Data analytics in specialised areas

Compute tax payable for individuals and companies

Application of Data Analytics in Taxation and public financial management

What is Tax ?

Tax is a financial obligation imposed by the government on individuals, businesses, or other entities to generate revenue that is used to fund public services and government functions. Taxes are a key source of income for governments at various levels, such as federal, state or provincial, and local.

Understanding Key Taxation Concepts: Exploring Income Tax, VAT, Customs Duty, and Excise Duty

Income Tax:

Income tax is a direct tax levied on an individual's or entity's income by the government.

How can data analytics in the realm of income tax be harnessed to enhance taxation and improve public finance management?

Data analytics can be harnessed in income tax to enhance taxation and improve public finance management in several ways:

➧ Efficient Tax Collection: Data analytics can identify tax evasion by analyzing vast amounts of financial data, ensuring that individuals and businesses pay their fair share of taxes.

➧ Risk Assessment: It helps tax authorities identify high-risk tax returns for further scrutiny, reducing the likelihood of tax fraud and evasion.

➧ Predictive Modeling: Predictive analytics can forecast tax revenues, aiding in budget planning and resource allocation for public services.

➧ Taxpayer Services: Data analytics can personalize taxpayer services, making it easier for individuals and businesses to comply with tax regulations.

➧ Fraud Detection: Detecting fraudulent tax refund claims through anomaly detection and pattern recognition.

➧ Policy Formulation: Analyzing historical tax data can inform tax policy decisions and optimize tax rates for revenue generation.

➧ Reducing Compliance Costs: Automation of compliance processes can reduce administrative costs for both taxpayers and tax authorities.

Data analytics in income tax enhances revenue collection, reduces tax evasion, aids in policymaking, and streamlines the taxation process for the benefit of public finance management.

Types of income tax:

Individual Income Tax: Imposed on individuals based on their earnings.
Corporate Income Tax: Applied to profits earned by businesses and corporations.

Taxable income is calculated after deducting allowable expenses and exemptions from total income.

Progressive Tax System: Higher income earners are taxed at a higher rate, promoting income equality.

A. Individual Income Tax:

Individual income tax is a portion of your earnings that you are required to pay to the government. It's like a fee you contribute based on how much money you make each year. This tax money is used by the government to fund various public services and programs, such as education, healthcare, defense, and infrastructure.

Composition of individual income tax

Salary and Wages: This is the most common source of income for many people. It includes the money you earn from your job, and it's usually paid to you in regular intervals (e.g., monthly or bi-weekly).
Self-Employment Income: If you run your own business, work as a freelancer, or earn money independently, this income is also subject to taxation. It can be more complex because you're responsible for calculating and paying taxes on your own.
Interest Income: If you have savings accounts, certificates of deposit (CDs), or other interest-bearing investments, you may receive interest income. This is also considered taxable income.
Dividend Income: If you own stocks or certain types of investments, you may receive dividends from them. Dividend income is typically taxed at a different rate than regular income.
Rental Income: If you own property and receive rent from tenants, that rental income is usually taxable. However, you can often deduct expenses related to maintaining and managing the property.
Capital Gains: When you sell an asset like stocks, real estate, or valuable personal property for a profit, the profit you make is called a capital gain. Capital gains are subject to taxation, and there are typically different tax rates for short-term (held for less than a year) and long-term (held for more than a year) gains.
Business Income: If you own a small business or are self-employed, the income you earn from your business activities is subject to taxation. This includes any profits your business generates.
Pensions and Retirement Income: Money you receive from retirement accounts such as pensions is often taxable when you withdraw it in retirement. However, there may be special rules or exemptions for certain retirement accounts i.e age limit 65years and above.
Social Security Benefits: Depending on your total income, a portion of your Social Security benefits may be taxable. This applies primarily to individuals with substantial income from other sources.
Unemployment Compensation: If you receive unemployment benefits while you're temporarily out of work, these benefits may be subject to income tax.
Alimony and Child Support: Alimony received is typically considered taxable income, while child support is not.
Prizes and Awards: If you win prizes, awards, or lottery payments, these are generally taxable as well.

Example

1.	Gross Salary: Ksh.600,000 per year
2.	Car Benefit: The higher of 2% of the car's cost(Ksh.500,000) or Ksh.69,600 (1750cc)
3.	House Benefit: The higher of 15% of the total income (gross salary + car benefit + life insurance) or the rental market value(Ksh.20,000)
4.	Mortgage Interest Deduction: The lower of 20% of the mortgage(Ksh.1,000,000) or Ksh.300,000
5.	Life Insurance Benefit: Ksh.10,000 per year with a relief of the lower of 15% of the insurance or Ksh.60,000
6.	Personal relief Ksh.28,800

Required

Calculate the tax payable

Try it »

Car Benefit:
- Car Benefit = The higher of 2% of the car's cost(Ksh.10,000) or Ksh.69,600
- Car Benefit = Ksh.69,600
House Benefit:(Calculated on total income)
- Total Income = Gross Salary + Car benefit + Life Insurance
- Total Income = Ksh.600,000 + Ksh.69,600 + Ksh.10,000 = Ksh.679,600
- House Benefit = The higher of (0.15 * Ksh.679,600) or Ksh.20,000
- House Benefit = Ksh.101,940
Deductions, Including Mortgage Interest Deduction:
- Deduct the Mortgage Interest Deduction from the Total salary:
- Mortgage Interest Deduction = The lower of 20% of Ksh.1,000,000 or Ksh.300,000
- Mortgage Interest Deduction = The lower of Ksh.200,000 or Ksh.300,000
- Mortgage Interest Deduction = Ksh.200,000
- Taxable Income = Total Income - Mortgage Interest Deduction
- Taxable Income = Ksh.679,600 + Ksh.101,940 - Ksh.200,000 = Ksh.581,540

First Ksh.288,000 at 10%:
Ksh.288,000 * 0.10 = Ksh.28,800

Next Ksh.100,000 at 25%:
Ksh.100,000 * 0.25 = Ksh.25,000

Amount above Ksh.388,000 to Ksh.500,000 at 30%:
(Ksh.581,540 - Ksh.388,000) * 0.30 = Ksh.58,062

Amount above Ksh.500,000 to Ksh.800,000 at 32%:
(Ksh.581,540 - Ksh.500,000) * 0.32 = Ksh.26,092 (Negative, as this portion is below Ksh.500,000)

Amount above Ksh.500,000 to Ksh.800,000 at 32%:
(Ksh.581,540 - Ksh.800,000) * 0.35 = (Negative, as this portion is below Ksh.800,000)

Tax on taxable income = Ksh.28,800 + Ksh.25,000 + Ksh.58,062 + 26,092 + Ksh.0 (0% tax on the portion below Ksh.500,000) = Ksh.137,954.80

To get tax payable
Tax on taxable income	Ksh.137,954.80
Less: Reliefs.
Personal relief	Ksh.28,800.00
Life Insurance Relief: lower of 15% of Ksh.10,000 or Ksh.60,000	Ksh.1,500.00
Tax payable:	Ksh.107,654.80

So, the individual's income tax for the given scenario, with the adjusted mortgage interest deduction, considering the house value in the mortgage, and taking the life insurance relief into account, would be Ksh.107,654.8.

Note: Tax calculation and procedures can differ from one jurisdiction to another.

***End***

B. Corporate Income Tax (CIT)

Corporate Income Tax (CIT) is a tax imposed on the profits or income of corporations and businesses. It is a direct tax that governments levy on the earnings generated by companies, partnerships, and other legal entities engaged in commercial activities. The tax is typically calculated based on the corporation's net income, which is the revenue earned minus allowable deductions and expenses.

Example

Maisha Mema Insurance Company Limited provided the following information for the year ended 31 December 2022

Gross premiums received
Claims paid
Commission ceded
Commission accepted
Claims recovered on reinsurance
Foreign exchange gains realised
Dividends from life assurance fund
Rental income (commercial building)
Bad debts provision
Investment income
Reserve for unexpired risks (1 January 2022)
Legal expenses related to claims
Agency fees
Management fees
Repairs on rental properties
Entertainment expenses
Purchase of furniture
Purchase of computer
Reinsurance premiums paid
Returned premiums

Sh."000"

30,000
4,000
800
20
3,000
3,500
2,000
1,600
500
1,200
1,000
400
400
120
200
400
600
300
4,000
5,000

Additional information:

Reserves for unexpired risks on 31 December 2022 were Sh 200,000.

Claims outstanding on 1 January 2022 and 31 December 2022 were Sh.600,000 and Sh 900,000 respectively.

Premiums outstanding on 1 January 2022 and 31 December 2022 were Sh.6,000,000and Sh.12,000,000 respectively.

Agency fees included Sh.200,000 relating to the life assurance business.

Legal fees included Sh.100,000 relating to settlement of a tax dispute.

Investment income comprised:

Interest from bank
Interest from treasury bonds

Ksh.
850,000 (net)
350,000 (gross)

Required:

(i) Taxable profit or loss of Maisha Mema Insurance Company Limited for the year ended 31 December 2022

(ii) Tax payable (if any) from your computations in (c) (1) above.

Try it »

(i)

Maisha Mema insurance company Itd Computation of taxable profit or loss for the year ended 31 Dec 2018
Incomes Gross premium received Add: Premium balance c/d Less: Premium balance b/d Returned premiums Reinsurance - premium paid Commission ceded Reduction in reserves (1000-200) Foreign exchange gained realised Less Allowable expenses Claims paid Claims bal c/d Claims bal b/d Claims covered on re-insuarance Commission accepted Legal expenses(400-100) Agency fees(400-200) Management fees Entertainment expenses Wear and tear: - Furniture 12.5 % × 600 - Computers 30% × 300 Taxable operating profit Other specified sources of income Rental income (1,600-200) Interest from bank 850÷0.85 Interest from treasury bond Adjusted taxable profit	Sh"000" 30,000 12,000 (6,000) (5,000) (4,000) 4,000 900 (600) (3,000) 20 300 200 120 400 75 90	Sh "000" 27,000 800 800 3,500 (2,505) 29,595 1,400 1,000 350 32,345

(ii) Tax payable 30% x 32,345,000 = 9,703,500

***End***

Value Added Tax (VAT):

VAT is an indirect tax applied at each stage of the production and distribution process.

Businesses collect VAT on sales and remit it to the government.

Input Tax Credit: Businesses can claim credit for the VAT they pay on purchases, reducing the tax burden.

Consumption Tax: The final consumer bears the ultimate burden of VAT, making it a consumption tax.

How VAT works

Charging VAT: When a business sells a product or service, it adds VAT to the sales price. This added VAT is called "output tax" because it is generated as a result of the business's operations.
VAT Collection: The business collects the VAT from the customer at the time of the sale. This collected VAT is essentially held in trust by the business on behalf of the government.
Reporting and Remitting: At regular intervals, such as monthly or quarterly, the business is required to report the total VAT it has collected (output tax) to the tax authorities.
Offsetting Input Tax: In many VAT systems, businesses can offset the VAT they've paid on their purchases and expenses, known as "input tax," against the output tax they've collected. The difference between output tax and input tax is what the business owes to the tax authorities.
Payment to Government: If the output tax exceeds the input tax, the business must remit the difference to the government. If the input tax is higher than the output tax, the business may be eligible for a refund or credit.

How can data analytics in the realm of Value Added Tax be harnessed to enhance taxation and improve public finance management?

Data analytics can be harnessed in the realm of Value Added Tax (VAT) to enhance taxation and improve public finance management in several ways:

➧ Real-time Transaction Monitoring: Data analytics can track VAT transactions in real-time, helping tax authorities identify discrepancies and potential fraud quickly.

➧ Fraud Detection: Advanced analytics can detect unusual patterns in transactions, flagging potential tax evasion or fraud cases for investigation.

➧ Compliance Analysis: Analyzing large datasets can provide insights into compliance levels among businesses, allowing tax authorities to target enforcement efforts effectively.

➧ Predictive Modeling: Predictive analytics can forecast VAT revenues, aiding in budget planning and resource allocation for public services.

➧ Automation of Reporting: Data analytics tools can streamline VAT reporting for businesses, reducing errors and ensuring accurate tax collection.

➧ Cross-border Transactions: For international VAT, analytics can help track cross-border transactions and ensure that businesses pay the correct VAT rates.

➧ Policy Analysis: Analyzing VAT data can inform tax policy decisions, such as adjusting tax rates or exemptions, to optimize revenue collection.

➧ Reducing Tax Gap: By identifying unreported or underreported VAT, data analytics can help reduce the tax gap, increasing government revenue.

Data analytics in the realm of Value Added Tax enhances tax compliance, reduces fraud, aids in policymaking, and streamlines VAT processes, ultimately contributing to improved public finance management.

The goal of VAT is to ensure that the tax burden is ultimately borne by the end consumer, and businesses act as intermediaries in collecting and remitting the tax to the government. This system helps prevent double taxation at each stage of production and distribution.

Example

Sale:
General Sales Zero-Rated Sales Exempt Sales	Ksh. 1,000,000 500,000 100,000
Purchases:
General Sales Zero-Rated Sales Exempt Sales	20,000 10,000 2,000

Additional information

Sales are inclusive of VAT,Purchases are exclusive of VAT
VAT rate is 16%

Required

Calculate VAT payable or refundable

Try it »

Sale:
General Sales Zero-Rated Sales Exempt Sales Total Output	Ksh. 1,000,000 x 16 / 116 500,000 x 0 / 116 100,000	VAT Output 137,931 0 - 137,931
Purchases:		VAT Input
General Sales Zero-Rated Sales Exempt Sales Total Input	20,000 x 16 / 100 10,000 x 16 / 100 2,000	3,200 0 - 3,200

Deductable input tax

Taxable supply

Total supply

x input tax

Deductable input tax

20,000 + 10,000

20,000 + 10,000 + 2,000

x 3,200 = 3,000

Vat Payable = Output Tax - Input Tax

137,931 - 3,000 = 134,931

Note: Tax calculation and procedures can differ from one jurisdiction to another.

***End***

Customs Duty:

Customs duty is a tariff or tax imposed on goods when they are transported across international borders.

Import Duty: Tax imposed on imported goods to protect domestic industries and generate revenue.

Export Duty: Tax applied on goods leaving the country, although it's less common than import duties.

Tariffs: Rates vary based on the type of goods; some countries have free trade agreements reducing or eliminating certain tariffs.

Purpose: Customs duties serve several purposes, including generating revenue for the government, protecting domestic industries from foreign competition, and regulating the importation of certain goods for health, safety, or security reasons.

Customs duty is a tax or tariff imposed on goods when they are transported across international borders. It is a source of revenue for governments and is used to regulate and control the flow of goods into a country. Customs duties are typically collected by customs authorities or agencies at the point of entry (e.g., ports, airports, or land border crossings).

key points to understand about customs duty:

Types of Customs Duties:
- Ad Valorem Duties: These duties are calculated as a percentage of the declared value of the goods. For example, if the duty rate is 10% and the declared value of the goods is Ksh.1,000, the customs duty would be Ksh.100.
- Specific Duties: Specific duties are fixed amounts of money levied on a quantity or unit of a product. For instance, a specific duty of Ksh.5 per kilogram of a particular item would result in a Ksh.50 duty for 10 kilograms of that item.
- Compound Duties: These duties combine both ad valorem and specific elements.
Exemptions and Tariff Schedules: Customs duties are typically applied based on a country's tariff schedule, which classifies goods into categories and assigns specific duty rates. Some countries provide exemptions or reduced rates for certain types of goods, such as essential medical supplies or educational materials.
Customs Declaration: When goods are imported, importers are required to declare the contents, value, and other relevant information to customs authorities. This declaration helps customs authorities assess the appropriate customs duty.
Customs Valuation: Determining the value of imported goods is crucial for calculating customs duties. Customs authorities use various methods to determine the value, including the transaction value (the price paid or payable for the goods), the deductive value (based on the resale price), and the computed value (based on production costs).
Trade Agreements: Many countries have trade agreements and treaties with other nations that can reduce or eliminate customs duties on specific goods. These agreements aim to promote international trade by reducing trade barriers.
Customs Procedures: Importers and exporters must follow customs procedures, which can include providing documentation, paying duties, and complying with import/export regulations. Failure to do so can result in penalties and delays.
Anti-Dumping and Countervailing Duties: Some countries impose additional duties on imported goods if they believe that foreign producers are selling goods below their fair market value (anti-dumping duties) or if they are providing subsidies to their producers (countervailing duties). These measures are intended to protect domestic industries from unfair competition.
Customs duties can vary widely between countries and are subject to change through legislative or administrative actions. Importers and exporters should be aware of the customs duties and regulations applicable to their specific trade activities to ensure compliance and minimize costs.