community Management Act, 2004 defines "Restricted
goods" to mean any goods the importation, exportation or transfer of which is
prohibited, save in accordance with any conditions regulating such importation,
exportation, or transfer and any goods the importation, exportation, or transfer of
which is in any way regulated by or under this Act or by any written law for the time
being in force in the Partner State.

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1) Restricted Imports
1. Postal franking machines except and in accordance with the terms of a written
permit granted by a competent authority of the Partner State.
2. Traps capable of killing or capturing any game animal except and in
accordance with the terms of a written permit granted by the Partner State.
3. Unwrought precious metals and precious stones.
4. Arms and ammunition specified under Chapter 93 of the Customs
Nomenclature.
5. Ossein and bones treated with acid.
6. Other bones and horn - cores, unworked defatted, simply prepared (but not cut
to shape) degelatinized, powder and waste of these products.
7. Ivory, elephant unworked or simply prepared but not cut to shape.
8. Teeth, hippopotamus, unworked or simply prepared but not cut to shape.
9. Horn, rhinoceros, unworked or simply prepared but not cut to shape
10. Other ivory unworked or simply prepared but cut to shape.
11. Ivory powder and waste.
12. Tortoise shell, whalebone and whalebone hair, horns, antlers, hoovers, nail,
claws and beaks, unworked or simply prepared but not cut to shape, powder
and waste of these products.
13. Coral and similar materials, unworked or simply prepared but not otherwise
worked shells of molasses, crustaceans or echinoderms and cattle-bone,
unworked or simply prepared but not cut to shape powder and waste thereof.
14. Natural sponges of animal origin.
15. Spent (irradiated) fuel elements (cartridges) of nuclear reactors.
16. Worked ivory and articles of ivory.
17. Bone, tortoise shell, horn, antlers, coral, mother-of pearl and other animal
carving material, and articles of these materials (including articles obtained by
molding).

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18. Ozone Depleting Substances under Montreal Protocol (1987) and the Vienna
Convention (1985).
19. Genetically modified products.
20. Non-indigenous species of fish or egg of progeny.
21. Endangered Species of World Flora and Fauna and their products.
22. Commercial casings (Second hand tires).
23. All psychotropic drugs under international control.
24. Historical artefacts.
25. Goods specified under Chapter 36 of the Customs Nomenclature (for example,
percuassion caps, detonators, signaling flares).
26. Parts of guns and ammunition, of base metal, or similar goods of plastics.
27. Armored fighting vehicles.
28. Telescope sights or other optical devices suitable for use with arms, unless
mounted on a firearm or presented with the firearm on which they are
designed to be mounted.
29. Bows, arrows, fencing foils or toys.
30. Collector’s pieces or antiques of guns and ammunition.
2) Restricted Exports
These are goods the exportation of which is regulated under this Act or of any law for
the time being in force in the Partner States. They include: -
1. Waste and scrap of ferrous cast iron;
2. Timber from any wood grown in the Partner States;
3. Fresh unprocessed fish (Nile Perch and Tilapia);
4. Wood charcoal.
5. Used automobile batteries, lead scrap, crude and refined lead and all forms of
scrap metals (Amended in L.N. EAC/16/2010 dated 29/06/2010)

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10.4. Transit Goods and Bond Securities
The East African Customs Community Management Act, 2004 defines “transit” to
mean the movement of goods imported from a foreign place through the territory of
one or more of the Partner States, to a foreign destination, while Bond securities are
written agreement whereby an importer promises to pay to the commissioner an
amount equal to the duty on goods in case any conditions in the agreement are
breached. Such bonds are used to cover the following: -
a) CB3 - Goods to be moved to a bonded warehouse
b) CB4 - Ex- warehouse for export
c) CB5 - Ex-warehouse ship stores
d) CB6 - Warehoused goods
e) CB7 - Before entry is made for goods
f) CB8 - Goods on transit i.e. from Mombasa port to Uganda
g) CB9 - Indirect transshipment i.e. from Mombasa port to JKIA
h) CB11 - Clearing Agent
i) CB12 - From one customs area to another i.e. From Mombasa port to Embakasi
ICD
j) CB13 - MUB goods
10.5. Purposes of Customs and Excise Duties
Customs & Excise duties are levied on goods with the aim of raising revenue and
protecting the local market.: -
a) Raising Revenue: - Every government requires funding to carry out its operations.
A significant part of this funding is the revenue raised through taxation (including
Customs & Excise duties). Revenue is used to fund both recurrent and capital
expenditure.

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b) Protectionist policy: - The government uses Customs & Excise duties to protect
local industries from competition brought by foreign industries. This involves
taxation of similar goods imported into Kenya or the exemption of local products
from taxation.
c) Economic stability: - The government uses Customs & Excise duties in times of
inflation and deflation. This is used to control expenditure patterns in the economy
i.e. during inflation taxes rates are raised to suppress the purchasing power of
money while in times of deflation tax rates are lowered to increase the purchasing
power of people.
d) Sin Tax: - is excise tax on socially harmful goods. The most commonly taxed goods
are alcohol, cigarettes, and gambling. Excise taxes are collected from the producer
or wholesaler. They drive up the retail price for consumers hence making these
good undesirables due to their high prices.
e) Customs Control: - These are measures put in place to regulate movement of
resources from or into Kenya. Some of the common reasons for control include: -
i. Protection of infant industries
ii. Control of Arms and Ammunitions
iii. Maintenance of food security
iv. Protection of religion and culture
v. Preservation of National heritage
vi. Protection of Human, Animal and Plant Health
10.6. Goods Subject to Customs Control
Section 14 (1) of the East African Customs Community Management Act, 2004 gives
the Commissioner powers to, on application, license any internal container depot for
the deposit of goods subject to Customs control, and the Commissioner may refuse to
issue any such license and may at any time revoke any license which has been issued.

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Section 16 (1) of The East African Customs Community Management Act (EACCMA),
2004 enumerates the following as goods that must be subject to Customs control: -
a) Imported goods (including through Post Office), from the time of importation
until delivery for home consumption or until exportation.
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 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.
Inspection:
Goods subject to Customs control, may be examined at any time by a Customs Officer
Liability:
In case of any loss or damage is occasioned to goods subject to Customs control
through willful or negligence the Commissioner or an officer, action is taken against
the Commissioner or such officer.

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10.7. Import Declaration Form, Pre-Shipment Inspection,

Clean Report of Findings
REFER TO PARAGRAPH 9.1
10.8. Excisable Goods and Services
Definitions
The Excise Duty Act, 2015, enacted to provide for charge, assessment, collection, and
administration of excise duty defines the following terminologies: -
(a) “Ex-factory selling price” shall be: -
a) If the excisable goods are sold by the manufacturer, other than to a
purchaser in an arm’s length transaction, the price payable by the
purchaser; or
b) In any other case, the open market value of the goods at the time of
removal from the manufacturer’s factory.
(b) “Excisable goods” means the goods specified in Part I of the First Schedule;
(c) “Excisable services” means the services specified in Part II of the First Schedule;
(d) “Excise control” provides that, Excisable goods stored in the factory of a
licensed manufacturer shall be subject to the control of the Commissioner.
(e) “Excise duty” means t h e excise duty imposed under the Act;
(f) “Exempt goods” means goods specified in the Second Schedule;
(g) “Export” means to take or cause to be taken from Kenya to a foreign country
or to an export processing zone;
(h) “Import” means to bring or cause goods to be brought into Kenya from a
foreign country or an export processing zone;
(i) “Licensed manufacturer” means a person licensed under section 17 to
manufacture excisable goods.

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Excisable Goods and Rates

The following are the goods specified in Part I of the First Schedule which are subject
to excise duty with applicable rates: -
1) Condensates per 1000l @ 20degC Kshs. 6225.00
2) Motor Spirit (gasoline) regular per 1000l @ 20degC Kshs. 19505.00
3) Motor Spirit (gasoline) premium per 1000l @ 20degC Kshs. 19895.00
4) Aviation Spirit per 1000l @ 20degC Kshs. 19895.00
5) Spirit type Jet Fuel per 1000l @ 20degC Kshs. 19895.00
6) Special boiling point spirit and white spirit per 1000l @ 20degC Kshs. 8500.00
7) Other light oils and preparations Per 1000l @ 20degC Kshs. 8500.00
8) Partly refined (including topped crude) per 1000l @ 20degC Kshs. 1450.00
9) Kerosene type Jet Fuel Per 1000l @ 20degC Kshs. 5755.00
10) Other medium oils and preparations per 1000l @ 20degC Kshs. 5,300.00
11) Gas oil (automotive, light, amber for high speed engines) per 1000l @ 20degC Kshs.
10305.00
12) Diesel oil (industrial heavy, black, for low speed marine and stationery engines)
per 1000l @ 20degC Kshs. 3700.00
13) Other gas oils per 1000l @ 20degC Kshs. 6300.00
14) Residual fuel oils (marine, furnace and similar fuel oils) of a Kinematic viscosity of
125 centistokes per 1000l @ 20degC Kshs. 300.00
180 centistokes Per 1000l @ 20degC Kshs. 600.00
280 centistokes per 1000l @ 20degC Kshs. 600.00
17) Other residual fuels oils per 1000l @ 20degC Kshs. 600.00
18) Fruit juices (including grape must), and vegetable juices, unfermented and not
containing added spirit, whether or not containing added sugar or other
sweetening matter Kshs. 10 per liter

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19) Food supplements 10%
20) Waters and other non-alcoholic beverages not including fruit or vegetable juices
Kshs. 5 per liter
21) Beer, Cider, Perry, Mead, Opaque beer and mixtures of fermented beverages with
nonalcoholic beverages and spirituous beverages of alcoholic strength not
exceeding 10% Kshs. 100 per liter
22) Powdered beer Kshs. 100 per kg
23) Wines including fortified wines, and other alcoholic beverages obtained by
fermentation of fruits Kshs. 150 per liter
24) Spirits of un-denatured ethyl alcohol; spirits liqueurs and other spirituous
beverages of alcoholic strength exceeding 10% Kshs. 175 per liter
25) Cigars, cheroots, cigarillos, containing tobacco or tobacco substitutes Kshs. 10000
per kg
26) Electronic cigarettes Kshs. 3000 per unit
27) Cartridge for use in electronic cigarettes Kshs. 2000 per unit
28) Cigarettes containing tobacco or tobacco substitutes Kshs. 2500 per mille
29) Other manufactured tobacco and manufactured tobacco substitutes;
“homogenous” and “reconstituted tobacco”; tobacco extracts and essences Kshs.
7000 per kg
30) Motor vehicles of tariff heading 87.02, 87.03 and 87.04
(a) Less than 3 years old from the date of first registration Kshs 150,000 per unit
(b) Over 3 years old from the date of first registration Kshs. 200,000 per unit
31) Motor cycles of tariff 87.11 other than motorcycle ambulances Kshs. 10,000 per unit
32) Plastic shopping bags Kshs. 120 per kg
Excisable Services and Rates

The following are the services specified in Part II of the First Schedule which are
subject to excise duty with applicable rates: -

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1) Mobile cellular phone services, at the rate of 10% of their excisable value
2) Other wireless telephone services, At the rate of 10% of their excisable value
3) Excise duty on fees charged for money transfer services by cellular phone service
providers, banks, money transfers agencies and other financial service providers
shall be 10% of their excisable value
4) Excise duty on other fees charged by financial institutions, 10% of the excisable value
10.9. Application for Excise Duty (Licensing)
Activities Requiring a Licence

No person can undertake any of the following activities without a license from the
Commissioner (Anyone who intends to deal is such goods must apply for a licence): -
(a) Manufacture excisable goods in Kenya;
(b) Import into Kenya excisable goods requiring an excise stamp;
(c) Supply excisable services;
(d) Use spirit to manufacture goods in Kenya that are not excisable goods; or
(e) Any other activity in Kenya which, may impose a requirement for a licence.
Obligations of Licensed Person

1) Must display in a conspicuous place: -
a. the original licence at the principal place of business; and
b. in case of excisable services, a certified copy of the licence at every other
place of business.
2) Must notify the Commissioner, in writing: -
a. if the licensed person ceases to carry on the licenced activity;
b. it there is any change in the name, address, place of business, ownership,
constitution, or nature of the principal activity or activities carried on by the
licensed person;

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c. of any closure of operations on a temporary basis; or
d. if, the case of a licensed manufacturer, there is any change in the factory
specified in the licence, or the plant and equipment
NB: The Commissioner reserves the right of suspension or cancellation of the Excise
Licence
10.10. Use of Excise Stamps
An excise stamp is a type of revenue stamp affixed to some excisable goods to
indicate that the required excise tax has been paid by the manufacturer. They
are securities printed by the Kenya Revenue Authority. The Cabinet Secretary,
National Treasury, has the authority to specify: -
(a) the excisable goods to which excise stamps is affixed;
(b) the systems for management of excise stamps and excisable goods, and
(c) the place and time of affixing excise stamps.
NB: It is an offence under the act to fail to comply to such directions
The Excise Duty (Excisable Goods Management System) Regulations, 2017 recently
published in the Kenya Gazette Supplement No. 44 under Legal Notice No. 48
provides that every package of excisable goods, except motor vehicles, manufactured
in or imported into Kenya, are required to be affixed with an excise stamp. The
purpose of this is to:
• Deter counterfeiting;
• Facilitate tracking of the stamps and excisable goods along the supply chain;
• Enable accounting for the production of excisable goods manufactured or
imported; and
• Facilitate any persons in the supply chain to authenticate the stamps and
excisable goods.

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Exempt Goods from Excise Stamp Charges

The regulations exempt the following excisable goods from the requirement of excise
stamps: -
• Excisable goods manufactured for export, the Kenya Defence Forces, the
National Police Service or delivered to a duty-free shop;
• Excisable goods imported or purchased from a duty-free shop by privileged
persons or institutions listed in the Second Schedule to the Act; and
• Excisable goods imported into Kenya as samples which shall have been
exempted from import duty under the Fifth Schedule to the East African
Community Customs Management Act, 2004.
10.11. Offences and Penalties
1) undertaking an activity requiring a licence, without being licensed attracts a
penalty equal to double the excise duty that would have been.
2) A licensed manufacturer who manufactures excisable goods in premises that is not
specified on the manufacturer’s licence is liable to a penalty equal to double the
excise duty payable on those goods.
3) If a licensed manufacturer removes excisable goods from excise control, the
manufacturer shall be liable to pay a penalty equal to double the excise duty
payable on those goods.
NB: Interest payable under, The Tax Procedures Act, 2015 apply to penalties
imposed here.
Other Offences
1) If anyone: -
(a) removes excisable goods from excise control in contravention of section 24 (3) (b);

Page 276
(b) enters any place where excisable goods are stored under excise control without
authorisation; or
(c) is involved in the unauthorised removal, alteration, or interference with excisable
goods under excise control.
2) Any person who buys, or, without proper authority, receives or has in the person’s
possession, any excisable goods that have been manufactured contrary to the
provisions of this Act, or which have been removed from the place where they
ought to have been charged with excise duty before such duty has been charged
and either paid or secured.
These offences attract a fine not exceeding five million shillings or to imprisonment
for a term not exceeding three years, or to both a fine and imprisonment.
10.12. Excisable Goods Management System
The National Treasury published Excise Duty regulations, specifically, “Excise Duty
Remissions Regulation, 2017” and “Excisable Goods Management Regulations
(EGMS), 2017” on 7th April 2017.
The regulations govern the use of excise stamps and are made pursuant to Section 28
of the Excise Duty Act, 2015. The coming into force of the new regulations revoked
the previous Excisable Goods Management System Regulations, 2013.
Kenya Revenue Authority (KRA) since then, has been implementing new excise duty
stamps through the Excise Goods Management System (EGMS) for beer, mineral
water, juices and soft drinks.
The new EGMS system is designed such that details of each excise stamp appended
on a product at the point of manufacturing are captured by the system at the time of
printing and then tracked along the supply chain right from the production facility.

Page 277
Manner of Affixing Excise Stamps

Excise stamps are expected to be affixed on excisable goods in the following manner
specified by the Commissioner:
• In case of locally manufactured goods, at the production facility immediately
after packaging; or
• In the case of imported goods, at a place approved by the Commissioner within
five days of the clearance for importation of the goods for home use.
Excise stamps on imported excisable goods to be affixed at the production facility in
the exporting country may be allowed in accordance with such conditions as the
Commissioner might specify. In addition, the Commissioner can upon the application
by the manufacturer or importer, permit digital stamps to be printed by the System
on each package and in a visible place with indelible security ink to enable the
authentication of, tracking and tracing of, and production accounting for excisable
goods.
Kenya Revenue Authority (KRA) has deferred the implementation of Excisable
Goods Management System (EGMS) on bottled water and juice that was to
commence on 1st August 2018 to a date to be announced later.

Page 278

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PUBLIC FINANCE AND TAXATION

1. Introductions to public financial management

2. Establishment of public funds in the public sector

4. Supply chain management in public entities

5. Oversight function in public finance management

7. Taxation of income of persons Taxable and non taxable persons

10. Administration of value added tax

11. Customs taxes and excise taxes

Topic 1: Introduction to public financial management ……………….………............6

1. INTRODUCTION TO PUBLIC FINANCIAL MANAGEMENT ..........................2

1.1. Nature and Scope of Public Finance ........................................................................ 2

1.2. General Overview of Public Financial Management as Envisaged by the

1.3. Role of the National and County Treasuries ........................................................ 15

1.4. Overview of the Public Financial Management Act ........................................... 18

1.5. Financial Regulations ............................................................................................... 25

1.6. Treasury Circulars; Meaning and Application .................................................... 26

1.8. Role of Budget Officers in Budget Preparation and Execution ......................... 28

1.9. Responsibilities of the National and County Treasuries in Relation to Budget

| Strathmore University | Strathmore Institute | 1

1. INTRODUCTION TO PUBLIC FINANCIAL

1.1. Nature and Scope of Public Finance

are given below.

border lie between economics and politics. He says, “Public finance is

adjustment of the one to the other.“

2. According to Adam Smith “public finance is an investigation into the nature

and principles of the state revenue and expenditure”

3. According to Findlay Shirras “Public finance is the study of principles

underlying the spending and raising of funds by public authorities”.

disbursement of resources needed for conduct of public or government

Thus, Public Finance is seen as a branch of economics which studies

| Strathmore University | Strathmore Institute | 2

Nature of Public Finance

”Art is the application of knowledge for achieving definite objectives.”

It is a science because we study in it the various principles, problems and policies

spend them properly.

advanced the following arguments in favour of public finance being science:

One. Public finance is not a complete knowledge about human rather it is

concerned with definite and limited field of human knowledge.

to government revenue and expenditure.

Three. Scientific methods are used to study public finance.

Four. Principles of public finance are empirical.

can extract from it in the public interest.

1) Positive science, as well as

| Strathmore University | Strathmore Institute | 3

problems of government’s revenue and expenditure can be known. It also offers

suggestions in this respect.

It is also normative science as study of public finance presents norms or standards of

the government’s financial operations . It reveals what should be the quantum of

Scope of Public Finance

1. Public Revenue: Public revenue concentrates on the methods of raising public

flow of Government funds into various streams.

raised by the government in a particular year is the part of public revenue.

4. Financial Administration: This refers to the organisation and administration of the

financial mechanism of the Government by relevant Government machinery.

| Strathmore University | Strathmore Institute | 4

1.2. General Overview of Public Financial Management

emphasis on accountability and public participation in decision making on how such

Part I — Principles & Framework of Public Finance