CPA › Public Finance and Taxation › August 2023

CPA Public Finance and Taxation – August 2023 Past Paper & Answers

Unit: Public Finance and Taxation

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Download CPA Public Finance and Taxation August 2023 past paper with detailed answers and marking scheme. This paper is based on KASNEB examination standards and is ideal for revision and exam preparation.

Access the full paper online, download the PDF, or study offline. Each question includes step-by-step solutions to help you understand key concepts in Public Finance and Taxation.

Other Public Finance and Taxation Past Papers

1a
Relationship between National and County Governments on budget and economic matters
​​Explain the following terms as used in public finance management: 

(i) Equitable share. 

(ii) Conditional grants. 

(iii) Own source revenue.
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1b
Introduction to Public Financial Management
​​The societal needs of most developing countries are mostly greater than the resources available to the government. The countries must therefore develop a public financial management framework to act as a tool for guiding formulation and implementation of public policies so as to improve the welfare of the citizens. 

In relation to the above statement, outline FOUR principles of public financial management regulations that govern all aspects of public finance in your country
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1c
Oversight Function in Public Finance Management
​​Summarise FOUR roles of the Senate as an oversight function in public finance management.
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1d
Relationship between National and County Governments on budget and economic matters
​ ​​Discuss THREE parameters used by the Commission on Revenue Allocation in sharing revenue among county governments or their equivalent in your country
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2a
Public Debt Management
​​Developing countries face significant challenges in meeting their development objectives and at the same time ensuring that their debt levels remain sustainable. They are therefore, advised by the International Monetary Fund (IMF) and World Bank to develop a framework for Debt Sustainable Analysis that is country specific. 

With reference to the above statement, analyse TWO objectives of conducting an annual debt sustainability analysis in your country
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2b
Procurement in public entities
​​According to the Public Procurement and Asset Disposal Act, 2015, the county treasury is required to establish a procurement function. 

In relation to the above provision, outline SIX responsibilities of the county government procurement function.
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2c
Administration of Value Added Tax (VAT)
​ ​ ​​Baraka Traders has provided you with the following details in respect of transactions for the month of December 2022:

Sh.
December 4:
Purchases
725,000
December 8:
Return outwards
58,000
December 12:
Catering expenses
87,000
December 15:
Repairs of delivery van
29,000
December 18:
Audit fees
26,100
December 20:
Cost insurance and freight (CIF) imports
125,000
December 22:
Sales (local)
1,131,000
December 24:
Sales (export)
250,000
December 27:
Exempt sales
350,000
December 28:
Photocopying
11,600
December 30:
Telephone bill
23,200

Additional information: 
  1. Input tax relating to goods sold as exempt sales could not be directly identified and it was found appropriate to restrict deductible input tax. 
  2. All transactions are inclusive of value added tax (VAT) at the rate of 16% where applicable. 
  3. Import duty is at 20% on cost, insurance and freight (CIF) basis. 
  4. A debtor of goods valued at Sh.50,750 was declared bankrupt on 15 December 2022. 

Required: 
(i) Compute output tax. 

(ii) Compute deductible input tax.

(iii) Determine VAT payable by or refundable to Baraka Traders. 

(iv) Advise the management of Baraka Traders on the penalty applicable for late filing and late payment of VAT.
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3a
Miscellaneous fees and levies
​​Explain the term “export levy” as used in miscellaneous fees and levies.
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3b
Introduction to Taxation
​ ​​Summarise FOUR roles that taxation policies of a country play in achieving budgetary objectives.
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3c
Taxation of Income
​ ​ ​ ​​Solomon Chuchuh is employed as the Managing Director of Utamu Millers Ltd. During the year ended 31 December 2022, he presented the following information relating to his income:

1
His basic salary was Sh.120,000 per month net of PAYE of Sh.48,000 per month.
2
He was provided with lunch by the employees from 1 August 2022 of Sh.6,000 per month.
3
He enjoyed a medical allowance from the company which is only available to senior managers. The allowance was Sh.12,500 per month.
4
The company paid for him Life Insurance premiums of Sh.4,800 per month for each member of his family from 1 September 2022. This included himself, wife and the daughter. 
5
 During the year, the employer paid a total of Sh.200,000 as school fees for his daughter. This amount was allowed in the company’s income statement.
6
He was provided with a fully furnished house with electricity and water. The employer paid monthly rent of Sh.50,000 for the house and deducted 5% of his basic salary for rent. The cost of furniture was Sh.240,000 while the monthly electricity bill and water bill amounted to Sh.1,800 and Sh.1,000 per month respectively.
7
On 1 October 2022, the company provided him with the following:
  • A land cruiser which was acquired at a cost of Sh.3,200,000 with an engine capacity of 3000cc.
  • A house servant and a night watchman whose monthly salaries were Sh.12,500 and Sh.15,000 respectively. The fair market value was agreed with commissioner at Sh.14,000 per month for each of them.
8
He contributed 15% of his monthly basic salary towards a registered pension scheme while the employer contributed 10% of his basic salary towards the same scheme. 
9
Other incomes for the year include: He has invested in the real estate and from his rental houses, he reported a net rental income of Sh.2,400,000 after deducting the following expenditure:
Sh.
9
Caretaker wages
420,000
Fencing cost
640,000
Loan repayment
320,000
Monthly rental income tax
487,820
Insurance, rent and rates
248,000
Advertising
360,000
Partitioning and CCTV cameras 
222,000
Repairs and maintenance
268,200
2,966,020
10
Dividend received from United Millers Co-Operative Society was Sh.306,000 net and interest received from Fanaka Bank Ltd. was Sh.240,000 net.

Required: 
(i) Compute the total taxable income for Solomon Chuchuh for the year ended 31 December 2022. 

(ii) Determine tax payable (if any) from the income computed in (c) (i) above. 
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4a
Public Private Partnerships Arrangements
​​Highlight FOUR factors that have contributed to the growth of Public Private Partnership (PPPs) arrangements in most developing countries.
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4b
Introduction to Taxation
​​Outline FOUR determinants of taxable capacity in your country
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4c
Taxation of Income
​ ​​Mambo, Moto and Mutokah are in a partnership sharing profits and losses in the ratio of 2:1:1 respectively

Their statement of profit or loss for the year ended 31 December 2022 was as follows:

Sh.
Sh.
Gross profit
4,200,000
Sale of delivery van proceeds
1,400,000
Expenses:
Advertisement
380,000
Depreciation
140,000
Rent and rates
120,000
General expenses 
450,000
Value added tax (VAT)
150,000
Bad debts
250,000
Purchase of furniture
620,000
Salaries and wages 
900,000
Legal fees
540,000
Goodwill written off
225,000
Interest on capital - Mambo
80,000
Interest on capital - Moto
140,000
(4,003,000)
Net profit
1,597,000

Additional information:
1
Advertisement expenses include Sh.120,000 spent on acquisition of a neon sign.
2
General expenses comprised the following:
Sh.
Partners end year party
150,000
Staff catering services
90,000
Embezzlement by cashier
210,000
3
Bad debts represented the general provision made for the year.
4
Legal fees comprised the following:
Sh.
Parking fines 
130,000
Settling a dispute with a customer 
200,000
Appeal on a tax assessment 
210,000
5
Investment allowances were agreed at Sh.380,000 with the Commissioner of domestic taxes.

Required: 
(i) Prepare adjusted taxable profit or loss of the partnership for the year ended 31 December 2022. 

(ii) The allocation of the taxable profit or loss in (c) (i) above to the partners
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4d
Taxation of Income
​ ​ ​ ​​Bright Traders is a small business in the Jua Kali sector. The following information has been presented to you for the year ended 31 December 2022:

1
Sales for the year were reported as follows:
1
Sh.
January - April
1,800,000
May - August
2,200,000
September - December
3,200,000
2
The business purchased goods four times during the year as follows:
Sh.
January
600,000
May
800,000
September
200,000
December
500,000
3
Expenses incurred during the year were as follows:
Sh.
Salaries and wages 
260,000
Electricity expenses
180,000
Legal expenses
100,000
Stationery
60,000
Water expenses
28,000
Rent expenses 
280,000

The proprietor of Bright Traders is not conversant with turnover tax requirements and has approached you to advise him on whether the business is liable to turnover tax and if so, the amount of tax payable for the year ended 31 December 2022. 

Required: 
Using the information provided above, advise the proprietor of Bright Traders on his turnover tax position and turnover tax liability (if any).
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5a
Taxation of Income
​​Following the convergence of market economies, most business transactions currently take place through the digital market place. Most countries have come up with ways of taxing the digital economy, although some countries continue to struggle in taxation of this economy. 

With reference to the above statement, suggest FOUR challenges faced by your country in taxing the digital economy.
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5b
Customs Taxes and Excise Taxes
​​Section 17 of the Excise Act empowers the commissioner to consider an application for excise license and either grant or refuse to issue the applicant with the license. 

Identify THREE instances in which the commissioner may refuse to grant an excise license to the applicant.
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5c
Taxation of Income
​ ​ ​ ​ ​ ​​Sky Rift Growers Ltd. was incorporated in the year 2021, but commenced agribusiness on 1 January 2022. The statement of profit or loss for the company for the year ended 31 December 2022 was as follows:

Sky Rift Growers Ltd.
Statement of profit or loss for the year ended 31 December 2022
Sh.
Sh.
Sales
28,000,000
Dividend income
270,000
Interest income (net)
264,000
Surplus from pension scheme
120,000
28,654,000
Expenses
Administration expenses
1,570,000
Clearing land and planting roses
8,940,000
General insurance
200,800
Bad debts
460,000
Lease expenses
600,000
Donations
42,000
Repairs and renewals
252,000
Loss on sale of investment
96,000
Legal and professional fees
300,000
Transport costs
296,000
Depreciation
840,000
Farm works
12,640,000
Loan repayment 
280,000
Pension contribution
350,000
Compensation to staff for work injury
420,600
Motor vehicle expenses
186,000
(27,473,400)
1,180,600

Additional information: 
1
The company’s main activity is growing flowers for local and export market.
2
The company has leased the land on which it grows flowers from Enkalop Roses Ltd. One of its shareholders, Enkalop Roses Ltd. owns 25% of the share capital in Sky Rift Growers Ltd.
3
Donations were made to the National Flowers Council to support its activities.
4
The loss on sale of investment relates to sale of shares that Sky Rift Growers Ltd. held in a quoted company
4
Bad debts comprise: 
Sh.
General provision
220,000
Specific provision
240,000
5
The surplus from pension scheme arose after an actuarial valuation was carried out by a firm of actuaries.
6
Dividend income was received from Enkalop Roses Ltd.
8
Repairs and renewals were analysed as follows:
8
Sh.
Repair of plough
97,200
Repair of green house
34,800
Office partitions
120,000
252,000
9
Farmworks cost comprises:
Sh.
Farmhouse where the farm manager resides
5,100,000
Irrigation system (including water pump Sh.120,000) 
800,000
Electrification network
1,200,000
Construction of gabions
300,000
Construction of godowns at the firm
2,400,000
Plough and lawn mower
380,000
Labour quarters for workers
1,800,000
Farm implements
540,000
Surveillance cameras
120,000
Total
12,640,000

Required: 
(i) Compute the investment allowances due to Sky Rift Growers Ltd. for the year ended 31 December 2022. 

(ii) Compute total taxable income for the company for the year ended 31 December 2022. 

(iii) Determine the tax liability due to the company for the year ended 31 December 2022.
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