1. Taxation of Incomes of Persons
Classification of Taxes
Meaning of income tax
Year of income and accounting year
Residence and significance

2. Classification of Taxes
Tax can be classified as follows:
Classification according to Mode of collection
Classification according to Rate of tax
Classification according to Tax base

3. Classification according to Mode of collection
The impact of a tax is the burden of tax i.e. who it is legally imposed on. The incidence of a tax on the other hand refers to the direct money burden of a tax.
Under this classification therefore taxes may be direct or indirect.

4. Direct tax
It is the one in which the impact and the incidence fall on one and the same person. Direct taxes are levied on income as well as wealth e.g. income tax and corporation tax

5. Merits of direct Taxes Equitable Exhibit certainty They are economical
Elasticity
They are desirable
Reduce inequalities of income
Encourage civic consciousness

6. Demerits of direct Taxes
Have a pinching effect
They cause inconvenience
They are arbitrary
Encourage evasion
Not imposed on all
Discourage savings and investment
Discourage production

7. Indirect tax
This is tax whose impact is on one person but incidence is partly or wholly or another person. e.g VAT, Customs duty and excise duty. Indirect taxes are levied on goods and services.

8. Merits of Indirect Taxes
They are convenient
Have a wide coverage
They are elastic
They are economical
They are diverse
They lead to less evasion
They help check consumption of harmful goods
They are a powerful tool of economic policies

9. Demerits of Indirect Taxes
The revenue generated is uncertain
They are regressive
They are uneconomical
They led to bad effects on production and employment
They feed inflation
They lead to lack of civic consciousness

10. Classification according to Rate of tax
This classification is as follows:
Progressive tax
Proportional tax
Regressive tax
Digressive tax

11. Progressive tax
It is a tax whose rate of taxation rises as taxable income increases

12. …continued

13. Merits of progressive Taxes
They are more equitable because broader shoulders are asked to contribute more.
They are productive as they raise greater revenue than would be the case with proportional taxes.
They are economical since the cost of collection remains the same irrespective of progression in rates.
They bring about equality of sacrifice through the recognition of the law of diminishing returns utility which apples to money as well.
They help reduce inequalities of wealth or income.

14. Demerits of progressive Taxes
They tend to be very heavy, paid as a lump sum, may discourage savings and reduce investments.
Changes in rates and the progression tend to be arbitrary.
They tend to be inconvenient and pinch the tax payers.
They are based on consumption that utility of money is the same for all tax payers.

15. Proportional tax
Is tax whose rate is the same for all tax payers irrespective of income or consumption levels e.g. Corporation tax where resident companies pay corporation tax on profits at a rate of 30%.

16. Merits and Demerits of proportional Taxes
The main merit of proportional tax is that it is a simpler tax to levy and understand since the same rate applies for all.
However, simplicity alone does not make a tax good hence proportional taxes are not equitable because both the rich and the poor pay the same rate. They are also not useful in bridging the gap between the rich and the poor.

17. Regressive tax
It is a tax whose rate of taxation falls as income rises. e.g. Tax on beer and tobacco products tends to be regressive.
No government will levy regressive taxes because the poor would shoulder the greatest burden of taxation compared to the rich however, in a relative sense certain taxes are seen to be regressive because the poor end up contributing more than the rich in the proportional sense.

18. Degressive tax
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.
The burden is relatively less since the tax is mildly progressive-the rate of progression is not sufficiently steep. Or
There is progression up to a certain point beyond which the rate becomes proportional.

19. Classification according to Tax base
Tax base means the object upon which tax is levied or on which the tax rate is applied .e.gIncome tax e.g.PAYE,
Tax Tax base
Income tax e.g.PAYE, Incomes of people- salaries Agricultural produce presumptive tax
Corporation tax Profits of companies
VAT Taxable supplies (goods and services)
Excise duty Locally manufactured products value, packaging and processing

20. Meaning of income tax
The income tax Department was up to 1973 a department of the East Africa Community, when on the break-up of the E.A Community the department was absorbed into the ministry of Finance of the Government of Kenya. When the Kenya Revenue Authority was formed in June 1995, the Income Tax Department became one of the four Revenue Departments of the Authority, others being; Customs and excise, Value Added Tax and Road Transport departments.

21. …continued
Cap 470 lays the legal framework underlying the income tax administration in Kenya. It consists of:
133 sections.
12 sections
Rules relating to various tax issues such as PAYE, local committee rules, retirement benefit rules.

22. …continued Section 3(1) of the income tax Act states
‘ subject to and in accordance with this 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,’

23. …continued
Section 3(1) is technically regarded to as the charging section. It is the backbone of any tax legislation and defines the following issues:
The law relating to the tax-Income tax Act
The name of the tax-Income tax
The tax base or object of the tax-Income
The scope of the tax-Year of income
The person liable to the tax-Resident or non resident
The jurisdiction within which tax is imposed- accrued in or derived from Kenya

24. Year of income and accounting year
Year of income means a period of 12 months commencing 1st January and ending on 31st December each year. Tax is charged for each year of income.
Accounting year refers to the period for which accounts are prepared i.e. the year for which financial statements are prepared to determine the profitability. It is normally a 12 month period which could commence any time and could end in the following calendar year.
NB. Where the accounting year doesn’t coincide with the year of income, then the year of income of that person becomes that year of income in which the accounting year ends.

25. Persons liable to tax (Residence)
The person liable to a tax can either be resident or non resident.
A resident is a concept used for tax for tax purposes and nothing to do with the nationality, citizenship or domicile of the tax payer.
Section 2 of Cap 470 states that the word resident can be applied in relation to:
Individuals and
Body of persons.

26. When applied in relation to an individual, residence means:
The person has a permanent home in Kenya and was present in Kenya for any period of time under consideration or
That he has no permanent home in Kenya but
Was present in Kenya for a period amounting to an aggregate of 183 days or more for that year of income.
Was present in Kenya in that year of income under consideration and each of the two preceding years of income for periods averaging to more than 122 days in each year of income.

27. Note
An individual must be physically present in Kenya for however short period during the year of income for him to be considered as a resident physical presence in Kenya means, “Being on Kenyan soil, territorial waters or air space.”
The expression permanent home has no technical meaning but an indication as to how the courts could interpret permanent home. In interpreting the word “Home” the court considered the following points.

28. …continued
When applied in relation to a body corporate, residence means:
The body is a company incorporated under the Laws of Kenya
Management and control of the affairs of that body is supposed to be exercised in Kenya in that particular year of income.
The body has been declared by the Minister by a notice in the Kenya Gazette to be a resident. Local branches of non-resident firms are classified as resident for income derived in Kenya; any income derived out of Kenya is not taxable.

29. Importance of residence
Kenya resident individuals pay Kenya income taxes on their incomes from Kenya and world wide employment, but Kenya non residents pay Kenya income taxes only on their income from Kenya.
Residents pay income taxes at graduated scale rates but non residents pay income taxes at special rates on certain specified incomes or sources
Resident companies are taxed at the rate of 30% on their taxable income while non residents companies with a branch in Kenya are taxed at a higher rate of 37.5%.
Withholding taxes are deducted at source on all income of Kenyan non residents but residents have withholding tax deducted on only some of their incomes.
Non residents companies with no branch in Kenya have withholding tax deducted at source on all their incomes while resident and non resident companies with branches in Kenya have withholding tax deducted from only their dividend and interest income.