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CPA
Intermediate Leval
Public Finance & Taxation November 2019
Suggested Solutions

Public Finance & Taxation
Revision Kit

QUESTION 1

Q (a) With reference to the above statement, identify four ways used by the national government to demand budgetary accountability by the government entities. (4 marks)

(b) outline four purposes of Puble Finance Management Equalization Fund Regulation 2015 (4 marks)

(c) Citing three reasons, justify the importance of information contained in the circulars guiding the budget processes for county governments (6 marks)

(d) Describe three functions performed by the Internal Auditor-General Department of the National Treasury in conducting internal auditing of government entities (6 marks)
A

Solution


(a) Ways used by the national government to demand budgeting accountability by the government entitles.

➫ In order to present a precise financial picture,it make sure accrual accounting is at the core of the entire PFM system.

➫ Improve inspection by using a whole systems approach.

➫ Plan reform appropriately.

➫ Regularly release financial statements for the public sector.

➫ Reduce corruption tolerance by using data analysis .

(b) Purposes of public finance management equalization fund regulations 2015

➫ The purpose of the equalization fund is to provide essential amenities like energy, water, and roads to marginalized sections of the nation.The goal is to bring them up to par with other public finance management equalization fund regulations 2015

(1). Indicate the fund's sources, object, and purpose.

(2). Establishing a board for the equalization fund to provide guidance to the cabinet secretary on the fund's performance

(3). To provide direction for managing and administering the fund

(4). To make provisions for the fund's withdrawals

(5). Make provisions for the fund's closure

(c) Justification of the importance of information contained in the circulars guiding the budget processes for county government

➫ provides guidance on the budget's underlying policy structure.

➫ Give instructions on the structure, substance, and price of the programs that need to be supported in the budget proposals.

➫ Focuses on the constitutional timeframes and requirements

(d). Three functions performed by the internal auditor-general department of the national treasury

➫ Examining the entity's governance procedures and its systems for accountability and transparency with reference to its resources, including its finances

➫ Conducting risk-based, cost-effective, and system audits with the goal of enhancing internal control mechanisms that could affect the achievement of the entity's strategic objectives

➫ Confirming the existence of assets managed by the company and making sure that the right security measures are in place to secure them

➫ Assuring that the entity adheres to the proper institutional policies and procedures and acceptable business practices

➫ Determining if the data management has access to is reliable and adequate for making decisions about the firm and its activities.

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QUESTION 2

Q (a) Outline four contents of information that the National Treasury should include in the financial statements in respect to the Contingencies Fund submitted to the Auditor- General. (4 marks)

(b) Summarise six benefits of applying e-procurement in the public sector (6 marks)

(c) The value added tax (VAT) payable by (or refundable to) Sitima Traders for the month of September 2018 (10 marks)
A

Solution


(a) Contents of information that the statement in respect to I treasury should include in financial the Auditor-General

➫ Dates and amounts associated with each payment

➫ The purpose for which the payment was made

➫ The person to whom the payment was made

➫ A statement showing how the funds were used for their intended purpose

(b) Benefits of applying e-procurement in public sector

➫ Reduction in paper work results in a decrease in administrative costs.

➫ Due to the absence of paperwork, postage, and other expenses related to creating and mailing tender documents, there is a price decrease in the tendering process.

➫ Staff reduction in procurement: Less personnel are required to manage the process.

➫ Given that a single department manages all procurement processes globally and has access to paperwork when needed, it gives a business an advantage over its rivals.

➫ There is a decrease in the amount of time needed to obtain materials. Staff members of e-procurement have more time to work on strategy-related issues than they would have if they were using paper invoicing, which requires writing, filing, and postal communication.

(c) The value added tax (VAT) payable by (or refundable to) Sitima Traders

Input Sh Output Sh
Purchases at std rate 16 / 116 × 487,200
Audit fees 16 / 116 x 41,760
Printing materials 16 / 116 x 29,000
Water bill
Telephone expenses 16 / 116 x 58,000
Imports 16% [500,000 + 40,000 + 20,000 × 12.5%]
Debit notes received 16 / 116 x 23,200		 67,200
5,760
4,000
0
8,000
112,000
3,200		 Export to Malawi 0% x 400,000
Sales at Std rate 16 / 116 x 1,136,800
Credit notes issued 16 / 116 x 20,880




 0
156,800
(2,880)
200,160 153,920


Taxable sales = Sales at std rate + Zero rated Supplies

Sales at Std rate = 100 / 116 x 1,136,800
Zero rate sales

Less credit notes 100 / 116 x 20,880
Total value of taxable supplies		 980,000
400,000
1,380,000
(18,000)
1,362,000


Deductible input tax = 1,362,000 / 16,420,000 x 200,160
166,028

VAT payable / refundable
Output tax
Less: Input tax
Bad debts relief 16/116 x 34,480
VAT refundable		 153,920
(166,028)
(4,480)
16,588


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QUESTION 3

Q (a) Outline four categories of goods which are subject to customs control under the Customs and Excise Act. (4 marks)

(b) The capital gain tax payable by Loki Marcete in respect to disposal of the building (4 marks)

(c)(i) Taxable income of Halima Ali for the year ended 31 December 2018 (10 marks)

(ii) Tax liability (if any) from the income computed in (c)(i)(above) (2 marks)
A

Solution


(a) Categories of goods which are subject to customs Control under the customs and excise acts

➫ Restored exports, or products with export restrictions

➫ Goods that have been seized or are subject to a seizure notification

➫ Goods in bonded warehouse

➫ Goods under drawback from the date of the drawback claim

➫ Unpaid duty on items that are subject to duty

➫ Goods awaiting export that is kept in a customs area with the required authorization from customs

(b) The capital gain tax payable by Loki Marete in respect to disposal of the building

Capital gain tax
payable by Loki Marete in respect to disposal of the building
Transfer value - selling price
Less: incidental cost. Advertising
Net transfer value
Adjusted cost:
Cost of building
Legal cost
Valuation cost
Roof replacement cost
Sewerage cost
Capital allowance
Capital gain



2,400,000
180,000
160,000
360,000
78,000
(282,000)

 5,840,000
(246,000)
5,594,000






(2,896,000)
2,698,000


Capital gain tax = 5% x 2,698,000 = 134,900

(c)(i) Taxable income of Halima Ali for the year ended 31 December 2018

Halima Ali computation of taxable income

Basic salary 250,000 × 12
Hardship allowance 45,000×12
Responsibility allowance 50,000×12
Commuter allowance 2,500×12
Bonus
Furniture 12/100x320,000
Insurance premium 500×12
Car benefit-cc rating 8,600 × 3 = 25,800
6 / 100 x 1,800,000 = 108,000
} higher
Re-imbursement for Medical bill
Cash reward
School fees
Total employment benefit before house allowance
House benefits - 15/100 x 5,296,400 = 794,460
Market rental value 80,000 × 12 = 960,000
}higher

Less: Allowable deductions
Pension contribution:
Actual contribution 15,000×12 = 180,000
Set limit = 240,000
30/100 x 6,256,400 = 1,876,920
}lower
Less: Mortgage interest
Actual 144,000
Set limit 300,000
}lower
Total taxable income 		Sh.
3,000,000
540,000
600,000
300,000
90,000
38,400
60,000

108,000
380,000
60,000
120,000
5,296,400

960,000
6,256,400




(180,000)


(144,000)
5,932,400


(ii) Tax liability

Computation of tax liability
First 147,580 @ 10%
Next sh.139,043(15% + 20% + 25%)
Excess(5,932,400 - 564,709) @ 30%
Gross tax payable
Less:
PAYE = 6,800 x 12
Personal relief
15% x 600,000 = 90,000
Set limit = 60,000
}lower
 14,758.0
83,425.8
1,610,187.3
1,708,371.1

(816,000)
(16,896)

(9,000)
Net tax payable 866,475.1


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QUESTION 4

Q (a) Adjusted taxable income or loss for Pareto Ltd. for the year ended 31 December 2018 (10 marks)

(b) Capital allowances due to Sawa Industries Ltd. for the year ended 31 December 2018 (10 marks)
A

Solution


(a) Adjusted taxable income

Pareto ltd computation of adjusted profit/ loss year of income 2018

Reported net profit
Add: disallowable expense
Increase in provision for bad and doubtful debts
Advertising - passenger sheds at bus stops
Depreciation
Interest - Commercial rental property
Money borrowed to pay tax and penalty
Legal cost appeal to tax tribunal
Registration of lease
Less: Ommitted allowable expenses
Capital allowances
Less:Non taxable income
Sale of debentures
Profit on sale of equipment
Unrealized foreign exchange gain
Bad debts recovered - Sale of furniture
Insurance compensation - Motor vehicle
Less: Income that withholding tax is final
Dividend
Less: Non business income
Rent received
Interest received
Adjust taxable profit
Add: Other incomes:
Dividend - co-operative society 100 / 85 x 170,000
Interest from Fahari bank Ltd 100 / 85 x 289,000
Rent 580,000 - 110,000
Total taxable profit		 Sh.
7,584,000

145,000
430,000
280,000
110,000
70,000
155,000
90,000

(960,000)

(4,200,000)
(88,000)
(50,000)
(130,000)
(405,000)

(675,000)

(580,000)
(289,000)
1,487,000

200,000
340,000
470,000
2,497,000


(b) Capital allowances due to Sawa Industries Ltd.

INVESTMENT DEDUCTION
Asset
Factory building
Processing machinery
Water pump
Drainage system
Borehole
Conveyor belt
Boilers

 Qualifying cost
5,200,000
2,400,000
360,000
320,000
680,000
780,000
920,000
10,660,000 		Rate @ 100%
5,200,000
2,400,000
360,000
320,000
680,000
780,000
920,000
10,660,000


IBD
Asset
Sports pavilion (3 months)
Labour quarters (9 months)
Staff canteen (9 months)
Godown (9 months)

 QC
650,000
2,600,000
960,000
1,800,000

 Rate 10%
16,250
65,000
72,000
135,000
288,250		 Bal c/f
633,750
2,535,000
888,000
1,665,000
5,721,750


Class I
37.5%
Sh		 II
30%
Sh		 III
25%
Sh		 IV
12.5%
Sh
W.D.V 01/01/2018
Additions
Furniture & fittings
Motor vehicle
Computers
Folklift
Photocopier
pickup
Cash register
Fax machine
Office cabinets
Delivery van
Disposal:
saloon car
Net asset
W&T allowance
W.D.V 31/12/2018




1,740,000








1,740,000
(652,500)
1,087,500



450,000

180,000

120,000





750,000
(225,000)
525,000


1,600,000



1,900,000



1,500,000

(1,200,000)
3,800,000
(950,000)
2,850,000

980,000






200,000
160,000



1,340,000
(167,500)
1,172,500


Forklift
Purchase cost
Import duty 25% x 1,200,000
VAT 16% x 1,500,000

1,200,000
300,000
240,000
1,740,000


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QUESTION 5

Q (a) The Excisable Goods Management System Regulations require for affixing of excise stamps on every package of excisable goods.
Identify two purposes of these stamps. (2 marks)

(b) Discuss three measures that the government has undertaken to help reduce the number of tax appeals proceeding to court. (6 marks)

(c) (i) Adjusted taxable profit or loss for the year ended 31 December 2018. (8 marks)

(ii) A schedule showing the distribution of the partners profit or loss computed in (c) (i) above (4 marks)
A

Solution


(a) Purposes of fixing a stamp on every package of Excisable goods

➫ Facilitating the tracking of excisable items and stamps along the supply chain

➫ Minimize counterfeiting.

➫ Help anyone in the supply chain who needs to authenticate stamps and excisable items.

➫ Enabling the production of produced or imported excisable commodities

(b) Measures that the government has undertaken to reduce the number of tax appeal proceeding to court

➫ Created a Tax Appeals Tribunal that combines the prior independent tribunals established in accordance with the relevant statutes. This tribunal has 20 members, with three constituting a quorum to hear cases. Professionals from the accounting, legal, financial, and economic disciplines make up the group's members. laying the groundwork for the quicker, more thorough, and more efficient resolution of conflicts.

➫ Introduced a unified Tax Procedures Act that unifies the dispute resolution systems under a single framework to streamline administration and dispute resolution procedures

➫ Engaged in a number of taxpayer recruitment/educational activities to make taxpayers aware of their tax compliance obligations.

➫ Introduced a platform for alternative dispute resolution (ADR) to assist taxpayers and the Kenya Revenue Authority in settling disputes amicably and more less expensive.

(c) (i) Adjusted taxable profit or loss

Mazao farm computation of taxable profit

Reported net profit
Add:
Partners Salaries (240,000 + 300,000)
Drawing (350,000 + 460,000)
Milking Machine
Interest on capital (105,000 + 125,000)
Presumtion tax
Legal - tax appeal
Rates
Depreciation
Legal - breach of contract
Interest on drawing (W1): Soi
: Timothy

Less:
Profit on sale of tractor
Insurance claim
Interest received
Rental income
F.W.D = 100% [40,000 + 75,000 + 150,000]
WTA = 12.5% x 200,000
Adjusted taxable profit		 Sh.
36,000

540,000
810,000
200,000
230,000
45,000
35,000
30,000
15,000
23,000
35,000
46,000
2,045,000

(45,000)
(510,000)
(90,000)
(200,000)
(265,000)
(25,000)
910,000


(ii) A schedule showing the distribution of the partners profit or loss

Partners distribution schedule

Salaries
Interest on capital
Interest on drawings
Share of profits
Adjusted taxable profit
Other incomes
Rental incomes
Total taxable income		 Soi
240,000
105,000
(35,000)
110,500
420,500

100,000
520,000		 Timothy
300,000
125,000
(46,000)
110,500
489,500

100,000
589,500 		Total
540,000
230,000
(81,000)
221,000
910,000

200,000


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