A country tax authority levies direct taxes on individuals and companies. They include income tax, property tax, withholding tax, and tax gifts and assets to the government.
What is a direct and indirect tax in Kenya?
A direct tax is a tax you directly pay to the government (Kenya Revenue Authority). In other words, the impact and incident of the tax fall on the same person. That is taxing authority imposes the tax on one person, and that person pays the tax. Indirect tax is a tax you pay when you buy goods and services. In other words, the impact and incident of the tax don’t fall on the same person.
Examples of direct and indirect tax in Kenya
Now you know what direct tax is. Here are examples of direct and indirect taxes in Kenya.
Corporate tax. A type of income tax that corporations pay to KRA.
Advance tax. It is a type of tax that caters to public service or commercial vehicles.
Residential rental income tax. It is a type of income tax that accrues from a taxpayer residential rental property.
Capital gain tax. A type of tax a taxpayer pay on the transfer of property.
Pay As You Earn (PAYE). An income tax from people with gainful employment in Kenya
Indirect taxes include Value Added Tax (VAT), excise duty, and custom taxes
What are the advantages of direct and indirect taxes?
- Promotes equality. Direct tax is progressive. The taxman taxes taxpayers according to their level of income to promote fairness. So the higher the taxpayer’s income, the higher the amount of taxes.
- Convenience: With indirect taxes, the taxman doesn’t burden the taxpayer because they are paid at time or point of purchase.
- Promote Tax certainty. Direct taxes help the government to be sure of the amount of taxes to be they’ll collect. For instance, the annual tax can be the same as income tax if the salary does not change.
- Promotes elasticity. Taxes are the earnings of the government. So when they fluctuate, the earnings also change-they can go higher or lower.
- Saves time and money. The government does not need to spend a lot of money on the collection of taxes. They have already set tax systems in place to collect the taxes at the source of income. For instance, indirect taxes are collected at the point or time of purchase.
What are the disadvantages of direct and indirect taxes?
- Encourages tax evasion. With direct tax, taxpayers are responsible for paying the tax directly to the government. So they can manipulate their income to pay fewer taxes.
- Discourages investment and savings. When taxpayers learn that the more income they earn, the higher the tax they pay. It discourages investing. Similarly, they are not likely to save because KRA will tax their interest.
- Tax systems depend on taxpayers’ honesty. The government expects taxpayers to be honest with self-assessment. And declare the correct taxable income. But in most cases, taxpayers don’t like paying a lot of taxes to the government. So they will end up understating their taxable amount.
- Not everyone pays these taxes. A taxpayer only pays taxes when they earn income. But in most cases, you’ll find most people are unemployed hence they cannot pay taxes. Similarly, some people earn so little that they cannot fit a particular tax bracket.
