NAME : KEMBOI K DAVID

REG NO : BBIT/2020/63755
UNIT NAME : PRINCIPLES OF TAXATION
UNIT CODE : BAF3204

QUESTION ONE

Explain the various canons of taxation and give the special emphasis on their relevance and
application
(10marks)

 Adequacy – A tax system is said to be adequate if it raises enough funds to pay for public
services, and more so, in a sustainable manner. There are two factors that contribute to
the adequacy of a tax, namely, stability/predictability and its elasticity. In the preparation
of the Budget, policy makers usually match expected spending within a realm of
predictable growth of tax revenues. However, in order to achieve adequacy in the long
run, they would like to know whether growth of a specific tax keeps up with the pace of
the growth of the economy (elasticity).
 Simplicity - This ensures that the tax system has simple rules for citizens to understand
and at the same time ensure that the cost of tax collection and administration is not higher
than the actual tax raised. For example, a tax system is made complex if it has many tax
exemptions such as tax credits, tax breaks, and tax holidays, among others. The
complexity is likely to increase the cost of collection and administration.
 Neutrality - The other similar term for neutrality is efficiency. This principle answers the
question of whether the tax system interferes with the investment and spending decisions
of individuals and businesses.
 Convenience - The method and frequency of payment Should be convenient to the tax
payer e.g., PAYE. This may discourage tax evasion. For example, it may be difficult for
many tax payers to make a lump sum payment of tax at the year-end. For such taxes, the
evasion ration if quite high.
  Economy - A good tax system Should be capable of being administered efficiently. The
system Should produce the highest possible yield at the lowest possible cost both to the
tax authorities and the tax payer. The tax system Should ensure that the greatest possible
proportion of taxes collected accrue to the government as revenue.

QUESTION TWO

Discuss the concepts tax burden and shifting of tax. What is the effect of shifting of tax to the tax
payer?
(10marks)

Tax Burden - is a measure of the tax burden imposed by government. It includes direct taxes, in
terms of the top marginal tax rates on individual and corporate incomes, and overall taxes,
including all forms of direct and indirect taxation at all levels of government, as a percentage of
GDP.

Tax Shifting- This is the transfer of the burden of a tax from the person on whom it is legally
imposed to another person. General sales of taxes are paid by business firms, but most of the cost
of the tax is actually passed on to those who buy the goods that are being taxed. In other words,
the tax is shifted from the business to the consumer. Taxes may be shifted in several directions.
Forward shifting takes place if the burden falls entirely on the user, rather than the supplier, of
the commodity or service in question - e.g., an excise tax on luxuries that increases their price to
the purchaser. Backward shifting occurs when the price of the article taxed remains the same but
the cost of the tax is borne by those engaged in producing it - e.g., through lower wages and
salaries, lower prices for raw materials, or a lower return on borrowed capital.

Effect of shifting of tax

Less discretionary income. Those paying income tax will be left with less discretionary income
to spend after income tax has been deducted. This is likely to lead to lower levels of household
spending and lower levels of household saving. However, if the government spend the tax
revenue – overall aggregate demand will not be affected.

Measurement of Incidence - Now we come to the typical case of differential tax incidence and
see how resulting changes in distribution are to be measured. Tax substitution process under the
budgetary policy change, will improve the position of some households and worsen that of
others.

Net Incidence - If we consider not only changes in income available for private use, but include
benefit from public services as well, we address ourselves to the more comprehensive concept of
net burden or gain from the budget transaction as a whole. Incidence then becomes one of de-
termining the distributional impact of net benefits combining. Resulting changes in the
distribution of income available for private use
QUESTION THREE

Discuss capital gains. Are there any circumstances in which they are not taxed ? explain.

(10marks)

Capital Gains Tax (CGT) is tax that is levied on transfer of property situated in Kenya whether it was
acquired on or before January 2015. The rate of tax is 5% of the gain and is paid by the seller or the
transferor of the property. It is a final tax and therefore not subjected to further taxation after payment.

How do you calculate? This is the sale price minus any commissions or fees paid. Subtract your basis
(what you paid) from the realized amount (how much you sold it for) to determine the difference. If you
sold your assets for more than you paid, you have a capital gain.

The profit on an asset sold after less than a year of ownership is generally treated for tax purposes as if it
were wages or salary. Such gains are added to your earned income or ordinary income.1 You’re taxed on
the short-term capital gain at the same rate as for your regular earnings. An exception is when the amount
of the gain happens to push you into a higher marginal tax bracket.