It is essentially the base year. A tax base is the object transaction with respect to which a tax is charged. Since tax is charged on each year of income and a year is a period of 12 months, the issue of timing is raised. - When within that year is this tax due?
A taxpayer would prefer payment of tax in arrears but the government prefers that tax be paid in advance. Canons of a good tax structure mitigate that the government demands tax in advance. Year of income is defined as a period of 12 months commencing on 1st January in any year and ending on 31st December of that year. This may cause hardships for persons whose accounting period does not coincide with this calendar year. The government’s financial year is from 1st July to 30th June. Section 27provides for computation of accounting years not coinciding with calendar years.
For a company whose accounting period does not end on 31st December, that accounting period shall be year of income for all chargeable income of that company.
For an individual who makes account for his business periods shorter or longer than 12 months, then such period shall be a year shall be e year of income for all chargeable income except employment income.
For partnerships who calculate each partners share of profit, year of income shall be a year which income was earned except income for employment or services rendered.
The Commissioner is empowered to make such necessary amendments including reducing accounting periods for years coinciding to 31st December or reducing longer periods to 1 year.
To enable the government to get revenue to finance acts throughout the year several measures in the Act under Section 12 provides for installment tax since 1980 for persons who do not pay (P.A.Y.E) on employment income, advance tax chargeable under section 12 A for those with PSV vehicles, since 1996.
Presumptive tax is chargeable in section 17A by those paying for any agricultural produce.
Withholding tax under section 35. Charge and interest where anyone paying charge/ interest/ annuity or insurance commission/ a pension/ consultancy agency or contractual fee or royalty is registered to withhold tax from the payment and remit it to the government. The same is applied on non-resident persons where withholding tax will be deducted from payment on any management or professional fee alongside other sources. Section 37 provides for withholding tax for emolument committed as P.A.Y.E for all employment income. All these deductions are remitted to the government at the end of every month to enable the government meet its expenditure needs.
What should one do if income earned in tear one for services delivered is not paid in that year but is received in year three?
In accounting, it is solved by accrual / realization method. Accrual method is income treated whenever received to year in which it accrued. When services are rendered in a year, realization, treats income, and charges it to the year in which it has been realized. The Income Tax Act favors accrual method, because section 3(1) talks of income that accrued in or was derived from Kenya.
In charging all the taxes, the personal rates and reliefs applicable are issued by the minister in the Finance Bill after every Budget Day. Section 4-11 elaborates on each of the sources.