The Kenyan Tax Environment

TASK ONE

1.1         The Kenyan tax environment

Tax is a compulsory monetary contribution to the state’s revenue, assessed and imposed by a government on the activities, enjoyment, expenditure, income, occupation, and property of individuals and organisations (BusinessDictionary.com, 2014).

In Kenya, the authority charged with the responsibility of collecting revenue on behalf of the Government of Kenya is the Kenya Revenue Authority (KRA). The purpose of KRA is to assess, collect, administer and enforce any laws relating to revenue. KRA also strive to enhance efficiency and effectiveness of tax administration by eliminating bureaucracy, procurement, promotion, training and discipline. The authority eliminates tax evasion by simplifying and streamlining procedures and improving tax payer service and education, in turn, increasing the rate of compliance.

Furthermore, KRA aims to promote professionalism and eradicate corruption amongst their employees by paying adequate salaries that enables the institution to attract and retain competent professionals of integrity and ethical morals. Moreover, KRA ensure the protection of local industries and facilitate economic growth through effective administration of tax laws relating to trade. Lastly, the authority ensures effective allocation of scarce resources in the Kenyan economy by effectively enforcing tax policies (Revenue.go.ke, 2014).

1. Purposes of taxation

Taxes have various purposes. Their main purpose is to generate revenue to finance public expenditure. Through taxation, KRA are able to raise revenue that would help finance the expenditure of the Kenyan government. The government strives to fund their expenditure by collecting taxes that would eventually benefit the public if the money collected from the taxes has been put to good use.

Taxes also lessen the inequalities of wealth in the society. Taxation is used to achieve fair distribution of wealth by moving it from where it is highly concentrated to where it is less concentrated. This is achieved using progressive taxation where one pays according to their ability to pay – lower income earners pay at a lower rate whereas higher income earners pay at a higher rate. This brings rise to economic stability.

In addition, taxes can be used to allocate resources to the desired sectors of the economy. Taxes alter the way resources are used in production, what goods are produced and who receives the production. The society can state that the production of certain demerit goods such as alcohol and tobacco is harmful to health and therefore the taxes on these demerit goods may reduce its production.

Moreover, taxes can be used as an effective tool to reduce the consumption of demerit goods. Higher taxes imposed on these goods would reduce their consumption as people may not have the means to purchase these goods.

Inflation also arises in any economy. The government of Kenya are able to charge higher taxes and thus reduce aggregate demand in the economy which would result in low inflation, thus making taxes a very vital tool.

Furthermore, the main purpose of import taxes is to protect infant industries from unhealthy foreign competition until they have gained sufficient strength to stand for themselves. Lastly, taxes are used to promote social welfare.

Lastly, the government of Kenya are able to increase the tariffs, therefore correcting an unfavourable balance of payment. This causes imports to become more expensive and will cause a fall in demand for the imported goods.

1.1.2        Types of taxation

The two classifications of taxes include direct taxes and indirect taxes. A direct tax is a government levy on the income, property, or wealth of people or organisations. This type of tax is borne entirely by the entity that pays it, and cannot be passed on to another entity. Examples of direct taxes include income tax, corporation tax, capital gain tax and property tax (BusinessDictionary.com, 2014). Generally, direct taxes are paid on income. This effectively means that the more income one earns, the greater their contribution is expected to be to the government of Kenya.

1. Direct taxes

Income tax

Income tax is an annual charge levied on wages, salaries, and commission as well as dividends, interest, and rents. In addition to financing the Kenyan government’s operations, progressive income taxation is designed to distribute wealth more evenly in the population. There are two types of income tax – Personal income tax and Corporation income tax. Personal income tax is levied on incomes of individuals, households, partnerships, and sole proprietorships while corporation income tax is levied on profits of incorporated firms (BusinessDictionary.com, 2014). In Kenya, the income tax rate is 30%.

Corporation tax

Corporation tax is a tax on profits and capital gains made by companies, calculated before dividends are paid (BusinessDictionary.com, 2014). In Kenya, the corporation tax rate is 30% for resident companies and 37.5% for non-resident companies.

Capital gain tax

Capital gain tax is a tax on capital gains - the profit realised on the sale of non-current assets that was purchased at a cost that was lower than the amount realised on the sale. These capital items include gains on the value of land, property, and share value. In Kenya, the capital gains tax was suspended but was brought back in 2013. However, the Income Tax Act has not been revised to accommodate for this tax.

Property tax

Property tax is a tax assessed on real estate by the government of Kenya. The tax is usually based on the value of the property that is owned by the individual (Investopedia, 2009). The rate of property tax in Kenya is usually about 1% of the property value.  In Kenya, stamp duty is levied on property transfers at varying rates, depending on the location of the property. Stamp duty is levied at 4% on properties located in municipalities, and at 2% on properties located outside municipalities.

1. Indirect taxes

On the other hand, indirect taxes are charges levied by the government of Kenya on consumption or expenditure but not on income or property. This tax is imposed on the basis of individual consumption (Ird.gov.dm, 2014).

Examples of indirect taxes include Value Added Tax (VAT), customs duties levied on imports, excise duties on production, and sales tax because they are not levied directly on the income of the consumer. The government of Kenya is tempted to increase indirect taxes to generate more state revenue since these taxes are less obvious than income tax (BusinessDictionary.com, 2014).