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CPA
Intermediate Leval
Public Finance & Taxation November 2019
Suggested Solutions

Public Finance & Taxation
Revision Kit

QUESTION 1

Q (a) Summarise five roles of the County Assembly in public finance management(5 marks)

(b) Propose five sources of revenue for counts a governments (5 marks)

(c) Outline the stages to be followed in the budget process for the National Government in any financial year
A

Solution


Roles of the County Assembly in public finance management

➫ Give broad guidance on budgetary issues

➫ Ensure that the County Assembly's, the County Government's, and its entities' adherence to the PFM Act's fiscal responsibility standards as well as the Constitution's other guiding principles for public finance and other related matters.

➫ In accordance with the Public Finance Management Act, keep an eye on all budgetary matters that fall under the purview of the County Assembly and report on them.

➫ Review and discuss the County Fiscal Strategy Paper, the Budget Estimates, and the Finance Bill while providing advice to the County Assembly.

➫ Introduce the Appropriations Bill in the County Assembly.

➫ Evaluate the financial accounts and other materials provided to the County Assembly and provide suggestions to the County Assembly for enhancing the management of the County's Public Finances

➫ Approves the budget projections for the county government, cities, and urban areas.

Sources of revenue for county a governments

Local revenue
➫ Property rates
➫ Entertainment taxes
➫ Single business permits
➫ Parking fees
➫ Building permits
➫ Fees from billboards and advertisements.

Equitable share
➦ Is the funding that the national and local governments receive vertically from the parliament.It is the biggest source of county government revenue
It should not be less than fifteen per cent of all the revenue raised by the national government.

Conditional Grants
➦ These are additional funds granted to county government by the national government and there use are restricted to conditions..i.e
➫ Funds for level 4,5 hospitals
➫ Fuel Levy Fund (for maintaining county roads).
➫ Free maternal healthcare

Loans
➫ Private lenders - commercial banks and other financial institutions.
➫ Foreign lenders - multinational corporations (IMF, World Bank).

Donor funding
➫ United States Agency for International Development (USAID)
➫ Denmark’s development cooperation (DANIDA)
➫ United Kingdom’s Department for International Development (DFID).

Offenses & Penalties
➫ Fines and penalties for violation of county by laws

Stages to be followed in the budget process for the National Government in any financial year

(i) Planning for integrated development growth, taking into consideration both the short-term and long-term

(ii) Planning and determining financial and economic policies and priorities at the national level over the medium term

(iii) Preparing overall estimates in the form of the budget policy statement of national government revenues and expenditures.

(iv) Adoption of a budget policy statement by parliament as a basis for future deliberations.

(v) Preparing national government budget forecasts

(vi) Submitting estimates to the national assembly for approval

(vii) Enacting the appropriation bill and any other bills required to implement the national government's budgetary proposals

(viii) Implementing the approved budget.

(ix) Evaluating and accounting for the national governments budgeted revenues and expenditures

(x) Reviewing and submitting quarterly reports on budgeted income and expenses

More info

QUESTION 2

Q (a) Identify three ad hoc committees that a county procuring entity could establish to ensure that procurement and asset disposal is done in accordance with the County Governments Procurement Regulations. (3 marks)

(b) Discuss five roles of the National Treasury in relation to procurement and asset disposal as outlined in the Public Procurement and Asset Disposal Act. (5 marks)

(c) Prepare a VAT account for the month of December 2018 showing the VAT payable or refundable, if any (12 marks)
A

Solution


Ad hoc committees that a county procuring entity could establish to ensure that procurement and asset disposal is done in accordance with the County Governments Procurement Regulations.

➫ Tender opening committee - responsible for receiving and opening bids, as well as selling guidelines for tender opening

➫ Tender committee - Conduct technical and financial evaluation of tenders

➫ Disposal committee - Recommends the best method of disposal of unserviceable assets

➫ Inspection and acceptance committee - Accept or reject, on behalf of the county procuring entity , the delivered goods, works or services.

➫ Negotiation committee - For the purpose of negotiationson on behalf of the county procuring entity

➫ Tender evaluation committee - Carry out the technical and financial evaluation of tenders or proposals on behalf of the county procuring entity .

Roles of the National Treasury in relation to procurement and asset disposal as outlined in the Public Procurement and Asset Disposal Act.

(i) To offer procurement-related technical support and aid in the setup and running of the public procurement and asset disposal system.

(ii) To create policy guidelines for the national executive's effective procurement management and disposal system.

(iii) To develop, assess, advance, and conduct research on national and local public asset disposal and procurement norms.

(iv) To oversee and administer the national government's procurement and supply chain management services cadre's service plan

(v) Create and recommend a successful procurement management system for the county and national governments to ensure transparent asset disposal and procurement.

(vi) To conduct research, create, and advance electronic procurement strategies in both the federal and local governments, as well as state companies and other governmental organizations.

(vii) To create and evaluate national and local government policies for purchasing common user items in the public sector.

(viii) To provide guidance for governmental bodies about procurement issues.

VAT account for the month of December 2018

Kimani Ltd
December 2018 VAT computation
Input Tax Output Tax
01/12
06/12
12/12
27/12
05/12
09/12
14/12
20/12




Jawabu Enterprises 16% x 300,000
Soytech ltd 16% x 420,000
N.Kaluma 16% x 200,000
B.salama 16% x 180,000
Cash purchases 16%(580,000 + 640,000)
Electricity 16% x 32,000
Photocopying 16% x 24,000
Ministry of sports 16% x 3,000
Return outwards 16% x 300(10% x 30,000)
Omittede invoice Dubai traders 16% x 220,000
Baddebts 16% x (520,000 - 400,000)
Credit note issued 16% x 220,000 		48,000
67,200
32,000
28,800
195,200
5,120
3,840
27,200
(4,800)
35,200
19,200
44,800 		04/12
07/12
14/12
20/12








Mwangaza 16% x 650,000
J.Kamau 16% x 520,000
Hazina(Exports)
Ministry sports 16% x 170,000
Cash sales 16%(960,000 + 450,000 - 17,600)







104,000
83,200
27,200
197,440
89,920







501,760 411,840
VAT Refundable = 501,760 - 411,840 = 89,920


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QUESTION 3

Q (a) In a tax seminar one of the facilitators noted that, "The Tax Procedures Act 2015. specifies on that the Commissioner should include in the default assessment to a taxpayer".
With reference to the above statement, outline five categories of such information (5 marks)

(b)(i) Total taxable income for Suleiman Kombo for the year ended 31 December 2018 (10 marks)

(ii) Tax payable (if any) from income computed in (b) (i) above. (3 marks)

(iii) Comment on any information not used in your computations under (b) (i) above (2 marks)
A

Solution


Information that the commissioner should include in the default assessment to a taxpayer.

➫ The reporting period for which the evaluation is made

➫ The amount of tax assessed or, where applicable, the amount of a shortfall or excess of input tax carried forward

➫ The amount of any interest for late payments owed on the tax assessed

➫ The sum charged as a late submission penalty and any late payment penalty due in relation to the assessed tax, deficit, or excess input tax.

➫ How the assessment was objected and;

➫ The deadline for making tax, penalty, and interest payments

Total taxable income for Suleiman Kombo for the year ended 31 December 2018



Tax payable

1st Sh.147,580 @ 10%
Next Sh.139,043(15% + 20% + 25%)
Excess @ 30%(2,387,100 - 564,709)

Less:Personal relief
PAYE(48,000 x 12)
Insurance relief 15% x 72,000 = 10,800
Set limits = 60,000/12 x 4 = 20,000
Withholding tax on dividend(50,000 - 42,500)
Net tax payable



}Lower		 14,758.00
83,425.80
546,717.30
644,901.10
(16,896)
(576,000)

(10,800)
(7,500)
33,705.10


Information not used in the above computations

➫ Given that his gross rental income is less than $10 million, the gross rental Withholding Tax paid is final with regard to rental revenue.

➫ Since the company did not list the school fees it paid as a deductible expense in its financial year accounts, Suleiman Kombo's income was not taxed on them.

➫ Suleiman Kombo's medical expenses are not taxable because the company offers health benefits to all of its employees.

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QUESTION 4

Q (a) Capital allowances due to Dalbir Singh for the year ended 31 December 2018 (10 marks)

(b) The adjusted taxable income of Latherman Co.Ltd. for the year ended 31 December 2018. (10 marks)
A

Solution


Capital allowances due to Dalbir Singh for the year ended 31 December 2018

Investment deductions
Asset Qualifying cost Rate 100%
Factory buildings
Packing bay
Conveyor belt
Processing machinery
Additional processing machinery		 31,560,000
990,000
1,200,000
5,200,000
9,000,000		 31,560,000
990,000
1,200,000
5,200,000
9,000,000


Industrial building allowance
Asset Qualifying cost Rate IBD Bal c/f
FOffice
Residential house
Work place nursery
Drawing and design room
Leased building
Warehouse

 6,250,000
960,000
1,200,000
720,000
12,000,000
2,250,000

25%
10%
10%
25%
10%
10%

 1,562,500
96,000
120,000
180,000
1,200,000
225,000
3,383,500 		4,687,500
864,000
1,080,000
540,000
10,800,000
2,025,000


Wear & tear allowance
Class (I)37.5% (II)30% (III)25% (IV)12.5% Software(20%)
W.D.V
Additions
Oracle database
Cad
Furnitures
Backhoe loader
Library fixtures
Computer saddling
Machine
Motor vehicle
Lorry
Tuk tuk
Mobile crane




3,680,000




1,800,000

1,900,000







840,000








2,000,000

180,000



620,000

480,000

450,000
270,000
Net Assets 7,380,000 840,000 2,180,000 1,100,000 720,000
WTA 2,767,500 252,000 545,000 137,500 144,000
WDV end Year 4,612,500 588,000 1,635,000 962,500 576,000


The adjusted taxable income of Latherman Co.Ltd. for the year ended 31 December 2018.


Reported profit before tax
Add: Disallowable expenses
Depreciation
Directors - Watchman Salary
Bank interest - Overdrafts senior manager
- Mortgage
Bad debts - Staff
- Increase in General provision for bad debt
legal fees - Tax appeal
- Staff loan collection
Audit fees
Sundry fees - Christmas party
- Penalty
Donations
Compensation
Installment tax
Booth
Less: Omitted allowable expenses
Wear & Tear - booth 12.5% x 240,000
Adjusted taxable business income
Other incomes:
interest income- post bank (k) Ltd
Fixed deposit 100/85 * 246,500
Savings account
Dividend:
B&M Co Ltd - withholding tax final
Electronic Lease
Rent income:
Net rental income
Add: Disallowable expenses
Water metres
Iron sheet replacement
Withholding tax
Total adjusted income




























346,000

28,000
120,000
60,000

 Ksh.
3,800,000

400,000
40,000
40,000
60,000
14,000
1,000
30,000
5,000
15,000
17,000
3,000
150,000
92,000
900,000
240,000

(30,000)
5,777,000

138,000
290,000
200,000


50,000





544,060
6,811,060


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QUESTION 5

Q (a) Explain each of the following terms as used under custom taxes

(i) Clean report of findings (2 marks)

(ii) Import declaration form. (2 marks)

(b) Summarise four factors which could influence the extent of tax shifting (4 marks)

(c) (i) Taxable profit or loss of the partnership for the year ended 31 December 2018 (8 marks)

(ii) Allocation schedule of profit or loss calculated in (G)
(i) above (2 marks)

(ii) Total taxable income of each of the partners for the year of income 2018. (2 marks)
A

Solution


(a) Custom taxes terms

Clean report of findings
➦ Is a report issued by an inspection company that the pricing has been confirmed, the items have undergone an inspection before shipping, and both have been found to meet the specifications of the buyer.

Import declaration form.
➦ Is a formal document that identifies and describes the items being imported.

(b) Factors which could influence the extent of tax shifting

(1) Public policy

(2) Rate of tax and Type of the market

(3) Familiarity of consumers with a particular set of prices

(4) Form of quoting the price

(5) Availability of substitutes

(6) General economic conditions

(7) Geographical coverage

(8) Time allowed for tax shifting

(c) Taxable profit or loss of the partnership for the year ended 31 December 2018


Reported net profit
Add: Disallowable deductions
Salaries and wages - Rachael
installment tax
Advertising - new product
Interest on capital :Teddy
:Rachael
:Michael
Legal fees- parking fine
Commission - Teddy
- Michael
Depreciation
Donation to famine relief
General reserves
Taxes on property
Understated stock (10/90x180.000)
Less: Omitted allowable expenses
Capital allowance
Less: Non taxable income
Profit on sale of shares
Less: Income whose withholding tax final
Interest on deposit
Less: Non business income
Farming income
Adjusted taxable profit 		Sh
1,040,000

40,000
45,000
10,000
60,000
70,000
80,000
12,000
45,000
35,000
92,000
100,000
120,000
12,000
20,000

(90,000)

(100,000)

(120,000)

(132,000)
1,339,000


Allocation schedule of profit

Partners distribution schedule
Teddy
Sh 		Rachael
Sh 		Michael
Sh 		Total
Sh
Salary
Interest on capital
Commission
share of profit		 -
60,000
45,000
403,600		 40,000
70,000
-
302,700		 -
80,000
35,000
302,700		 40,000
210,000
80,000
1,009,000
Adjusted taxable income 508,600 412,700 417,700 1,339,000


Share of profits

Teddy 4/10 x 1,009,000 = 403,600

Rachael 3/10 x 1,009,000 = 302,700

Michael 3/10 x 1,009,000 = 302,700

Total taxable income of each of the partners

Teddy
Sh 		Rachael
Sh 		Michael
Sh
Taxable income
Farming income
Less:Partnership loss
Consultancy fee
Total taxable income		 508,600
52,800
(135,000)
120,000
546,400
412,700
39,600
(135,000)
-
317,300		 417,700
39,600
-
-
457,300


Farming income

Teddy 4/10 x 132,000 = 52,800

Rachael 3/10 x 132,000 = 39,600

Michael 3/10 x 132,000 = 39,600


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