Principles of Taxation cheat sheet

Key terms

Tax

A compulsory financial charge imposed by government on persons or entities, not given in direct exchange for a specific service, used to fund public expenditure.

Income tax

A direct tax charged on income accrued in or derived from Kenya, and on certain income of a Kenyan resident earned elsewhere, chargeable under the Income Tax Act.

Value Added Tax

An indirect tax charged on the value added at each stage of the supply of taxable goods and services, ultimately borne by the final consumer.

Excise duty

A duty charged on the local manufacture or importation of specified goods and services (alcohol, tobacco, fuel, and certain other excisable goods and services), whether or not they are essential.

Customs duty

A duty charged on goods imported into, or in some cases exported from, Kenya and the wider East African Community customs territory.

Advance tax

Tax paid in advance by the owner or operator of certain public service and commercial vehicles before a licence is issued, later credited against the tax finally assessed.

Instalment tax

Income tax paid in periodic instalments during the year, in advance of the final self-assessment, based on the taxpayer's estimated or prior-year tax liability.

Capital gain tax

A tax charged on the gain realised when certain property (land, buildings and shares in unlisted companies among the categories) is transferred at a price above its adjusted cost.

Pay As You Earn (PAYE)

Income tax withheld by the employer from an employee's taxable pay, computed on the graduated individual tax bands currently in force, and remitted to KRA.

NSSF

The mandatory National Social Security Fund retirement contribution, shared between employer and employee; not itself a tax, but a compulsory statutory deduction.

NHIF

The statutory health-cover deduction named in the syllabus; now collected as the Social Health Insurance Fund (SHIF) contribution under the Social Health Insurance Act, the same successor noted in ATD Business Mathematics and Statistics, at 2.75% of gross pay.

Affordable Housing Levy

Not on the syllabus's list of three, but on every Kenyan payslip since 2024: 1.5% of gross pay from the employee, matched by 1.5% from the employer, under the Affordable Housing Act, 2024. Like NSSF and SHIF it is deducted from pay before PAYE is computed.

Progressive

The rate of tax rises as the taxable amount rises, so a higher earner pays a higher proportion of income in tax. Kenya's individual PAYE bands are progressive.

Digressive

Rates rise with income but at a diminishing rate beyond a certain point, so the tax is progressive only up to that point and closer to proportional above it.

Regressive

The rate of tax falls as the taxable amount rises, so a lower earner pays a higher proportion of income; a flat-rate tax on a necessity (such as VAT on a basic good) behaves regressively relative to income, since it takes a larger share of a poorer household's income.

Proportional

A single, constant rate applies regardless of the amount taxed, so tax paid rises in direct proportion to the taxable amount. Kenya's standard corporate income tax rate is proportional.

Tax effect

The overall economic consequence a tax has, on prices, on behaviour, and on the distribution of income.

Tax impact

The point at which a tax is initially levied, on whoever is legally liable to pay it to the authority in the first instance.

Tax incidence

The point at which a tax is finally borne, after any shifting (see Tax shifting, above) has taken place; impact and incidence coincide only where the tax cannot be shifted.

Direct taxes

Taxes levied directly on the income or wealth of the person who bears them, and which cannot be shifted to someone else; income tax and capital gains tax are direct taxes.

Indirect taxes

Taxes levied on a transaction (typically a supply of goods or services) rather than directly on income, and which can usually be shifted, wholly or partly, to another party through the price charged; VAT, excise and customs duty are indirect taxes.

Forward shifting

The person initially liable passes the burden of the tax forward, to the buyer, through a higher price.

Backward shifting

The person initially liable passes the burden backward, to their supplier, by negotiating a lower purchase price.

Factors that determine the tax shifting

Chiefly the price elasticity of demand and supply for the good in question: the more inelastic demand is relative to supply, the more of the tax a seller can shift forward to the buyer, and vice versa. Market structure (how much competition the seller faces) and the length of time available to adjust also matter.

Equity

Taxpayers in similar circumstances should bear a similar burden (horizontal equity), and those with greater ability to pay should bear more (vertical equity).

Economy

The cost of collecting a tax should be small relative to the revenue it raises.

Convenience

The manner and timing of payment should be convenient for the taxpayer, PAYE deducted at source is a deliberately convenient design.

Certainty

The amount, timing and manner of payment should be clear and predictable to the taxpayer, not arbitrary.

Simplicity

Tax rules should be easy for an ordinary taxpayer to understand and comply with.

Elasticity

Revenue should be capable of rising as national income rises, without needing a new tax to be introduced.

Flexibility

The system should be capable of being adjusted relatively quickly to changing economic circumstances.

Productivity

A tax should raise a significant amount of revenue relative to the administrative effort of collecting it.

Diversity

Government should draw revenue from a range of tax sources rather than relying too heavily on any one, spreading the burden and reducing the risk of one source underperforming.

Ways of tax evasion

Deliberately illegal methods of reducing a tax bill:

Measures the government can put in place to prevent tax evasion

The measures include:

Body corporates

A company is resident in Kenya if it is incorporated under Kenyan law, or if its management and control were exercised in Kenya in the year of income, even if it was incorporated elsewhere.

Individuals

An individual is resident in Kenya if they: