Distinguish between a direct and indirect tax.

QUESTION ONE
(a)(i)Distinguish between a direct and indirect tax. ( 4 marks)
(ii)Is Value Added Tax (VAT) a direct or indirect tax? Explain ( 2 marks)
(b)What are the rules governing the payment of VAT? Specify the additional tax that may arise from failure to comply with those rules. ( 6 marks)
(c)(i)Mr. Mali Mingi is a hardware merchant. He purchases cement from Athi Cement Ltd. which
he then sells to his customers. Both Mali Mingi and Athi Cement Ltd. require a profit margin of 20% on cost. Cement attracts 18% VAT. If the cost of production by Athi Cement Ltd. is Sh.220 per bag of 50Kg. At what price should Mali Mingi sell a bag of cement including VAT? ( 5 marks)
(ii)What VAT is payable to the Collector of VAT by Mr. Mali Mingi per 50 Kilogramme bag?(3 marks)
(Total: 20 marks)
QUESTION TWO
(a)Many farmers in the rural areas are unaware of the benefits accorded to them in form of capital allowances under the Income Tax Act. Write a brief summary on capital allowances which may be available to the farmer. ( 6 marks)
(b)On 1 January 2003, Pesa Limited brought into full operation its Limuru Factory of producing bottle tops. The following expenditure had been incurred up to that date.

Sh.
Factory building
(including store and showroom of Sh.600,000 and 800,000 respectively) 5,600,000
New machinery installed: Fixed 8,000,000
Moveable 2,000,000
Delivery trucks (6980cc each) 4,800,000
Office furniture 1,600,000
Computers 2,400,000
Workers’ canteen 800,000
In 2005, additional machinery worth Sh.1,200,000 was purchased and installed in the store at a cost of Sh.320,000. It was brought to use on 1 January 2005 to produce can tops. A saloon car worth sh.600,000 was also purchased.
Required:
Compute the capital allowances due to the company in 2003, 2004 and 2005.
(Total: 22 marks)
QUESTION THREE
(a)Explain clearly the nature of a public good with specific reference to provision of education in Kenya today and the role taxes play under such circumstances. (10 marks)
(b)What is the principle of cost sharing and to what extent does it influence the level of taxation?
( 8 marks)
(Total: 18 marks)

 

 

 

 

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