MASINDE MULIRO UNIVERSITY OF SCIENCE AND TECHNOLOGY

NAME: DIANA WANJA NJOROGE

REG NO: SAR/B/01-03440/2016
COURSE CODE: BCA 422
COURSE: TAXATION THEORY AND PRACTICES
TASK: INDIVIDUAL ASSIGNMENT
LECTURER: MULI MAINGI
DATE OF SUBMISSION: 31/8/2020
Despite the penalties and fines stipulated in the income tax ;tax evasion is still
rampant in the country. Discuss major factors contributing go this vice and
measure that revenue authority can take to curb it
Tax payment is a civic duty and an imposed contribution by the government to
contribute to her principal source of revenue to provide public goods and services
to its citizentry. It is a compulsory unrequited payment to this government.
Tax evasion is an illegal deliberate misrepresentation of the true state of affairs by
individuals and corporations to the tax in order to reduce tax liability by methods
that violate the provisions of tax laws. It is therefore an offense that could lead to
imposition of criminal proceedings against the taxpayer. If discovered and has
been in existence for along time and therefore one of the greatest economic
crimes facing many tax authorities and government in Kenya at present. Tax
evasion prevalence is vast and greatly impairs taxation macro economic
objectives thus creating a gulf between actual and potential government tax
revenue raising many issues which need urgent attention.
Reasons for tax evasion are numerous and vary from person to person, trade to
trade and proffesion to profession. Factors contributing to tax evasion include:
1. High tax rates are also responsible to some extent for tax evasion.these high
rates are said to be tolerated only because of the considerable evasion that takes
place. The low tax receipt do not permit the government to reduce rates of
income tax as high income tax rates are necessary to fill up the resource gap
created by the tax evasion in gurb provoke tax payers to evade tax payment.
2. The tax officers of the income tax department office also find it hard to
uneartb cases of tax evasion because of several reasons:
a) They are allocated large quantum of work
b) The field machinery of income tax department is hopelessly poor resulting in a
long gap between two surveys
c) The execution of the income tax act requires the knowledge of several other
acts.
d) Tax audit of account is compulsory in limited cases. The auditors are appointed
or removed by the Directors of companies under such circumstances one can
hardly expect them to discharge the duties properly.
e) There is no coordination between the punishments of the government.
3) Tax payers are not conscious of their responsibilities towards the society and
the country in which they are living .people blame the government for difficulties
and shortages but as regards the payment of taxes.they feel as if it is their right to
evade taxes. This is because proper training is not imparted in this direction.
4) Many retail traders try to evade sales tax and considerably understate their
sales. They avoid the issue of cash memos and the purchasers also do not insist
because they save sales tax. In such cases, although the intention is not primarily
one of evading the income tax but since the business has been outside the books
of accounts, businessmen also do not show it in their books of accounts.
6) there is no doubt that the direct taxes acts provide for prosecutions and
imprisonment in cases of concealments and also false declaration of statement
put in actual practice rarely anyman is prosecuted on this ground or severe
penalties are imposed. Even the moderately levied penalties by the assessing
offers have been reduced by the apple late authorities.
6) There are people who got expert tax consultants to suggest them the means
and methods to evade taxes. There is also the dearth of experienced personnel in
the income Tax department. The present strength of fully trained and
experienced officers in is inadequate for dealing with the current cases.
7) Tax pricing which is a profit allocating method used to attribute a multinational
corporates net profit(or loss). Before tax countries where it does business is also
emerging as another method used to evade tax this reduces government income
thus affecting the level and quality of public services that the government is able
to offer to citizens.
8) The very structure of the countries tax system. For instance the way Kenya’s
tax system is designed, it is difficult to collect actual taxes from self employed
such as accountants,doctors and businessmen.
9. The emergence of an underground economy that mostly deals with cash and
reluctant on cheques, electronic funds transfer ,credit and debit cards, does not
issue invoices as claim for payment as well as not issuing receipts as confirmation
of payment has led to the evolution of another category of tax evasion method
since the whole system does not leave a trail of any transaction making it easy to
evade tax and conceal the practice.
10 digital economy with the significant technological development, electronic
commerce, collaborate platforms, digital currencies and new ways of
commercializing goods and services there are increasing difficulties difficulties for
taxing and controlling.
11. Great weight of intangibles which makes it difficult to assign their true value
and determine their place of origin.
12. Proliferation of special tax regimes for attracting investments eg.tax rulling
13. Inflation

Measures to be taken to curb this vice of tax evasion

1.low tax rates it is important for the country to realize that a higher tax rate
does not mean more tax collection. In fact it may mean the exact opposite,
people tend to José their income when the tax rates are increased. A very high tax
rate may discourage people from undertaking productive economic activity. The
laffer curve explains that beyond a certain point in a increasing tax rate leads to
lower collections. The government needs to find out the optimal tax rate and
implement it.
2. Due to the potential negative effect of tax evasion on the tax revenues in
Kenya, new policy guidelines contained in the budget speeches and other tax
policy documents should be implemented as a matter of urgency; almost
immediately.
3. The government should work together with Kenya Revenue Authority in
ensuring that those capable of tax evasion are prosecuted, fined, and jailed to
help set as an example on other who might be considering the vice. This is
because tax evasion costs the government revenue which in turn costs the faithful
taxpayers quality service.
5 The government should embark on public enlightenment campaign and
adequate utilization of the tax revenue on public goods to discourage tax
avoidance and tax evasion and also reduction in tax rate. This will certainly
enhance and boost revenue generation in the state as is being pursued with
vigour so as to survive in the present day economic meltdown and inflationary set
backs.
6) .Exit taxes. Means that the country can set up exit taxes .if a company wants to
move their business overseas they should pay a tax to the government. The
objective is to induce companies to produce locally; this should be implemented if
the tax rates are reasonably low.
7. Territorial taxation
8) The tax system should be simplified by abolishing exemptions and allowances
9) All major companies should be required to publish annual “cash tax payment
“made by the company in the economy. In short the actual tax payment for each
year and not some provision or other evasive figure be published
10) Kenya Revenue Authority should be required to publish full accounts in each
country in which they operate including information on the relative and absolute
amounts of economic activity in Kenya for example sales, employment, and
investment.
11) The accounting firms should be broken up and steps taken to separate for
functions such as auditing, taxation and consulting to avoid conflicts of interest
and government should cease embedding their staff in economic and tax
department.

2. Business decisions usually involves determining in advance the tax effect of

every proposed action and the making decision that will minimize income tax
burden .briefly outline various business management decisions that would
involve tax minimization.
Tax minimization is when you legitimately arrange your tax affairs to reduce the
amount of tax you pay. These arrangements comply with both the letter and spirit
of the the business. Tax planning is a key strategy for business and individuals to
minimize their tax liability.

1. Examine your business structure. Your business structure has everything to

do with how you are taxed, what deductions maybe allowed.
Dependingbon your circumstances, a change of business structure maybe
useful from a tax minimizing perspective.
2. Track and report everything efficiently. One of the best ways to ensure you
minimize tax liability is to ensure that everything is tracked and reported
efficiently. Poor record keeping can be costly, not only because you may
have to pay someone extra to remedy it, but because you could muss
things that are important to record for your deductions or credits. Clean
book start from the beginning of the year rather than a late scramble to get
them together for tax season.this helps ensure you are prepared to rake
advantage of all tax incentives and avoid any late penalties.
3. Engage your CPA for tax planning engaging a CPA with the qualifications
and experience to deals with your particular circumstances can save you a
lot of money and ensure you minimize tax liability. Tax planning is an
important task for every business, your accountant keeps up with change to
the tax code and knows what you can do the best advantage of your
business. The best experience with minimizing taxes tend to happen when
tax planning has occurred at an early stage. You may find that its too late to
take advantage of skme deductions if you wait or that its complicated back
tracking what you needed to have done.
4. Stock up to reduce your income tax liability. This is an old strategy which
will mostly holds true under the new tax law(check with your CPA about
your business specifically) if you need to to reduce taxable income
 particularly near the end of the year you can look around to see what
supplies you may be able to stock up on.
5. Financial planners. There are instances where you need two or more
financial consultants who charges for their services and should definitely be
considered if needed in your business. However there are plently of
credible financial planning agents with whom you can obtain solid financial
information for free to get started in your tax minimizing strategy. These
people work in banks, insurance agencies and many financial institutions.
6. Business can also reduce their tax burden by taking advantage of the
incentives offered such as capital deductions given to investors on capital
expenditure on industrial building and purchase of machinery used. For the
production of income. Capital deductions are given in respect of wear and
tear allowances on tractors,combine harvestors and other moving
equipment among others.
7. Write off bad debts for the tax year. Bad debts are any of those that can be
uncollectible. Generally this means that you have made repeated attempts
to collect on to the invoice and client has stopped responding or has made
no other payments. You are to write off bad debts to save on taxes but this
should be undertaken with care, if you write off a debt too early olnly to
have paid late you will have to reverse the write off and declare the
payment as income. A write off only works by running a report of aging
accounts from your accounts receivable account. Where the customer is no
longer active with you. It is possible to write this account off by crediting
accounts receivable and debiting a “bad debt” account. You may also need
to separately reserve any sales taxes that were charged on the original
invoice.
8. Avoid an audit while it makes financial sense to explore all your options for
reducing your tax bill, you might need to be careful. If your deductions look
suspicious to the IRS, the agency might audit your business. When you
receive an audit learn how to handle an audit properly then consult your
tax professional.
9. Make smart purchases and investments if you are going to invest in new
equipment or services for your business, the timing of those purchases can
 affect your tax liability. One should plan out when to invest before the end
of the year or consult a financial manager.
10.Know which deductions you can legally make many small business owners
are unaware of deductions and are missing out on money that can be saved
every year.
3. Developing countries such as Kenya must have different tax policy from a
developed country. Briefly explain the reasons why and propose an effective tax
policy for a developing country.
Tax policy is the choice by a government as to what taxes to levy, in what amount
and to whom. It has both micro economic and macro economic aspects. The
macro economic aspects concern the overall quantity of taxes to collect, which
can inversely affect the level of economic activity this is one component of fiscal
policy. The micro economic aspects concern issues of fairness (whom to tax) and
allocate efficiency (which taxes will have how much of a distorting effect on the
amount of various type of economic activity)
Tax policy of these countries consists of a tax structure, where the share of
revenues collected from more budget tax revenues from taxes on international
trade and much less from direct taxes. Based on the review of the empirical
literature, it was found that most of the research tax impact on economic growth
had a negative relationship. Also, according to the theoretical literature taxes do
not affect economic growth.
Developing countries face formidable challenges when they attempt to establish
efficient tax systems. First, most workers in these countries are typically
employed in agriculture or in small, informal enterprises. As they are seldom paid
a regular, fixed wage, their earnings fluctuate, and many are paid in cash, "off the
books." The base for an income tax is therefore hard to calculate. Nor do workers
in these countries typically spend their earnings in large stores that keep accurate
records of sales and inventories. As a result, modern means of raising revenue,
such as income taxes and consumer taxes, play a diminished role in these
economies, and the possibility that the government will achieve high tax levels is
virtually excluded.
It is difficult to create an efficient tax administration without a well-educated and
well-trained staff, when money is lacking to pay good wages to tax officials and to
computerize the operation (or even to provide efficient telephone and mail
services), and when taxpayers have limited ability to keep accounts. As a result,
governments often take the path of least resistance, developing tax systems that
allow them to exploit whatever options are available rather than establishing
rational, modern, and efficient tax systems.
Because of the informal structure of the economy in many developing countries
and because of financial limitations, statistical and tax offices have difficulty in
generating reliable statistics. This lack of data prevents policymakers from
assessing the potential impact of major changes to the tax system. As a result,
marginal changes are often preferred over major structural changes, even when
the latter are clearly preferable. This perpetuates inefficient tax structures.
Income tends to be unevenly distributed within developing countries. Although
raising high tax revenues in this situation ideally calls for the rich to be taxed more
heavily than the poor, the economic and political power of rich taxpayers often
allows them to prevent fiscal reforms that would increase their tax burdens. This
explains in part why many developing countries have not fully exploited personal
income and property taxes and why their tax systems rarely achieve satisfactory
progressivity (in other words, where the rich pay proportionately more taxes).
In developing countries where market forces are increasingly important in
allocating resources, the design of the tax system should be as neutral as possible
so as to minimize interference in the allocation process. The system should also
have simple and transparent administrative procedures so that it is clear if the
system is not being enforced as designed.
Developing countries attempting to become fully integrated in the world
economy will probably need a higher tax level if they are to pursue a government
role closer to that of industrial countries, which, on average, enjoy twice the tax
revenue. Developing countries will need to reduce sharply their reliance on
foreign trade taxes, without at the same time creating economic disincentives,
especially in raising more revenue from personal income tax. To meet these
challenges, policymakers in these countries will have to get their policy priorities
right and have the political will to implement the necessary reforms. Tax
administrations must be strengthened to accompany the needed policy changes.
Political,social and cultural factors also makes the tax system differ in many
countries

Tax policy for a developing country.

Lower presumptive tax rate and Capital Gains Tax (CGT) - The aim of the
Economic Transformation Agenda was to reduce the cost of doing business and to
make the Kenyan market competitive. The broadened tax base as contemplated
in the ITB therefore, approbates and reprobates this aim. While an increase in
taxes would result in additional revenue to meet the social and economic needs
of the country, it also presents a burden to the different categories of taxpayers.
The government should lower income tax rate on tax payers so as to encourage
them to save and invest .
Full repeal of the state and local property tax deduction. Tax reform should fully
repeal the state and local tax deductions and use the savings to lower tax rates.

Lower marginal rates at every level. Tax reform should lower the top marginal tax
rate and eliminate the new “bubble rate.”

Simplify the tax system and curb exemptions. A simpler tax system with a limited
number of rates is critical to fostering taxpayer compliance, as seen in developed
countries. Notably, in fragile states, focus first on simplifying taxes, procedures,
and structures. Simplicity of the tax system and legislation is the guiding principle
for fragile states. This makes tax administration less challenging in weak states
that lack such basic institutions as security and a well-functioning judicial system.

Introduce comprehensive tax administration reforms. Successful revenue

mobilization cases tend to take a more holistic approach to modernizing tax
institutions. In all five case studies, revenue administration reforms figured
prominently and covered a broad spectrum of legal, technical, and administrative
measures, such as

 Management, governance, and human resources: Four of the five countries

implemented some management and governance changes. Developed
countries gradually recruited new tax and customs officers and phased out
the old ones as part of its anti-corruption reform.
 Establishment of large taxpayer offices: A large taxpayer office allows a
country to focus tax compliance efforts on the biggest taxpayers, as
developed countries have done. These offices also support good tax
administration; they often pilot new tax and customs procedures before
their rollout to the broader population.
 Smart use of information management systems: Successful revenue
mobilization hinges on managing information and leveraging the power of
big data to improve compliance and fight corruption. Most of the countries
studied have taken advantage of IT systems to leapfrog their revenue
mobilization reforms. Developed countries has automated most processes,
including e-filing. It has also instituted a system for information sharing
among tax authorities, taxpayers, and banks, as well as a one-stop Internet
portal. Cambodia, Guyana, and Liberia have likewise computerized the
administration of their taxes and customs.
 More modern registration, filing, and management of payment
obligations: All five countries have sought to establish or modernize basic
rules and processes in these key compliance areas. For instance, developed
counties have implemented a unique system of taxpayer identification
numbers and streamlined its process. It also introduced income tax
withholding, a measure critical to fostering compliance.
 Enhanced audit and verification program: A risk-based audit, which links
the likelihood and nature of an audit to the taxpayer’s inherent risks, is the
most effective type in terms of encouraging compliance. All developed
countries have made this a key part of their revenue mobilization strategy.
Notably, Cambodia conducted risk-based audits of taxpayers at customs
and of the 150 largest taxpayers and hired some 200 new auditors.