Elements of Taxation cheat sheet

Key terms

Pay As You Earn (PAYE)

The income tax an employer withholds directly from an employee's own taxable pay, computed against the graduated bands currently in force and remitted straight to KRA.

NSSF

A mandatory retirement contribution to the National Social Security Fund, split between employer and employee; a compulsory deduction, but not itself a tax.

NHIF

The name the syllabus still uses for the statutory health-cover deduction, which now takes the form of a Social Health Insurance Fund (SHIF) contribution, currently 2.75% of gross pay, under the Social Health Insurance Act.

Progressive

Climbs as the taxable amount climbs, so someone earning more hands over a bigger slice of it, the shape Kenya's individual PAYE bands follow.

Digressive

Climbs with income too, but the climb flattens out past a certain point, effectively progressive only up to that threshold and behaving close to a flat rate beyond it.

Regressive

Falls as the taxable amount rises, so it actually costs a lower earner a bigger share of their income, the effect a flat charge on a daily necessity has once measured against income.

Proportional

Stays fixed at one rate no matter how large the amount taxed, the shape Kenya's standard corporate tax rate takes.

Tax effect

The broad economic footprint a tax leaves, on prices charged, on behaviour, and on how income ends up distributed across the population.

Tax impact

Where the tax first lands, on whichever party is legally obligated to hand it over to the authority in the first place.

Tax incidence

Where the tax actually ends up resting once any shifting (see Tax shifting, below) has run its course; it only coincides with impact when the tax genuinely cannot be passed on.

Direct taxes

Charged straight on the income or wealth of the person meant to carry it, with no route to pass the burden on elsewhere, income tax and capital gains tax both work this way.

Indirect taxes

Charged on a transaction rather than on income directly, which is exactly what lets it be passed on, wholly or in part, to someone else via the price, the pattern VAT, excise and customs duty all follow.

Forward shifting

The party first liable pushes the cost of the tax onward to the buyer, folded into a higher price.

Backward shifting

The party first liable pushes the cost backward instead, squeezing a lower price out of their own supplier.

Factors that determine the tax shifting

Comes down mainly to the relative price elasticity of demand and supply for the good involved: the more inelastic demand is compared with supply, the more of the tax a seller can push forward onto the buyer, and the relationship reverses the other way round.

Equity

Taxpayers facing similar circumstances should carry a similar load (the horizontal strand), and someone with more capacity to pay should be asked to carry more (the vertical strand).

Economy

Whatever it costs government to actually collect a tax should stay small next to what that tax brings in.

Convenience

Paying should fit naturally into the taxpayer's own routine, PAYE taken straight off pay at source is exactly this principle built into the system's design.

Certainty

How much is owed, and when, and how it must be paid, should be spelled out clearly rather than left open to arbitrary interpretation.

Simplicity

An ordinary taxpayer should be able to understand and follow the rule without needing specialist help just to comply.

Elasticity

Revenue should grow naturally as the wider economy grows, without Parliament having to legislate a brand-new tax every time.

Flexibility

The system needs to be adjustable at reasonably short notice as economic conditions shift.

Productivity

The revenue a tax brings in should be worth the administrative effort of actually collecting it.

Diversity

Government is better served drawing revenue from several different sources than leaning too heavily on any single one.

Ways of tax evasion

The deliberately illegal end of reducing a tax bill: understating income earned, inflating claimed expenses, simply not registering or filing at all, smuggling goods across the border, and issuing invoices that do not reflect a genuine transaction.

Measures the government can put in place to prevent tax evasion

A stronger audit and investigation capacity, cross-checking a taxpayer's declared figures against third-party data, making ordinary compliance simpler, raising penalties, investing in taxpayer education, and deploying technology, iTax and the Electronic Tax Register (see the chapter on administration of income tax) among them, that leaves a transaction with far less room to hide.

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.

Individuals

Resident if they have a permanent home in Kenya and were present at any time during the year; or have no permanent home but were present for 183 days or more in the year; or were present for an average of more than 122 days a year in that year and each of the two preceding years.