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Taxation(April 2011) Question Paper
Taxation(April 2011)
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2011
UNIVERSITY EXAMINATIONS: 2010/2011
SECOND YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CMS 209: Taxation
DATE: December 2010 TIME: 2 HOURS
Answer ALL questions. Marks allocated to each questions are shown at the end of the question. Show ALL your workings. Any assumptions made must be stated.
QUESTION ONE
(a) (i) Distinguish between a direct and indirect tax. ( 4 marks)
(ii) Is Value Added Tax (VAT) a direct or indirect tax? Explain ( 2 marks)
(b) What are the rules governing the payment of VAT? Specify the additional tax that may arise from failure to comply with those rules. ( 6 marks)
(c) (i) Mr. Mali Mingi is a hardware merchant. He purchases cement from Athi Cement Ltd. which
he then sells to his customers. Both Mali Mingi and Athi Cement Ltd. require a profit margin of 20% on cost. Cement attracts 18% VAT. If the cost of production by Athi Cement Ltd. is Sh.220 per bag of 50Kg. At what price should Mali Mingi sell a bag of cement including VAT? ( 5 marks)
(ii) What VAT is payable to the Collector of VAT by Mr. Mali Mingi per 50 Kilogramme bag?
( 3 marks)
(Total: 20 marks)
QUESTION TWO
(a) Many farmers in the rural areas are unaware of the benefits accorded to them in form of capital allowances under the Income Tax Act. Write a brief summary on capital allowances which may be available to the farmer. ( 6 marks)
(b) On 1 January 2003, Pesa Limited brought into full operation its Limuru Factory of producing bottle tops. The following expenditure had been incurred up to that date.
Sh.
Factory building
(including store and showroom of Sh.600,000 and 800,000 respectively)
New machinery installed: Fixed
Moveable
Delivery trucks (6980cc each)
Office furniture
Computers
Workers’ canteen
5,600,000
8,000,000
2,000,000
4,800,000
1,600,000
2,400,000
800,000
In 2005, additional machinery worth Sh.1,200,000 was purchased and installed in the store at a cost of Sh.320,000. It was brought to use on 1 January 2005 to produce can tops. A saloon car worth sh.600,000 was also purchased.
Required:
Compute the capital allowances due to the company in 2003, 2004 and 2005.
(Total: 22 marks)
QUESTION THREE
(a) Explain clearly the nature of a public good with specific reference to provision of education in Kenya today and the role taxes play under such circumstances. (10 marks)
(b) What is the principle of cost sharing and to what extent does it influence the level of taxation?
( 8 marks)
(Total: 18 marks)
QUESTION FOUR
(a) List and explain any three deductions that may be available against gains or profits from employment. ( 3 marks)
(b) Mr. Matata has approached you with a view to obtaining help in determining his taxable income for 2005. He has supplied the following information:
1. Business Income
He runs a small garage that generate taxable income of Sh.60,000. In 2004, he had a tax loss of Sh.40,000 from this business.
2. Wife’s Income
His wife was employed by Mafuta Ltd. as the Finance Director. Her salary was sh.52,000 p.m. Additional benefits include:
Company car 1800 cc.
House at New Muthaiga (market value of rent Sh.20,000 per month)
Staff gifts of oil products worth Sh.1000 p.m
3. Capital Gains
In the course of the year, the Matatas sold one plot they owned in Nairobi for Sh.1,200,000. This represented a gain of Sh.600,000 which they used to take a holiday to Mombasa.
4. Investment Income
Withholding Tax
Sh. Net
Sh.
Dividends:
Kenya Breweries Ltd
HFCK Ltd.
CMC Ltd.
Interest:
Kenya Commercial Bank Savings Account
HFCK – Housing Development Bond
Post Office Savings Bank
15% 2010 Treasury Bonds.
2,000
1,000
4,000
2,000
7,000
-
1,500
18,000
9,000
36,000
18,000
63,000
20,000
13,500
5. Employment Income – Mr. Matata
He was employed by Utajiri Limited as the General Manager – Sales. His salary was Sh.40,000 per month and a bonus of 2% on total sales revenue. He had a car of 2000cc which he used to visit customers otherwise his wife would pick and drop him at the place of work each day using her official car.
6. Utajiri Limited insures all its sales against default from customers. The cost of the insurance was Sh.10,000 which represents 0.001 percent of sales. The company also paid sh.20,000 to cover the life of Matata and his household items.
7. PAYE of Sh.130,000 was deducted from Matata’s pay but due to an oversight in the part of the Chief Accountant the tax was not paid to the Collector of Income tax. His wife’s PAYE was Sh.180,000 in the year.
Required:
(i) Compute total income chargeable to tax and show the tax payable thereon. (15 marks)
(ii) Comment on any information not used for computing taxable income above. (2 marks)
(iii) Is Matata to blame for failure of the company to pay his PAYE? Explain. (2 marks)
(Total: 22 marks)
QUESTION FIVE
Mr. Hesabu has recently opened all Income Tax Consultancy office in Nairobi. He has been approached by his clients on the following matters.
(i) M/S Watu, Wote, Wao are three partners operating WWW Enterprises. In 2005, they made profits of Sh.180,000. They share profits in the ratio 3:3:4. Wao had overdrawn on his account and was charged Sh.30,000 interest. Watu and Wote received interest of Sh.25,000 each from the partnership. The interest account is included in the above profits. Mr. Wote wishes to know how much tax he would pay. He has no other source of income. ( 6 marks)
(ii) Live Well Foundation is a Non-Governmental Organisation formed for the purposes of addressing people’s spiritual needs. It will derive its income from donations of all kinds, charitable walks and sale of religious literature. They wish to know if they will be required to pay any tax.
( 4 marks)
(iii) Mrs. Mjini is a happily married housewife residing in Kilimani Estate, Nairobi. Since her compound is big she engages in backyard gardening during her spare time and she derives a lot of satisfaction from it. She also maintains very accurate records of the performance of her garden. Details for the three years ending 31 December 2005 are as follows:
Year ended 31 December 2003 Profit Sh.20,000
Year ended 31 December 2004 Loss Sh.40,000
Year ended 31 December 2005 Profit Sh.50,000
Garden produce consumed by Mrs., Mjini’s family during the year of income 2005 was sh.60,000 (not included in the above results).
She wishes to know how much tax she should pay from this activity in 2005. ( 4 marks)
(iv) New Plastic Limited, manufacturers of plastic products wishes to sponsor research into plants that may produce plastics related materials. They have set aside Sh.20,000,000 which will be awarded to the Department of Biochemistry, Ubora Science University. They wish to know if there is any tax advantage which may arise. ( 4 marks)
Required:
As Mr. Hesabu’s tax manager, write a memorandum on each of the points for his consideration.
(Total: 18 marks)
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