Ch02 Basic Features of Income Tax.docx

Taxation Management – BASIC FEATURES OF INCOME TAX Background/History Income Tax Act of 1922: At the time of independence, this Act prevalent in undivided India was adopted by the Government of Kenya as its Income Tax Law. Income Tax Ordinance, 1979 First law on Income Tax was promulgated in Kenya from 1st July, 1979. Income Tax Ordinance, 2001 To updates the tax laws and brings our law in accordance with international standards, this ordinance was promulgated on 13th September, 2001, which became effective from 1st July, 2002. IT rules 2002 These were promulgated by CBR on 1st July 2002 in exercise of powers granted under section 237 of the Ordinance. Rules are integral part of the main enactment / Law. I.T Ordinance 1979 stands repealed vide section 238 of the Ordinance. The Ordinance overrules all other laws for the time being in force (Sec 3). Federal Government empowered to allow exemptions to certain types of income or specific persons during financial year but required to place the same before National Assembly at the end of that financial year Sec 53(3). CBR can issue administrative instructions explanations/circulars under the powers vested through Sec 206 and 213. However, CBR’s instructions not binding on Tax Payers since these are administrative interpretation not judicial interpretation. Sec 206 and sec 213 of the ordinance are reproduced below: Section 206: (1)To achieve consistency in the administration of this Ordinance and to provide guidance to taxpayers and officers of the Central Board of Revenue, the Central Board of Revenue may issue Circulars setting out the Board’s interpretation of this Ordinance. (2)A circular issued by the Central Board of Revenue shall be binding on all Income Tax Authorities and other persons employed in the execution of the Ordinance, under the control of the said Board other than Commissioners of Income Tax (Appeals). (3)A Circular shall not be binding on a taxpayer. Section 213: In the course of any proceedings under this Ordinance, the Commissioner or any taxation officer may be assisted, guided or instructed by any income tax authority to which he is subordinate or any other person authorized in this behalf by the Central Board of Revenue. Case Law is an important source of interpretation. Decisions and interpretation of Supreme Court are binding on all courts in Kenya, according to Article 189 of constitution 1973. Decisions and interpretation of High courts are binding on subordinate courts/tribunals in the area of their jurisdictions. Basic Features of Income Tax Ordinance 2001 Scheme of the Ordinance is given below: There are thirteen chapters Chapters are divided into: Parts & Divisions There are 240 Sections This ordinance comprises of seven Schedules Tax Year: 74---Tax year means a period of 12 months ending on June 30th which is Sec. 2(68) read with Sec. also called Normal Tax Year. Special Tax Year: In case a person has a different accounting period from normal tax year or adopted such a period after seeking approval from commissioner under section 74(3) it is called special tax year. Classes of taxpayer regarding Special Tax Year: 5764530254000380873025400085090254000Classes of Tax payers Special Accounting Year Companies manufacturing Jute goods 1st July to 30th June Companies manufacturing Sugar 1st October to 30th September All persons exporting rice and carrying insurance business 1st January to 31st December All persons carrying on business of cotton ginning, rice husking 1st September to 31st August and oil milling 1st April to 31st March All people carrying on business of manufacturing and dealing in shawls 1st January to 31st December All Insurance Companies 5764530-76200085090-7620003806190-825500 Explanation—a tax year can be a period of less than 12 months under special circumstances for example discontinuance of business u/s 117. Section 117 is reproducing below: 117. Notice of discontinued business (1)Any person discontinuing a business shall give the Commissioner a notice in writing to that effect within fifteen days of the discontinuance. The person discontinuing a business shall, under the provisions of this Ordinance or on being required by the Commissioner by notice, in writing, furnish a return of income for the period commencing on the first day of the tax year in which the discontinuance occurred and ending on the date of discontinuance and this period shall be treated as a separate tax year for the purposes of this Ordinance. Where no notice has been given under sub-section (1) but the Commissioner has reasonable grounds to believe that a business has discontinued or is likely to discontinue, the Commissioner may serve a notice on the person who has discontinued the business or is likely to discontinue the business to furnish to the Commissioner within the time specified in the notice a return of income for the period specified in the notice. A return furnished under this section shall be treated for all purposes of this Ordinance as a return of income, including the application of Section 120. Person—Sec. 2(42) read with section 80. Person includes: An individual A company or association of persons incorporated or formed in Kenya or elsewhere; and The federal Government, a foreign government, a political sub division of foreign government, or Public international organization For the purpose of the above: “An association of persons”—includes a firm, a Hindu Undivided Family, any artificial juridical person and anybody of persons formed under a foreign law, but doesn’t include a company. “Company” means--- A company as defined in companies ordinance, 1984 A small company as defined in sec. 2(59A) A body corporate formed by or under any law in force in Kenya; o A modarba A body incorporated by or under the law of a country outside Kenya, relating to incorporation of companies; A trust, a cooperative society or a finance society A foreign association whether incorporated or not, which the central board of revenue has, by general or special order, declared to be a company for the purpose of this ordinance; A provincial government A local authority in Kenya Firm means the relation between persons who have agreed to share the profits of a business carried on by all or anyone of them acting for all; Trust means an obligation annexed to the ownership of a property and arising out of the confidence reposed in and accepted by the owner, or declared and accepted by the owner for the benefit of another, or of another and the owner, and includes a “unit trust”; and “Unit trust” means any trust under which beneficial interest are divided into units such that the entitlements of the beneficiaries to income or capital are determined by the number of units held. Sec. 2(66) “Taxpayer” means any person who derives an amount chargeable to tax under this ordinance; o Any representative of a person who derives an amount chargeable to tax under this ordinance Any person who is required to deduct or collect tax under part V of chapter X and chapter XII Any person required to furnish a return of income or pay tax under this ordinance. Exercises on determination of Tax Year Exercise 1: Determine Tax year relating to following accounting period: 1st July 2006 to 30th June 2007 1st July 2007 to 30th June 2008 1st July 2008 to 30th June 2009 Answers: Tax year 2007Tax year 2008Tax year 2009 Exercise 2: Determine tax year pertaining to accounting periods given here under: Sr Classes of Tax Payers Accounting Period A Mr. Aslam, a rice exporter (i)1st Jan 08 to 31st Dec 08 (ii)1st Jan 07 to 31st Dec 07 (iii)1st Jan 06 to 31st Dec 06 B Mr. Kamal, a manufacturer (i)1st April 08 to 31st Mar 09 of shawls. (ii)1st April 07 to 31st Mar 08 (iii)1st April 06 to 31st Mar 07 (iv)1st April 05 to 31st Mar 06 M/S XYZ, a company manufacturing sugar. M/S ABC, Insurance Company. (i)1st Oct 07 to 30th Sep 08 (ii)1st Oct 06 to 30th Sep 07 (iii)1st Oct 05 to 30th Sep 06 (i)1st Jan 08 to 31st Dec 08 (ii)1st Jan 07 to 31st Dec 07 (iii)1st Jan 06 to 31st Dec 06 (iv)1st Jan 05 to 31st Dec 05 Answer E-2: The tax years in the above exercise are special tax year. A (i) Special Tax year 2009 A (ii) Special Tax year 2008 A (iii) Special Tax year 2007 B (i) Special Tax year 2009 B (ii) Special Tax year 2008 B (iii) Special Tax year 2007 B (iv) Special Tax year 2006 C (i) Special Tax year 2009 C (ii) Special Tax year 2008 C (iii) Special Tax year 2007 D (i) Special Tax year 2009 D (ii) Special Tax year 2008 D (iii) Special Tax year 2007 D (iv) Special Tax year 2006 Tax Year – Points to Remember •Normal Tax Year starts from 1st July and ends on 30th June (a period of twelve months). •A tax payer can adopt a special Tax year after seeking approval from Commissioner of Income Tax (CIT), •Commissioner can withdraw the permission granted to adopt a special Tax year in respect of a tax payer, if in the opinion of CIT it is not feasible. But CIT must notify the tax payer the reasons in writing for withdrawal of permission granted to tax payer. •A Tax Payer using special Tax year may revert to Normal Tax Year after seeking approval from Commissioner of Income Tax (CIT). DETERMINATION OF LEGAL STATUS OF A PERSON Exercise: Determine legal status of the following persons under the provisions of section 80 of the ordinance. ABC University, Karachi XYZ Bank Limited A joint family of Mr. H (a Hindu), Comprising Mr. H, his sons Mr. C & Mr. D XYZ Modaraba XYZ Mills Ltd. Federal Government Government of Sind Government of Punjab ABC Trust KDs’ an unregistered firm of K and D Mr. A Serving as a Manager in a Textiles Company Mr. Z, a Director in Private Company Mr. y, Running his Business as Sole Proprietor ABC Welfare Trust Mr. A & B Joint Owners in Immovable Property XYZ Cooperative Housing Society Answer to exercise on legal status: A (i) Company A (ii) Banking Company A (iii) Hindu Undivided Family A (iv) Company A (v) Public Company A (vi) Person A (vii) Company A (viii) Company A (ix) Company A (x) Firm A (xi) Individual A (xii) Individual A (xiii) Individual A (xiv) Company A (xv) Association of persons A (xvi) Company Tax on Income •Income Tax is a tax on a person in respect of his income during a tax year •Income of a tax year as computed under the provisions of this ordinance is Taxable Income, it is total income reduced by total of any deductible allowances. It is charged to tax in a tax year according to applicable rules. 'Income– Sec. 2 (29) Income has been defined in section 2 (29) of the ordinance as under: “income” includes any amount chargeable to tax under this Ordinance, any amount subject to collection or deduction of tax and any loss of income but does not include, in case of a shareholder of a company, the amount representing the face value of any bonus share or the amount of any bonus declared, issued or paid by the company to the shareholders with a view to increasing its paid up share capital; •Any amount chargeable to tax under this ordinance •Any amount subject to deduction and collection under various sections of this ordinance. •Any loss of Income SCOPE OF INCOME/CONCEPT Receipt of Income may be o On Cash Basis as well as o In kind Deemed Income at Par with real income Cash Basis Vs Accrual Basis Illegal Income Lump Sum Receipts Tax-free income Income can not be taxed twice, if not expressly Mentioned otherwise Charge on Person Certain Incomes excluded from Taxable Income (exemptions) Lump Sum Receipts Tax-free income Income can not be taxed twice, if not expressly Mentioned otherwise Certain Incomes excluded from Taxable Income (exemptions) MODULE 4 HEADS OF INCOME (Section 11) Following are the heads of income, ascertained in section 11 Salary (Section 12) Income from Property (Section 15) Income from Business (Section 18) Capital Gains (Section 37) Income from other Sources (Section 39) Total Income (Section 10) Total income of a person for a tax year shall be the sum of the person’s income under each of the heads of income. Exempt Income It has been laid down in Section 41 to 53, 102 & Second Schedule of the ordinance.