TAXATION
Learning objectives; candidates should know and appreciate the following;-
1. The meaning of Tax
2. The three common features or elements in any given tax system
3. Seven main types of taxes
4. The seven main purposes of taxation
5. Power to tax
6. Principles of an optimal tax system
7. The incidence of tax and tax shifting
8. Classification of taxes
9. Advantages of direct taxes as opposed to indirect taxes
10. Disadvantages of direct taxes as compared to indirect taxes
11. The economic effects of taxation on production, employment and distribution
12. Factors determining Taxable Capacity of a country
1. Meaning of tax
Taxation is the most important source of public revenue and tax can be defined as an involuntary payment by
the taxpayers without expectation of direct benefit from public supply of goods and services in return. In
other words there is no direct relationship between taxation and benefits from public goods and services one
enjoys from the government. So every taxpayer can enjoy goods and services by government like any other
citizen without preference or discrimination.
Other definitions of tax are as follows;-
a) That a tax is a compulsory contribution e public authority, irrespective of the exact amount of services
rendered to the taxpayer in return.
b) That it is a personal financial contribution to the government to defray the expenses incurred in the
common interest of all.
c) It is a contribution of wealth by a person or group of persons for goods and services rendered by the
government to the general public.
2. The three common main features or elements in any tax system
i) Tax authorities
These are bodies with the legal power to impose tax on the society e.g. the KRA on behalf of the national
government of the local authorities. The taxing authorities have power to enforce payment of taxes.
ii) Taxpayers
Taxpayers are the legal persons or entities either natural persons or organisations that pay taxes to the
appointed tax authorities. Examples of taxpayers are; individuals, companies, business and other
organisations. The amount of tax payable is compulsory and therefore one punishable for failure to remit.
iii) Tax
This is the amount paid to the taxing authority by the taxpayer as a direct cash payment or paid indirectly
through purchase of goods and services. Tax is not paid for any specific service rendered by the tax authority
to the tax-payer. The tax once paid becomes public revenue to the government for use to provide public
goods and services to all citizens.
Page 1 of 11
, 3. Seven main types of taxes
i) Income tax
This is a tax imposed on annual gains or profits earned by individuals, limited companies, businesses and
other organisations.
ii) Value added tax (VAT)
This is a tax imposed on the sale of goods and services and was introduced in Kenya with effect from the
1st January 1990.
iii) Sales tax
This is a tax imposed on sale of commodities which was abolished in Kenya as from the 31st December
1989.
iv) Excise duty
This is a tax imposed on commodities produces locally.
v) Customs duty
This is a tax imposed on import or export of commodities.
vi) Stamp duty
This is a tax imposed on the transfer of a property.
vii) land, rent and rates.
This is a tax imposed on property. Rent is paid to the national government on some land leases while rates
are paid to the county government based on property values.
4. The seven main purposes of taxation.
The seven main reasons why government impose taxes are as follows;-
i) Raising of revenue
The main purpose of taxes is to raise public income and taxes are the single largest source of revenue to the
government. The government needs such income from taxes to finance social welfare programmes, provide
public goods like roads, schools etc.
ii) Economic stability
Taxes are also imposed to maintain economic stability in a country. During high inflation the government
imposes higher taxes to discourage consumption on unnecessary goods and services. While on the other
hand, during deflation, taxation imposed are reduced to help check the big the fluctuations in prices of goods
and services and therefore maintain economic stability.
iii) Protection policy
In cases, where a government has a policy of protecting local industries against unfair competition from
foreign companies, heavy taxes are imposed on imported goods and services from other countries that are in
direct competition with locally produced goods and services.
iv) Social welfare
Some commodities such as wines, alcoholic drinks, tobacco cigarettes, etc. that are considered to be harmful
to the society suffer high tax rates to make them more expensive and discourage their consumption. Revenue
obtained from such a tax is used to finance social welfare programmes like schools and health services.
Page 2 of 11
Learning objectives; candidates should know and appreciate the following;-
1. The meaning of Tax
2. The three common features or elements in any given tax system
3. Seven main types of taxes
4. The seven main purposes of taxation
5. Power to tax
6. Principles of an optimal tax system
7. The incidence of tax and tax shifting
8. Classification of taxes
9. Advantages of direct taxes as opposed to indirect taxes
10. Disadvantages of direct taxes as compared to indirect taxes
11. The economic effects of taxation on production, employment and distribution
12. Factors determining Taxable Capacity of a country
1. Meaning of tax
Taxation is the most important source of public revenue and tax can be defined as an involuntary payment by
the taxpayers without expectation of direct benefit from public supply of goods and services in return. In
other words there is no direct relationship between taxation and benefits from public goods and services one
enjoys from the government. So every taxpayer can enjoy goods and services by government like any other
citizen without preference or discrimination.
Other definitions of tax are as follows;-
a) That a tax is a compulsory contribution e public authority, irrespective of the exact amount of services
rendered to the taxpayer in return.
b) That it is a personal financial contribution to the government to defray the expenses incurred in the
common interest of all.
c) It is a contribution of wealth by a person or group of persons for goods and services rendered by the
government to the general public.
2. The three common main features or elements in any tax system
i) Tax authorities
These are bodies with the legal power to impose tax on the society e.g. the KRA on behalf of the national
government of the local authorities. The taxing authorities have power to enforce payment of taxes.
ii) Taxpayers
Taxpayers are the legal persons or entities either natural persons or organisations that pay taxes to the
appointed tax authorities. Examples of taxpayers are; individuals, companies, business and other
organisations. The amount of tax payable is compulsory and therefore one punishable for failure to remit.
iii) Tax
This is the amount paid to the taxing authority by the taxpayer as a direct cash payment or paid indirectly
through purchase of goods and services. Tax is not paid for any specific service rendered by the tax authority
to the tax-payer. The tax once paid becomes public revenue to the government for use to provide public
goods and services to all citizens.
Page 1 of 11
, 3. Seven main types of taxes
i) Income tax
This is a tax imposed on annual gains or profits earned by individuals, limited companies, businesses and
other organisations.
ii) Value added tax (VAT)
This is a tax imposed on the sale of goods and services and was introduced in Kenya with effect from the
1st January 1990.
iii) Sales tax
This is a tax imposed on sale of commodities which was abolished in Kenya as from the 31st December
1989.
iv) Excise duty
This is a tax imposed on commodities produces locally.
v) Customs duty
This is a tax imposed on import or export of commodities.
vi) Stamp duty
This is a tax imposed on the transfer of a property.
vii) land, rent and rates.
This is a tax imposed on property. Rent is paid to the national government on some land leases while rates
are paid to the county government based on property values.
4. The seven main purposes of taxation.
The seven main reasons why government impose taxes are as follows;-
i) Raising of revenue
The main purpose of taxes is to raise public income and taxes are the single largest source of revenue to the
government. The government needs such income from taxes to finance social welfare programmes, provide
public goods like roads, schools etc.
ii) Economic stability
Taxes are also imposed to maintain economic stability in a country. During high inflation the government
imposes higher taxes to discourage consumption on unnecessary goods and services. While on the other
hand, during deflation, taxation imposed are reduced to help check the big the fluctuations in prices of goods
and services and therefore maintain economic stability.
iii) Protection policy
In cases, where a government has a policy of protecting local industries against unfair competition from
foreign companies, heavy taxes are imposed on imported goods and services from other countries that are in
direct competition with locally produced goods and services.
iv) Social welfare
Some commodities such as wines, alcoholic drinks, tobacco cigarettes, etc. that are considered to be harmful
to the society suffer high tax rates to make them more expensive and discourage their consumption. Revenue
obtained from such a tax is used to finance social welfare programmes like schools and health services.
Page 2 of 11
