Advanced Taxation
Advanced Taxation tests computation and advice under the Inland Revenue Act No. 24 of 2017 (as amended), VAT law and associated administration. Questions combine accounting profit with tax adjustments, capital allowances, losses, withholding tax and indirect tax.
Core rules
- Income tax base: assessable income from business, employment, investment and other sources, less qualifying deductions and losses. Deductions must be revenue in nature, incurred in producing income and not expressly disallowed.
- Capital allowances: replace accounting depreciation. Identify the pool, rate and qualifying expenditure; balance adjustments arise on disposal.
- Disallowed items: capital expenditure, private expenses, provisions not incurred, fines and penalties, and excessive related-party payments are commonly added back.
- Indirect taxes: VAT standard rate is 18% (from 1 January 2024); SSCL is 2.5% on turnover. Input VAT is recoverable only to the extent used in taxable supplies; exempt supplies create a cost.
- Administration: self-assessment, instalment payments, returns, assessments and appeals. Withholding tax credits reduce the final liability but do not replace reporting.
Worked example
Accounting profit before tax is Rs. 10m. It includes depreciation Rs. 2m, an unapproved donation Rs. 0.5m, a general doubtful-debt provision Rs. 0.3m and a fine Rs. 0.1m. Capital allowances are Rs. 2.5m. Add back the depreciation, donation, provision and fine: 10 + 2 + 0.5 + 0.3 + 0.1 = Rs. 12.9m. Deduct capital allowances of Rs. 2.5m: taxable income = Rs. 10.4m. At the standard 30% rate, tax = Rs. 3.12m. If the donation were to an approved charity within the statutory limit, it would not be added back; state the assumption.
Traps
- Adding back accounting depreciation and then deducting capital allowances twice.
- Treating capital expenditure as a revenue deduction.
- Deducting provisions before the liability is incurred.
- Claiming input VAT on exempt supplies.
- Ignoring withholding tax credits or transfer pricing adjustments.
- Carrying forward losses beyond the permitted period or without the ownership test.