CAMS Level II

Elements of Taxation flashcards

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Complete Flashcard Reference

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What is a tax, and what sets it apart from a payment for a service?

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

Zero-rated and exempt supplies both carry no output tax. What is the one difference between them?

A zero-rated supply is still a taxable supply, so the supplier reclaims the related input tax in full. An exempt supply sits outside the VAT system, so the supplier cannot reclaim the related input tax: it becomes a real, irrecoverable cost.

What separates employment income from business income for a person who works for someone else?

Employment income arises under a contract of service: the person works for another in return for pay, under the other's direction and control. A contract for services is self-employment: an independent contractor produces a specified result and controls how the work is done. That is taxed as business income.

What are the five badges that bring an activity into charge as a business?

Trade, profession, vocation, adventure and concern. Each is enough on its own. An adventure is one standalone deal for profit, taxable even if never repeated; a concern is the catch-all for any undertaking commercial in substance.

Since the Finance Act, 2021, how is every class of asset written off for investment allowances?

In a straight line: in equal annual instalments of cost, so the allowance is the same every year until the full cost is used up. The older reducing-balance pools no longer apply. Computing a reducing balance out of habit is the commonest error.

What is withholding tax, and which kinds of income does it catch?

The payer deducts tax at source before paying the recipient and remits it directly to KRA. It catches dividends, interest, royalties, management, professional and training fees, rent for certain landlords, and payments to non-resident contractors and certain other non-resident income. Depending on the category it is either a final tax or an advance credit against the recipient's liability.

A taxpayer disputes a KRA assessment. What is the route the dispute takes?

1. A formal objection to KRA within the statutory time limit, following the notice of the decision. 2. If the objection is disallowed, an appeal to the Tax Appeals Tribunal. 3. A further appeal on a point of law to the High Court, and beyond that to the Court of Appeal.

What is a pseudo tax, and which charges are the examples?

A compulsory payment to government that funds a specific purpose or service rather than general revenue. Examples: stamp duty, airport tax, the catering levy and the petroleum levy, the last typically ring-fenced for a strategic fuel reserve or road maintenance.

What is the difference between tax evasion and tax avoidance?

Evasion is illegal: understating income, inflating expenses, not registering or filing, smuggling, false invoices. Avoidance is the lawful arrangement of one's affairs to reduce tax, using provisions Parliament enacted. A scheme with no commercial purpose beyond the tax advantage can still be disregarded under general anti-avoidance rules.

What is the difference between a direct tax and an indirect tax?

Direct: charged straight on the income or wealth of the person meant to carry it, with no route to pass it on. Income tax and capital gains tax. Indirect: charged on a transaction, so it can be passed on through the price. VAT, excise duty and customs duty.

What is the difference between tax impact and tax incidence?