RETURN OF INCOME

A taxpayer has a responsibility of informing the commissioner about the details of his
tax position relating to:
a) Taxable income or loss.
b) Sources of his income e.g. Business, employment etc
c) The claim for tax relief.
d) The payment of taxes at source, etc
A taxpayer will inform the Domestic Tax Department his tax position through the
submission of the annual return of income (Return). A return is a standard form that is
issued by the DTD for completion by taxpayer in respect of loss/income for the year.
Three kind of taxpayer are required to submit a return of income:
i. Individual i.e natural persons.
ii. Legal persons.
iii. Partnership (though partnerships are not taxable entities)

CONTENT OF A RETURN OF INCOME

- The date, stamp.
- The file number.
- The originating tax district.
- The full names and address of the tax payer.
- The source of income including any deemed income. Eg Wife’s income.
- Any interest on amount borrowed.

DOCUMENTS TO BE INCLUDED IN A RETURN OF INCOME

Where a person carries on a business he shall be required to make a return of income for
that year of income and accounts of his business for an accounting period relating to
their year of income.

Where the accounts have been prepared or examined by another person in a

professional capacity then he (tax payer) shall furnish with that returning of income:-
a) A copy of the accounts, signed by himself and by that other person. i.e Accountant
b) A certificate signed by his Accountant.
c) The nature of the books of account.
d) The extent of his examination of the above books.
e) Whether such accounts reflect all the transactions of the business.
f) Whether the accounts present a true and fair view of the profits of the business
reported on.
g) In the case of a company or partnership, a certificate specifying the nature and
amounts of all payment of whatever kind made, and the nature of any benefit,
advantage or facility of whatever kind granted. In the case of a company to the
 director and the employees whose emoluments are at the rate of Kshs. 80,000 or
more in a year or in the case of a partnership to the partners.

KEEPING & PRESERVATION OF BOOKS OF ACCOUNTS

A person carrying on a business shall keep records of all receipts and expenses, goods
purchased and sold and accounting books, deeds, contracts and vouchers which in the
opinion of the commissioner are adequate for the purpose of computing tax.

Any person who contravenes the provision above shall be liable to such penalty not
exceeding Shs. 20,000 or as the commissioner may deem fit to impose.

Where a person appearing to be chargeable with tax fails or refuses to keep books of
accounts which in the opinion of the commissioner are adequate for the purpose of
computing tax, the commissioner may by notice in writing require that person to keep
the records, books or accounts and to keep them in the language specified in the notice.

A person carrying on a business shall preserve every book of accounts and every
document which is essential to the explanation of any book of account relating to the
business for a period of not less than 10 years after the year of income to which that
book of account or document relate.

Books or documents may not necessarily be preserved;

1. Where the commissioner has notified the tax payer in writing that the preservation
of these books or documents is not required.
2. In the case of a company which has gone into liquidation and has been finally
dissolved or in the case of ceasation of a business other than one carried on by a
company for more than 3 months after the date on which the person having custody
of the documents or the books of accounts relating to the company or business as the
case may be informs the commissioner that he proposes to destroy them.

TYPES RETURNS
1. Instalment return
2. Self assessment returns
3. Final returns (Abolished though still applicable for partnership and the only return
for partnership)

INSTALMENT RETURN
This was introduced in year 1990. It replaced provisional returns.

Unlike the provisional tax which was required to be submitted 3 months after the year
end, the instalment return is submitted as the year progresses. Incase of a normal tax
payer, by 20th of 4th month, 20th of the 6th month, 20th of the 9th month and 20th of the 12th
month, at the rate of 25% of the estimated tax for each instalment. All these due dates
are in the current year of income.

Where more than 2/3 of the income of the business is from agriculture (farming) the
instalment tax should be paid as follows:
- 1st instalment by 20th of the 9th month – 75%
- 2nd instalment by 20th of the 12th month – 25%

The estimated tax on instalment tax is based on

- Previous year tax plus 10% or
- Actual performance for the period

The instalment tax should be paid by

i) Individuals whose annual tax liability exceeds Shs. 40,000 per annum.
ii) All liable body corporate.

Failure to pay the instalment tax or underpayment of instalment tax, penalties are
imposed as follows:
- Incase of under-estimation
Penalty = 20% [A – 110B]
100
Where A – Equal to Actual tax liability
B – Equal to instalment tax paid.
- Penalty for not paying the tax by due dates is 20% of the outstanding tax.
- If non payment continues, interest is charged of 2% per month on a cumulative
basis.
The underestimation penalty is chargeable where the difference between the amount
of installment tax payable and amount actually paid exceeds 10% of the amount
paid.

SELF ASSESSMENT RETURN

Was introduced with effect from the year of income ending 1992. It modified the final
returns.

It’s required to be made by both individuals and companies. A tax payer is required to
compute own taxable income, tax payable and make payments in accordance with his
assessment. This tax is due by last day of the 4 th month after the account year end. For
businesses whose year end on 31st Dec. the self assessment returns should be submitted
by 30th June.

Failure to submit a self assessment return, C. I. T will issue an estimated assessment and
charge a penalty of 20% of tax due and an interest of 2% p.m. on tax due plus penalty as
long as the tax remains unpaid.
The self assessment return should be submitted by:-
- All liable body corporates
- Individuals with other income apart from employment
- All partnership i.e. only the income detail of partners is required.

FINAL RETURN
A final return is submitted by partnerships only. It is due by the end of the 4 th month
following the partnership account year end.

Since a partnership is not a separate taxable entity each partner will be required to
submit his own return of income as an individual.

The final return will contain:

- The total income or loss of the partnership and how this was shared between the
partners. Supporting documents must be submitted alongside the return.
- A signed declaration that the return of income contains a full and true statement of a
partnership income or loss.
Other returns include:-
- Pay as You Earn (P.A.Y.E) returns – Required by 28th of the following year.

- Withholding tax return – Dividends, royalties, interests, commission.

NOTICES OF ASSESSMENT
The commissioner shall assess every person who has income chargeable to tax as
expeditiously as possible after the expire of the time allowed to that person under the
Act for the delivery of the return of income.

Where a person has delivered a return of income the commissioner may:-

1. Accept the return and deem the amount that person has declared as his self
assessment in which case no further notification is required, or
2. If he has reasonable cause to believe that the return is not true and correct, he may
determine according to the best of his judgment the amount of true income of that
person and assess him accordingly.
3. Where a person has not delivered a return of income for a year of income, whether
or not he has been required by the commissioner to do so but the commissioner
considers that the person has income chargeable to tax for that year, he may
according to the best of his judgment determine the amount of income for that
person and assess him accordingly.

SERVICE OF NOTICE OF ASSESSMENT

A notice of assessment is the tax bill which is issued by the commissioner of domestic
taxes to all tax payers for each year of income.
After the introduction of the self assessment return, assessments only originate from tax
payers rather than the commissioner. This means that a person who is chargeable to tax
is required to submit a return with self assessment.

All assessment must be submitted with:-

1. Audited accounts where applicable
2. Income tax computation
3. A cheque or balance of tax after deducting instalment tax paid and withholding tax
4. Dividend tax account where applicable.
5. A cheque for compensating tax where applicable.

COLLECTION AND RECOVERY OF TAXES

Where taxes assessed are not collected by due dates the collector of income tax has the
power to collect the tax due as a debt owed to the government. Such a debt can be
collected as follows:
a) The taxpayer can be sued for the recovery in a court of law.
b) The taxes can be collected through an authorized agent.
c) Restraining order against taxpayer. In this case the commissioner can seize the
property of the defaulting taxpayer, which would be auctioned so as to satisfy the
tax debt.
CONTENT OF AN ASSESSMENT
i. A notice to the taxpayer that he has been assessed under the income tax Act Cap
470 of the laws of Kenya.
ii. Information to the person assessed that he has a right to object where he does not
agree to the assessment
iii. The tax assessed and loss carried forward.
iv. The amount of relief available i.e. for individuals
v. Amount of any tax paid at source
vi. Any penalties and interests where applicable as per the income tax Act.
vii. Any amount of tax payable and due dates where taxes have been overpaid, a tax
credit should be reflected.

TYPES OF ASSESSMENT
1. Self assessment
2. Instalment assessment
The commissioner may make an instalment assessment for tax in respect of any
person after the expirely of the time allowed to that person under the Act for the
payment of instalment tax.

When a person has paid instalment tax he shall be deemed to have been assessed for
the purposes of instalment tax on the basis of instalment tax paid.

3. Estimated assessment
 This is issued by the commissioner of income tax on any income that he estimates to
the best of his judgment where;
a) The tax payer has failed to submit instalment returns
b) The tax payer has failed to submit self assessment returns.
c) The C.I.T does not agree with the tax payers self assessment return.
d) Returns have been made but the documents accompanying them do not satisfy
the commissioner.
Penalties are normally charged of 5% p.a. based on the outstanding tax. The
minimum penalty being Shs. 5,000 incase of a body corporate and Shs. 1,000 in case
of an individual.
4. Additional assessment
It is issued by the income tax department after the tax payer has submitted his self
assessment return. Additional assessment is issued when income tax department
discovers that there are some incomes which have not been declared by the tax
payer or discovers some expenses claimed by the tax payer which does not relate to
business.

Where under declaration or non declaration of income is through fraud or willful

negligence, heavy penalties are normally imposed.

Incase of a tax payer, 200% of the tax evaded and incase of the agent or the
accountant, a fine of up to Shs. 200,000 is imposed or imprisonment of up to 2 years
or both.
5. Amended assessment
This is issued by the commissioner where a tax payer has lodged a notice of
objection to the commissioner against an assessment or has applied for relief of error
or mistake or has made an appeal to the local committee tribunal or court against an
assessment.

Amended assessment is not considered to be a different assessment as such as it is

issued to collect an error in the previous assessment. Amended assessment can
either be amended upwards or downwards.

OBJECTIONS BY TAXPAYERS
A taxpayer is required to pay tax on the income as per assessment. However, where a
taxpayer feels that the income as per assessment arising from the commissioner is too
high, he has a right under the Act to object to such an assessment.

A taxpayer shall not be allowed to appeal against his own self assessment. The only
remedy against self assessment error would be relief of error or mistakes.
An objection raised by a taxpayer is referred to as notice of objection. For such a notice
to be treated as valid it must be
i. Made in writing
ii. State the ground of objection i.e. reason why the objection is lodged
iii. Made within 60 days from the date of service from commissioner’s assessment.
i.e plus 10 more days, (days of service) to give 70 days
iv. All the relevant documents, returns and accounts must have been submitted
within 70 days. The 10 days of service are taken to be the maximum time that
mail will have been delivered to any address in Kenya or abroad
A tax payer can dispute a notice of assessment due to mistake or error relating to
- The amount of income or loss assessed
- The amount of tax payable
- Allowances or deductions made or ommitted to have been made when computing
the chargeable income or loss.
- Imposition of penalties
- Relief granted or omitted to have been granted.
- An assessment is time barred. An assessment is time barred if its issued 7 years after
the year of income to which it relates.

If the relevant documents are not submitted within 60 days together with the objection
it will be considered invalid objection. Invalid objection has no legal remedy in the Act.

LATE OBJECTION
Are objections which are made after statutory period have expired i.e. after 60 days.
Such a notice shall be accepted by the commissioner provided that the tax payer has
demonstrated that he was prevented from objecting in time by reasons e.g.
a) Sickness
b) Absence from Kenya
c) Other reasonable cause e.g. letter being misposted
In such circumstances, the commissioner will expect that the tax payer has paid other
taxes other than the ones in objection.

On receipt of a valid objection or, a late objection, the commissioner has the following
options:-
i. Accept the objection fully and amend the assessment in light of objection
ii. Amend the assessment to the best of his knowledge i.e. partial acceptance.
iii. Refuse to amend the assessment and confirm it.

If it is not accepted the notice of assessment objected remains in force. However, a tax
payer has a further right to appeal to the appellate bodies.

DATE OF SERVICE
It is the date a tax payer is deemed to have received any correspondence or document
from the income tax. For any mail within the country, its deemed to be 10 days from the
date of postage. However for any mail outside the country, it is deemed to be the
average period such a mail takes from Kenya to that particular destination.

VALID APPEAL
Where all appeal documents have been lodged invalid time there is said to be avalid
appeal. The clerk of local committee on registering the appeal will appoint a date venue,
which will be notified to both the appellant and respondent.

APPELLATE BODIES
If the tax payer is dissatisfied with any decision from the commissioner regarding his
objection, he has a right to appeal to the following bodies:
 Local Committee
 The income tax Tribunal
 The High Court
 The Court of Appeal

Below is the procedure for an appeal:-

i. The tax payer must notify the Commissioner of Domestic Tax (C.D.T) of his
intention to appeal to the local committee by giving a notice within 30 days after
receiving a notice of assessment from the commissioner.
ii. The notice of intention to appeal must be copied to the clerk of the local
committee.
iii. Copies of the memorandum of appeal and a statement of facts must be sent to
the commissioner.
iv. The taxpayer must submit the following documents to the clerk of the local
committee
a) A memorandum of appeal. This will state the grounds of appeal and will be
submitted in the original 9 copies (one to the chairman and 8 to the
members).
b) A statement of fact. This will give the sequence of events regarding the
assessments objection and the appeal. It shall disclose the date of the
assessment being objected to the date it was confirmed. The statement shall
be in the original 9 copies.
c) A copy of the letter and the notice of the intention to appeal to the local
committee which was sent to the C.D.T.
d) A copy of commissioner’s decision against which the appeal is being lodged.

The clerk will not register a late appeal for hearing unless the tax payer is prevented
from lodging an appeal in time to the local committee due to reasons such as absence
from Kenya, sickness or any other reasonable cause.
LOCAL COMMITTEE
A local committee is a body appointed by the minister for finance to arbitrate between
the income tax department and the taxpayer. A local committee shall constitute a
chairman and not more than 8 other members appointed by the minister from the
general public. They are laymen as far as tax is concerned. They hold the office for a
period not exceeding 2 years specified in the appointment unless prior to the expirely of
that period;

- The member resigns from the office by written notification signed by him and
addressed to the minister.
- Have failed to attend 3 consecutive
- A member being unfit to perform duties due to reasons of mental or physical
disability.
The quorum for a meeting of Local Committee (L.C) meetings of the committee thereby
revoking his appointment. shall be the chairman and 2 other members.
The minister may make rules prescribing
- The manner in which an appeal under the Act should be made to the local
committee and the fees to be paid in respect of an appeal.
- The procedure to be adopted by the Local committee in hearing an appeal and the
records to be kept by the committee.
- The manner in which a L.C shall be convened and the places and the time at which it
shall hold sittings.

TRIBUNALS
The minister for finance may by notice in the gazette establish a tribunal to arbitrate
between the tax payers and the income tax department. The tribunal shall consist of
chairman and not less than 2 members and not more than 4 other members appointed
by the minister.

A member of tribunal shall hold office for the period not exceeding 2 years specified in
his appointment. The tribunal’s decision is not biding on its members. The quorum for a
meeting of a tribunal shall be chairman and 2 other members.

The tribunal handles two types of tax matters:-

- Matters relating to transactions designed around tax.
- Assessment issued to collect tax on short fall distribution.
Where the taxpayer is not satisfied with the decision of the tribunal he can appeal to the
high court by giving a notice of 15 days after he has been served with the decision of the
tribunal. Such appeals will only be on the question of law.

APPEALS TO COURT OF LAW

Appeals to the high court will only be on the questions of law or mixed law and facts.
For the appeals to the high court, the appellant who could either be the CDT or the
taxpayer must serve the respondent with the intention to appeal to the court within
30days with decision from other appeal bodies.
The appellant must file in court the following;
- Memorandum of appeal.
- Statement of fact giving sequence of events leading to decision which is being
appealed --- against.

APPLICATION FOR RELIEF OF ERROR OR MISTAKE IN A RETURN

A tax payer can make an error or mistake when completing a return of income form e.g.
wrong
figures of income resulting in excess taxes. The tax payers can make an appeal to the
CDT for the
error or mistake to be rectified. This application is referred to as an application of relief
or error or
mistake in return.
If the application is accepted the assessment is amended according so as to rectify the
error or
mistake.
The time limit for such an application is 7 years after the year of income to which the
error or
mistake relates.

ENFORCEMENT OF TAX PAYMENT

After the commissioner has imposed the relevant penalties and interests for late
payment of tax, he can enforce any of the following method to correct the tax:-
- Appoint a distraint agent
- Appoint an agent e.g. employer, bank
- Put an encumbrance (i.e. restriction to sale) on the tax payer’s property
- Sue for tax unpaid.
- He can write off the tax.