Nyumbani Real estate developers Ltd is a company engaged in real estate development. The company commenced construction of 20 residential houses and a shopping mall for lease. The houses and mall were completed on 30 June 2020 and were ready for sale and leases. The company commenced operations in the second half of the year 2020, they completed transactions with the following details.
Selling price per house was Sh.18,500,000
Cost of acquisition of land was Sh.45,000,000 per acre
Materials used in building one house cost Sh.3,480,000 inclusive of value added tax (VAT) of 16%
Drawings for the houses and related architectural design fess were a total of 450,000 net of VAT
Fees for quantity surveyors, civil engineers and electrical engineers for the houses amounted to Sh.1,740,000 inclusive of VAT
Cost of sewage and drainage system amounted to Sh.4,840,000 for the entire development
A second hand bulldozer was purchased for Sh.800,000 and used in land excavation within the entire land
A saloon car used by the site manager was valued at Sh.900,000 as at 30 June 2020. The car had been purchased at the beginning of the year at Sh.1,500,000. The car was used in the maintenance of the estate and shopping mall.
The labour wages for the construction workers on the entire site were Sh.600,000 per month up to 30 June 2020.
The entire project was financed by ACDC Bank with a loan of Sh.80,000,000 at an interest of 10% per annum. The loan was to be repaid in full on completion and sale of the houses. The loan was granted on 1 January 2020, and the interest on loan was payable at the end of each year. The loan was however repaid in full on 1 September 2020.
Pavement and roads within the whole estate were built at a cost Sh.6,000,000. A playground was also constructed at a cost of Sh.840,000 but for use by house owners only.
The shopping mall comprised shops whose construction cost was 1,200,000, gymnasium Sh.450,000 and offices Sh.600,000. The shopping mall was leased on 1 July 2020 at Sh.1,400,000 per month. Maintenance expenses per month amounted to Sh.400,000. The company incurred cost sh.400,000, water meter 180,000 and electricity deposits sh.360,000 before leasing.
Estate power lines costs sh.800,000 and covered the residential estate and shopping mall.
The loan was shared between estate development and shopping mall at sh.4000,000 and sh.16,000,000 respectively.
All the houses were sold during the year ended year ended 2014.
Assume that deductible costs and allowances were to start on 1st July 2020 after commencement of operations.
Required:
With reference to the VAT Act explain the VAT registration position of real estate development companies and advice Nyumbani Real estate developers Ltd on their whether they are required to register for VAT (4 marks)
Total taxable profit or loss from the sale of houses (10 marks)
Taxable rental income or loss for the shopping mall (6 Marks)
QUESTION TWO (20 MARKS)
“Tax avoidance has been described as aggressive tax planning”. Assess the validity of this assertion (6 Marks)
The following information was obtained from the accounts of Mifuko Yetu Sacco Society Limited for the year 2019.
Interest on fixed deposit account (net)
4,156,500

Income on short ternm notes
1,460,000

Dividends from Limited companies
3,460,500

Tender fees
240,000

Insurance fees on loans
1,260,000

Rental Income
1,846,000

Meeting expenses
347,000

Member education expenses
267,200

Security expenses
480,000

Funeral expenses
409,000

Software maintenance
164,800

Auditors fees
178,900

Interest on defaulted loans
424,700

Expenses on investment on short term notes
632,800

Honoraria
182,600

Rental Expenses
350,000

Additional Information
All incomes earned are subject to withholding tax where applicable
Rented property expenses amounted to Sh. 194,800
Required
Taxable profit or loss for the Sacco for the year ended 31st December 2019 (4 Marks)

“Many objectives of the Common Market for East and Southern African (COMESA) treaty remain elusive due to emerging challenges”
Highlights four such challenges. (4 Marks)

Nexus Fruit Processors Ltd. produces processed mango juice. The mangoes are purchase directly from the farmers. The following information relates to the company’s transactions between July 2020 and December 2020.
The sales for July 2020 amounted to sh. 450,000. The sales increased by 5% in August and by 10% per month in the subsequent months.
Monthly purchases from farmers were constant at 180,000 per month.
The value added tax (VAT) paid between August 2020 and December 2020 was 217,500. Input tax claimed over the same period amounted to 45,000
Transactions are stated net of VAT where applicable
Required
Confirm the accuracy of the VAT reported by the company between August 2020 and December 2020. (6 marks)
QUESTION THREE (10 MARKS)
The following is an extract from a recent working paper published paper by the International Monetary Fund (IMF) titled “Tax policy for emerging markets
“Setting up efficient tax system is far from simple, particularly for developing countries that want become integrated in the international economy. The ideal tax system in these countries should raise essential revenue without excessive government borrowing and should do so without discouraging economic activity and without deviating too much from tax system in other countries”
Required
In the context of the extract above, discuss the challenges face by a developing country like Kenya in establishing efficient tax systems. (10 Marks)

Answer rating: 100% (QA)

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