ATD Level II
Principles of Taxation glossary
Every term this guide defines, A to Z, each with the chapter that teaches it. Open it when a word in a question is unfamiliar, and test yourself on it in the last week: cover the definition and say it in one sentence.
37 terms from the free first chapter
A
- 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.
- 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.
B
- Backward shifting
The person initially liable passes the burden backward, to their supplier, by negotiating a lower purchase price.
- 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.
C
- 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.
- Certainty
The amount, timing and manner of payment should be clear and predictable to the taxpayer, not arbitrary.
- Convenience
The manner and timing of payment should be convenient for the taxpayer, PAYE deducted at source is a deliberately convenient design.
- Customs duty
A duty charged on goods imported into, or in some cases exported from, Kenya and the wider East African Community customs territory.
D
- 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.
- 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.
- 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.
E
- Economy
The cost of collecting a tax should be small relative to the revenue it raises.
- Elasticity
Revenue should be capable of rising as national income rises, without needing a new tax to be introduced.
- Equity
Taxpayers in similar circumstances should bear a similar burden (horizontal equity), and those with greater ability to pay should bear more (vertical equity).
- 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.
F
- 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.
- Flexibility
The system should be capable of being adjusted relatively quickly to changing economic circumstances.
- Forward shifting
The person initially liable passes the burden of the tax forward, to the buyer, through a higher price.
I
- 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.
- 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.
- Individuals
An individual is resident in Kenya if they:
- Have a permanent home in Kenya and were present in Kenya at any time during the year; or
- Have no permanent home in Kenya but were present in Kenya for 183 days or more in aggregate during the year; or
- Were present in Kenya for an average of more than 122 days a year in that year and each of the two preceding years
- 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.
M
- Measures the government can put in place to prevent tax evasion
The measures include:
- Stronger audit and investigation capacity
- Third-party data matching (banks, employers, land registries)
- Simplifying compliance so evasion is less attractive than compliance
- Harsher penalties
- Taxpayer education
- Technology such as iTax and the Electronic Tax Register (see the chapter on administration of income tax) that makes transactions harder to conceal
N
- 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.
- NSSF
The mandatory National Social Security Fund retirement contribution, shared between employer and employee; not itself a tax, but a compulsory statutory deduction.
P
- 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.
- Productivity
A tax should raise a significant amount of revenue relative to the administrative effort of collecting it.
- 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.
- 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.
R
- 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.
S
- Simplicity
Tax rules should be easy for an ordinary taxpayer to understand and comply with.
T
- 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.
- 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.
V
- 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.
W
- Ways of tax evasion
Deliberately illegal methods of reducing a tax bill:
- Understating income
- Inflating expenses
- Failing to register or file returns
- Smuggling goods to avoid customs and excise duty
- Issuing fraudulent tax invoices
The full glossary adds every term from the other 7 chapters, A to Z, each with the chapter that teaches it.