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CPA
Intermediate Leval
Public Finance & Taxation May 2016
Suggested Solutions

Public Finance & Taxation
Revision Kit

QUESTION 1(a)

Q Explain the following terms as used in public finance management:

(i) Financial regulations.

(ii) Treasury circulars.
A

Solution


Financial Regulations:


Financial regulations refer to a set of rules and guidelines established by a government or public financial institution to govern financial management and control within the public sector. These regulations are designed to ensure transparency, accountability, and the proper use of public funds. Financial regulations cover various aspects of financial management, including budgeting, accounting, procurement, and internal controls.

In public finance management, financial regulations play a crucial role in maintaining fiscal discipline and preventing misuse or mismanagement of public resources. They provide a framework for financial decision-making and help ensure that financial transactions comply with legal and ethical standards.


Treasury Circulars:


Treasury circulars are official communications or directives issued by the treasury or financial authorities within a government. These circulars provide guidance and instructions on various financial matters, such as budgetary procedures, expenditure controls, and financial reporting. Treasury circulars are a means of disseminating important financial information and ensuring consistent practices across different departments or agencies.


In the context of public finance management, treasury circulars serve as a tool for standardizing financial processes, promoting compliance with financial regulations, and communicating changes in financial policies or procedures to relevant stakeholders.



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QUESTION 1(b)

Q Outline eight general responsibilities of a County Treasury with respect to public funds.
A

Solution


County Treasury Responsibilities with Respect to Public Funds:


  1. Budgeting and Financial Planning:

    ➫ Develop and implement the county's budget in coordination with relevant departments.
    ➫ Ensure that the budget aligns with the county's priorities and legal requirements.

  2. Financial Reporting:

    ➫ Prepare accurate and timely financial reports to communicate the financial status of the county to stakeholders.
    ➫ Comply with accounting standards and regulations in financial reporting.

  3. Cash Management:

    ➫ Effectively manage the county's cash flows to meet financial obligations and optimize resources.

  4. Expenditure Control:

    ➫ Implement and enforce controls to ensure that expenditures are in line with the approved budget.
    ➫ Monitor and prevent unauthorized or irregular expenditures.

  5. Revenue Collection:

    ➫ Oversee the collection of revenues, including taxes and fees.
    ➫ Ensure that revenue collection processes are efficient and compliant with relevant laws.

  6. Debt Management:

    ➫ Manage the county's debt portfolio, including borrowing and repayments.
    ➫ Ensure compliance with debt covenants and terms.

  7. Internal Controls:

    ➫ Establish and maintain internal controls to safeguard public funds against fraud and mismanagement.
    ➫ Conduct regular audits and reviews to assess the effectiveness of internal controls.

  8. Compliance and Accountability:

    ➫ Ensure compliance with financial regulations and legal requirements.
    ➫ Be accountable for the prudent and transparent use of public funds.


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QUESTION 1(c)

Q Describe the stages of the annual budget process for the national government.
A

Solution


Stages of the Annual Budget Process for National Government:


  1. Preparation Phase:

    • Guidance and Policies: Government agencies receive guidance and policies from the executive.
    • Budget Instructions: The executive issues instructions outlining budgetary priorities and expectations.
    • Baseline Data: Agencies collect and analyze data to determine baseline budget requirements.

  2. Formulation Phase:

    • Budget Formulation: Government agencies prepare their budget proposals based on allocated funds and priorities.
    • Consultations: Consultations occur between agencies, stakeholders, and the finance ministry to refine budget proposals.
    • Cost-Benefit Analysis: Agencies conduct cost-benefit analyses to justify proposed expenditures.

  3. Review and Approval:

    • Legislative Review: The budget proposal undergoes review and scrutiny by legislative committees.
    • Public Hearings: Public hearings may be held to gather input and feedback from the public and interest groups.
    • Adjustments: Budget proposals may be adjusted based on legislative recommendations or changes in economic conditions.

  4. Authorization Phase:

    • Legislative Approval: The approved budget is authorized by the legislative body.
    • Appropriation Acts: The budget is enacted into law through appropriation acts or similar legislative instruments.
    • Authorization Limits: Agencies receive legal authorization for spending up to specified limits.

  5. Execution Phase:

    • Implementation: Government agencies execute their budgets as approved by the legislature.
    • Procurement: Procurement processes are initiated to acquire goods and services.
    • Project Management: Project and program management activities are undertaken to ensure effective implementation.

  6. Monitoring and Control:

    • Financial Oversight: Ongoing monitoring of budget execution and financial control measures.
    • Variance Analysis: Variances between planned and actual expenditures are analyzed and addressed.
    • Internal Audits: Internal audit units conduct periodic audits to ensure compliance and identify areas for improvement.

  7. Reporting:

    • Financial Reporting: Periodic reporting on budget execution and outcomes.
    • Performance Reports: Agencies produce performance reports detailing accomplishments and challenges.
    • Transparency: Governments publish budget and financial reports to promote transparency and accountability.

  8. Audit and Evaluation:

    • Financial Audit: Independent audits assess the government's financial management and compliance.
    • Program Evaluation: Evaluation studies assess the effectiveness and impact of government programs.
    • Continuous Improvement: Lessons learned from audits and evaluations inform continuous improvement in budget processes.

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QUESTION 2(a)

Q Section 68 of the Public Procurement and Asset Disposal Act requires an accounting officer of a procuring entity to keep records for each procurement for at least six years after the resulting contract has been completed or, if no contract resulted, after the procurement proceedings were terminated.

With reference to the above statement, outline six such records that should be maintained.
A

Solution


Records to be Maintained per Section 68 of the Public Procurement and Asset Disposal Act:


  1. Procurement Plan:

    Detailed documentation outlining the entity's procurement plan, including the scope, objectives, and estimated costs.

  2. Request for Proposal (RFP) or Invitation to Tender (ITT):

    The official document inviting potential suppliers to submit proposals, including the terms and conditions of the procurement.

  3. Bids or Proposals Received:

    Records of all bids or proposals received from potential suppliers, including their details, prices, and any accompanying documentation.

  4. Bid Evaluation Reports:

    Comprehensive reports on the evaluation of bids, outlining the criteria used, the evaluation process, and the recommended supplier(s).

  5. Contract Documents:

    Copies of the finalized contract documents, specifying terms and conditions, deliverables, timelines, and other relevant details.

  6. Minutes of Evaluation Committee Meetings:

    Detailed minutes documenting discussions, decisions, and recommendations made during the bid evaluation committee meetings.

  7. Correspondence and Communications:

    Copies of all official correspondence and communications related to the procurement process, including emails, letters, and memos.

  8. Performance Reports:

    Reports assessing the performance of suppliers during and after the completion of the contract, including any issues or disputes.

  9. Payment Records:

    Documentation of all payments made to suppliers, including invoices, receipts, and other financial records.

  10. Termination Documentation:

    If the procurement proceedings were terminated, records detailing the reasons for termination and any related documentation.

    11.

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QUESTION 2(b)

Q Discuss four responsibilities of the National Treasury in the administration of the consolidated fund.
A

Solution


Responsibilities of the National Treasury in the Administration of the Consolidated Fund:


  1. Budget Formulation:

    The National Treasury is responsible for formulating the national budget, aligning it with government priorities, and ensuring fiscal sustainability.

  2. Financial Planning:

    Developing long-term financial plans and strategies to guide the effective management and utilization of resources from the Consolidated Fund.

  3. Expenditure Control:

    Implementing measures to control government expenditures, ensuring they stay within approved budgetary limits and comply with financial regulations.

  4. Revenue Mobilization:

    Overseeing the mobilization of government revenues, including taxes and other sources, to fund public expenditures and meet financial obligations.

  5. Debt Management:

    Effectively managing the national debt, including borrowing and debt repayment, to maintain fiscal sustainability and avoid excessive financial burdens.

  6. Financial Reporting:

    Preparing and presenting comprehensive financial reports to provide transparency on the financial position and performance of the government.

  7. Cash Management:

    Managing the government's cash flows to ensure the availability of funds for timely and efficient execution of budgetary activities.

  8. Public Financial Accountability:

    Enforcing financial accountability by establishing and maintaining systems for internal and external audits, evaluations, and reviews.

  9. Policy Advice:

    Providing advice to the government on financial and economic policies, including recommendations to enhance fiscal responsibility and economic stability.

  10. Treasury Single Account (TSA) Management:

    Implementing and managing the Treasury Single Account system to consolidate and manage government funds in a unified manner.

    11.

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QUESTION 2(c)

Q Summarise six factors that influence taxable capacity in your country
A

Solution


Factors Influencing Taxable Capacity in a Country:


  1. Economic Structure:

    The composition of the economy, including the contribution of various sectors such as agriculture, manufacturing, and services, affects the taxable capacity.

  2. Income Levels:

    Higher levels of income generally result in a higher taxable capacity as there is a larger tax base to generate revenue from.

  3. Employment Rates:

    The level of employment in a country influences taxable capacity, as a larger workforce contributes to income tax revenue.

  4. Government Expenditure:

    The size and efficiency of government spending impact taxable capacity, as well-managed expenditures can support a stable tax system.

  5. Demographic Factors:

    The age distribution and population size influence taxable capacity, with a larger working-age population often contributing more to taxes.

  6. Legal and Regulatory Environment:

    The clarity and stability of tax laws and regulations play a crucial role in determining taxable capacity, affecting compliance and revenue collection.

  7. Financial Literacy:

    The level of financial literacy among the population can impact taxable capacity by influencing compliance and understanding of tax obligations.

  8. Corruption Levels:

    The prevalence of corruption in a country can affect taxable capacity, as it may lead to tax evasion and reduced trust in the tax system.

  9. Global Economic Conditions:

    The state of the global economy can influence taxable capacity through factors such as trade, investment, and external financial assistance.

  10. Technological Advancements:

    The adoption of technology in tax administration can enhance efficiency, reduce tax evasion, and contribute to overall taxable capacity.

    11.

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QUESTION 3(a)

Q Highlight four circumstances that might lead to suspension and cancellation of licences by the commissioner as per the Excise Duty Act 2015
A

Solution


Circumstances Leading to Suspension and Cancellation of Licenses by the Commissioner:


Under the Excise Duty Act 2015, the Commissioner may suspend or cancel licenses under various circumstances, including but not limited to:

  1. Non-Compliance with Excise Duty Regulations:

    Failure to comply with the regulations set forth in the Excise Duty Act, including reporting and payment requirements.

  2. Failure to Pay Excise Duty:

    Non-payment or delayed payment of excise duty as required by law.

  3. Submission of False Information:

    Providing false or misleading information in license applications, reports, or any other documents submitted to the Commissioner.

  4. Engaging in Illicit Trade:

    Participating in activities related to illicit trade, including smuggling, counterfeiting, or any other illegal practices.

  5. Violation of License Conditions:

    Breaching the conditions specified in the license granted by the Commissioner for excise-related activities.

  6. Failure to Maintain Records:

    Not keeping proper records as required by the Excise Duty Act, hindering effective monitoring and audit processes.

  7. Insolvency or Bankruptcy:

    Entering into insolvency or bankruptcy proceedings, which may affect the financial stability necessary for excise-related operations.

  8. Non-Cooperation with Inspections:

    Refusal to cooperate with inspections, audits, or investigations conducted by authorized officers to ensure compliance.

  9. Public Safety Concerns:

    Engaging in activities that pose risks to public safety, health, or security, as determined by relevant authorities.

  10. Other Grounds as Specified in the Act:

    Any other circumstances outlined in the Excise Duty Act 2015 that warrant the suspension or cancellation of licenses by the Commissioner.

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QUESTION 3(b)

Q Identify any four activities that constitute tax evasion in your country
A

Solution


Activities Constituting Tax Evasion in a Country:


  1. Underreporting Income: Intentionally providing false information or understating income on tax returns to pay lower taxes than legally owed.
  2. Overstating Deductions: Inflating deductions or claiming expenses that do not qualify in order to reduce taxable income artificially.
  3. Concealing Income: Hiding income by not reporting it to tax authorities or using offshore accounts and other means to keep assets and income undisclosed.
  4. Engaging in Offshore Tax Havens: Using offshore accounts, entities, or tax havens to conceal income and assets from tax authorities.
  5. Engaging in Shell Companies: Establishing shell companies or fictitious entities to disguise the true ownership of assets and income.
  6. False Invoicing and Transactions: Creating fake invoices or engaging in fraudulent transactions to manipulate financial records and reduce taxable income.
  7. Smuggling and Underreporting Goods: Smuggling goods or underreporting the value of imported or exported goods to evade customs duties and taxes.
  8. Double Dipping: Claiming the same deduction or tax benefit in multiple jurisdictions simultaneously.
  9. Creating Bogus Trusts or Foundations: Establishing fraudulent trusts or foundations to shield income and assets from taxation.
  10. Engaging in Money Laundering: Using complex financial transactions to disguise the origins of funds and make illegally obtained money appear legitimate, often to evade taxes.
  11. Abusing Tax Credits and Incentives: Manipulating the use of tax credits or incentives for purposes other than their intended use, resulting in lower tax liabilities.
  12. Falsifying Records: Creating false financial records or altering documents to misrepresent financial transactions and evade taxes.

It's important to note that tax evasion is illegal, and individuals or entities found guilty of such activities may face severe legal consequences, including fines and imprisonment.


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QUESTION 3(c)

Q (i). Taxable income of Moses Bundi for the year ended 31 December 2015.

(ii) Tax liability (if any) from the income computed in (c)(i) above.
A

Solution


(i). Taxable income of Moses Bundi for the year ended 31 December 2015.



Basic salary 160,000 × 12
Motor vehicle benefit
➫ cc ratings
➫ 2% x 460,000 x 12
86,400
1,104,000
} higher of
Directors allowance
Electricity benefits
➫ Actual benefit 1,800 x 12
➫ Set limit
216,000
18,000
} higher of
Water benefit
➫ Actual benefit 12,500 × 12
➫ Set limit
1,500,000
6,000
} higher of
Telephone 30% × 16,000 × 12
Insurance premium
Entertainment allowance

House benefit
➫ 15% x 4,027,600
➫ Actual rent 64,000 x 12
➫ Less:norminal rent 25,000 x 12
604,140
768,000
(300,000)
468,000
} higher of

Less: Allowable deduction
Pension contribution:
➫ Actual 30,000 × 12
➫ set limit
➫ 30% x 4,495,600
360,000
240,000
1,348,680
} Lower of
Total taxable employment income
Other incomes
Rental incomes
Add: non-allowable deductions
Building extension
Purchase of water tank
Metalic door
Less: Capital allowance 12.5% (320,000 + 150,000)
Total taxable income		 Sh.
1,920,000


1,104,000
280,000


216,000


150,000
57,600
240,000
60,000
4,027,600




468,000
4,495,600




(240,000)
4,255,600

1,800,000

840,000
150,000
320,000
(58750)
7,306,850


(ii) Tax liability (if any) from the income computed in (c)(i) above.


First 121,968 @10% + 114,912 @60
Surplus (7,306,850 - 466,704) @30%
Gross tax payable
Less: P.A.Y.E 42,000 x 12
Less: Personal relief
Less: Insurance relief
➫ 15% x 24,000
➫ Set limit
36,000
60,000
} Lower of
Net tax payable		 81,144
2,052,043.8
2,133,187.8
(504,000)
(13,944)

(36,000)

1,579,243.8


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QUESTION 4(a)

Q Using the information provided, confirm whether Nuts Processing Ltd. paid the correct VAT from the month of June 2015 to December 2015.
A

Solution


OUTPUT TAX
Sales
June
July
August
September
October
November
December
Total sales
V.A.T 16% x 7,969,223.64

Sh.
840,000.00
924,000.00
1,016,400.00
1,118,040.00
1,229,844.00
1,352,828.40
1,488,111.24
7,969,223.64
1,275,075.78

INPUT TAX
Purchases
June
July
August
September
October
November
December
Total Purchases
V.A.T 16% x 4,702,009.88		 Sh.
577,500.00
606,375.00
636,693.75
668,528.44
701,954.86
737,052.60
773,905.23
4,702,009.88
752,321.58


V.A.T payable = output tax - input tax

1,275,075.78 - 752,321.58 = 522,754.20

Vat to be paid = 522,754.20

V.A.T paid = 580,000

Overpaid V.A.T = 57,245.80


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QUESTION 4(b)

Q Capital allowances due to Nafaka Millers Limited for the year ended 31 December 2015
A

Solution


INVESTMENT ALLOWANCE

Asset
Factory building
Packing machine
Processing machine
Factory extension

 Qualifying cost
4,200,000
960,000
540,000
960,000
6,660,000		 Rate @100%
4,200,000
960,000
540,000
960,000
6,660,000


INDUSTRIAL BUILDING ALLOWANCE

Asset
Sports pavilion
Labour quarters
Recreation facility

 Qualifying cost
624,000
1200,000
480,000
2,304,000		 Rate
10% x 624,000 x 4 / 12 = 20,800
10% x 1,200,000 x 4 / 12 = 40,000
10% x 480,000 x 4 / 12 = 16,000
76,800		 Residue c/f
603,200
1,160,000
464,000
2,227,200


Class I
37.5%		 II
30%		 III
25%		 IV
12.5%
W.D.V 01/01/2015
Additions:
Furniture & fittings
Digital weighing sale
Mobile phone
Tractor
Computers
Combined harvesters
Disposal:
Computers
Net assets
W.T.A
W.D.V 31 / 01 / 2015




2,400,000

1,800,000


4,200,000
(1,575,000)
2,625,000





620,000


(60,000)
560,000
(168,000)
392,000

250,000
60,000
140,000





450,000
(56,250)
393,750


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QUESTION 5(a)

Q Outline four contents of a notice of assessment
A

Solution


Contents of a Notice of Assessment:


A notice of assessment typically includes the following key information:

  1. Taxpayer Information:

    Details about the taxpayer, including their name, address, personal identification number(PIN), and other relevant identifying information.

  2. Assessment Period:

    The specific tax period covered by the assessment, indicating the start and end dates for which the assessment applies.

  3. Income and Deductions:

    Summary of the taxpayer's reported income, deductions, and any adjustments made by the tax authority during the assessment process.

  4. Tax Calculation:

    The calculation of the taxpayer's tax liability based on the reported income, applicable tax rates, and allowable deductions.

  5. Tax Credits and Rebates:

    Information about any tax credits or rebates applied to the taxpayer's account, which may reduce the overall tax liability.

  6. Total Tax Payable:

    The final amount of tax payable by the taxpayer, taking into account the calculated tax liability and any credits or rebates.

  7. Payment Instructions:

    Details on how and when the taxpayer should remit the outstanding tax payment, including acceptable payment methods and deadlines.

  8. Contact Information:

    Contact details for the tax authority, including addresses, phone numbers, and other relevant information for inquiries or disputes.

  9. Explanation of Assessments:

    An explanation of how the tax authority arrived at the assessed amount, including any adjustments or corrections made to the taxpayer's original filing.

  10. Appeal Process:

    Information on the process for filing an appeal if the taxpayer disagrees with the assessment, including deadlines and required documentation.

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QUESTION 5(b)

Q In a tax seminar, one of the facilitators noted that "introduction of information communication technology in taxation. such as the iTax system by the Revenue Authority has benefited both the taxpayer and the Revenue Authority".

Citing four benefits of iTax system or any other tax system used in your country, justify the facilitators comment.
A

Solution


Benefits of iTax System in Taxation:


In a tax seminar, one of the facilitators noted that the introduction of information communication technology in taxation, such as the iTax system by the Revenue Authority, has benefited both the taxpayer and the Revenue Authority. Here are some key justifications for this comment:

  1. Efficiency and Accuracy:

    The iTax system streamlines tax processes, reducing manual intervention. This improves the accuracy of tax calculations and minimizes errors in data entry.

  2. Online Filing and Payments:

    Taxpayers can conveniently file their tax returns and make payments online through the iTax system. This reduces paperwork, saves time, and enhances the overall efficiency of the tax payment process.

  3. Real-time Information Access:

    Both taxpayers and the Revenue Authority have real-time access to tax-related information. This enables quick verification of tax status, outstanding balances, and other relevant details.

  4. Enhanced Compliance:

    The iTax system facilitates better communication between taxpayers and tax authorities. Automated reminders, notifications, and online assistance contribute to increased taxpayer compliance.

  5. Data Security:

    Security features implemented in the iTax system help protect sensitive taxpayer information. This builds trust and confidence among taxpayers, encouraging more widespread adoption of online tax services.

  6. Cost Reduction:

    Automation and online services provided by the iTax system contribute to cost savings for both taxpayers and the Revenue Authority. The reduction in manual processing and paperwork lowers operational expenses.

  7. Faster Refunds and Processing:

    Automated processes within the iTax system result in quicker processing of tax refunds. Taxpayers experience faster resolution of tax-related matters, enhancing overall satisfaction.

  8. Improved Transparency:

    The iTax system promotes transparency by providing taxpayers with clear visibility into the tax assessment and payment processes. This reduces the likelihood of disputes and misunderstandings.

  9. Data Analytics and Reporting:

    The iTax system allows tax authorities to leverage data analytics for better insights into taxpayer behavior and compliance patterns. This information can inform policy decisions and enforcement strategies.

  10. User-Friendly Interface:

    The iTax system typically features a user-friendly interface, making it accessible to a wide range of users. This inclusivity contributes to higher adoption rates among taxpayers.

  11. Real-time Update of Taxpayers' Ledger:

    The iTax system provides real-time updates to taxpayers' ledgers upon filing returns and making payments, ensuring accurate and up-to-date financial records.

  12. Accessibility:

    The iTax portal is easily accessible from the comfort of the taxpayer's office or home, providing convenience in managing tax-related activities.

  13. Multiple Payment Channels:

    The system offers numerous payment channels, with continuous efforts to add more banks, making the payment of domestic taxes even more convenient for taxpayers.

  14. Simplified Tax Return Filing:

    The iTax system simplifies tax return filing by using an Excel-based format. Taxpayers can complete returns offline and upload them to the online portal, enhancing ease of use.

  15. Swift Application and Processing:

    The system ensures the swift application and processing of various tax-related services, including Tax Compliance Certificates, Refunds, Amendments, waivers, and tax exemptions.

  16. Communication via Email and SMS:

    Taxpayers receive communication via email and SMS notifications upon the completion of transactions. This includes notifications about the successful filing of iTax returns.

  17. Electronic Generation of Certificates:

    The iTax system enables the electronic generation of various certificates, such as PIN, Withholding Tax certificates, Exemption Certificates, etc.

  18. Reduction of Refunds Backlog:

    Taxpayers can utilize approved refunds to offset other tax liabilities, contributing to the reduction of the refunds backlog.

  19. Excel-Based iTax Returns:

    iTax returns are Excel-based, providing an easy and user-friendly format for completion before uploading the returns to the iTax portal.

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QUESTION 5(c)

Q (i) Adjusted taxable profit or loss for the partnership for the year ended 31 December 2015.

(ii) A schedule showing distribution of partner's taxable income for the year ended 31 December 2015.
A

Solution


(i) Adjusted taxable profit or loss for the partnership for the year ended 31 December 2015.



Reported net profit
Add:
Embezzlement by kaka
Partition of staff offices
Prepaid rent & rates
Stamp duty
Legal cost: Partnership deed
Negotiating a bank loan
Custom bond
Salary to partners
Purchases Overstated 20 / 120 x 300,000
Purchase of computers
Conveyors fees
Farm work
Interest on partners capital
Mambos Mortgage interest
Donation to tennis club
Commission to Kaka
Less:
V.A.T on sales 16 / 116 x 9,280,000
Capital gain on sale of property
Rental income
Dividend from Waki Co-operative (net)
Unrealised foreign exchange gain
Wear and tear allowance
Computers 30% x 160,000
Office partitions 12.5% x 48,000
Adjusted taxable profit		 Sh.
3,145,000

24,000
48,000
32,400
64,000
42,000
28,400
24,600
200,000
50,000
160,000
92,800
60,000
450,000
65,800
34,800
21,100

(1,280,000)
(290,000)
(240,000)
(170,000)
(94,000)

(48,000)
(6,000)
2,414,900


(ii) A schedule showing distribution of partner's taxable income for the year ended 31 December 2015.



Salary to partner
Interest on capital
commission - Kaka
Shares of profits
Adjusted taxable profit
other incomes
Rental income
Dividend 100 / 85 x 170,000

 M.
100,000
225,000

871,900
1,196,900

120,000
100,000
1,416,900		 K.
100,000
, 225,000
21,100
871,900
1,218,000

120,000
100,000
1,438,000		 Total
200,000
450,000
21,100
1,743,800
2,414,900


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