UNIVERSITY EXAMINATIONS: 2020/2021

EXAMINATION FOR THE BACHELOR OF COMMERCE

DATE: APRIL 2021

QUESTION ONE (10 MARKS)

Briefly comment and advise on the VAT position of each of the following cases: Assuming the
rate of VAT of be 16%. Explain the tax position with reference to the VAT Act of Kenya.

a. Safari Options which provide tour services in Kenya. The company charged a client
Sh.1000,000 for tour services including VAT where applicable. Out of this fee 30% exclusive
of VAT was to cater for a charter aircraft to Maasai Mara. Use appropriate calculations.

b. Joseph who is a registered for VAT has claimed that he cannot he should only pay sh.840,000
for goods that the supplier value at sh.1,000,000 because he will not deduct the 160,000 VAT
related to such goods due to restrictions of invoice matching. The supplier who is not
registered for VAT is pleading with him to pay more so that it can cover for turnover tax
which the supplier is liable to pay. Assuming Joseph agree to cover the turnover tax for the
supplier, how much should he pay for the goods

c. Since the introduction of invoice matching last year, accountants argue that tax point should
be the invoice date. Explain the tax point and invoice matching conflict.

d. Glassware Limited is incorporated in Kenya but trades wholly in Uganda as an agent of

e. Elvis, who has carried on business as a cobbler for many years, is registered for VAT
purposes though he finds the administrative work required very time-consuming. His VAT
exclusive turnover for the past two years has been Sh.4,200,000 p.a. and due to the declining
number of people requiring shoe repairs he does not expect it to increase for the next few
years.

(10 marks)
QUESTION TWO (20 MARKS)
a) Muses knows very little about double taxation agreements. He is a consultant, who works in
many countries and in many cases, he has ended up paying taxes on the same income more
than once.

Required:
Explain to Moses the concept of double taxation treaty. (6 marks)

b) Critique the provisions of Income Tax Act (Cap.470) relating to the taxation of savings and
credit cooperative societies (SACCOS). (4 marks)
c) Explain three tax planning opportunities that could be derived from financial management
decisions made by a limited liability company (6 marks)
d) The Covid-19 crisis has brought tax havens firmly back on the agenda, as political leaders
around the world. Many countries including Kenya reduced the tax rate in 2020. Explain the
term tax haven and explain why Kenya should not be considered tax haven despite reducing
tax rate as Covid-19 relief. (4 marks)

QUESTION THREE (20 MARKS)

a) Describe tax incentives available for a mining company in Kenya (6 marks)

Income:
Sales 4,882,000
Sale of old plant (Sh.30,750) and Lorry (Sh.150,000) 180,750
Refund of VAT 21,250
Post office savings bank interest 5,750
Dividend (net) 42,500
5,132,250
Expenses:
Purchases 1,491,500
Wages 408,750
National Hospital Insurance Fund (NHIF) 35,500
Rent 620,500
Lorry maintenance expenses 1,165,750
Salaries to partners 1,200,000
School fees for directors’ children 86,250
Repairs and maintenance (plant) 233,750
Advertising 75,000
Insurance premiums 156,750
Interest on loan 125,000
Subscription – glass Makers Association 25,000
 Donation to Bursary Fund 8,000
Legal expenses 89,000
Bad debts 298,000
Water and electricity 86,250
Depreciation: Furniture and fittings 111,500
Plant 61,750
Total expenses 6,278,250
(1,146,000
Net loss for the year
)

Additional information:

1. In the first quarter of 2020 the tax rate was reduced from 30% to 25%. The revenue authority
has explained that the reduced tax rate applies beginning the month of May 2020. This
applies also to the instalment tax payment since this was after the first instalment for 2020.
2. Glass worth sh.65,000 was used by directors for their private purposes. This amount should
be was included in bad debts for the period.
3. Lorry maintenance expenses include cost of a new lorry sh.750,000 and depreciation charge
for the year of Sh.162,500.
4. Annual rent for the CEO house was sh.300,000. This was paid for by the business.
5. During the year ended 31 December 2020, new plant was acquired for Sh.200,000. This has
been included in the repairs and maintenance costs of plant.
6. The director’s personal car insurance was paid for by the business. It amounted to Sh.90,000.
7. Interest on loan and the legal expenses relate to one of the employee’s mortgage loan.
8. Bad debts were made up of:
Specific provision Sh.50,000
General provision Sh.61,500
9. Written down values as at 31 December 2020 were as follows:
Furniture and fittings Sh.49,500
Motor vehicles Sh.107,000
Plant Sh.9,000

Required:
i) The adjusted profit or loss for tax purposes for the year ended 31 December 2020. (14 marks)
ii) Tax payable by the company for the year ended 31 December 2020. (2 marks)