a) Discuss the consequences of overtaxing persons in a developing country

b) Thika leather ltd. are manufacturers of belts, hats and shoes. The company has given the following information to be used in the self assessment return for the year of income 2022.

Stock (opening balance) 1,500,000 Gross Sales 30,000,000

Purchases 12,000,000 Stock (closing) 1,900,000

Salaries and wages 6,500,000 Profit on exchange 120,000

Electricity and water 654,000 Profit on sale of shares

Insurance 346,000 Dividends 77,000

Rent, rates and taxes 1,230,000 Interest 100,000

Vehicle running expenses 3,670,000 Net loss for the year 150,000

Travelling expenses 429,500

NSSF 190,500 Net loss carried forward 2,128,500

Bank charges and interest 139,000

Donations 41,000

Sales returns 4,000,000

Postage and telephone 126,000

Bad debts 354,000

Depreciation 916,000

General expenses 1,300,000

Repairs and renewals 980,000 Profit brought forward

Legal expenses 99,500

34,475,500

34,475,500

Net loss brought down 2,128,500

Directors fees 6,000,000 9,000,000

Proposed dividends 3,500,000 2,628,500

11,628,500 11,628,500

The following information is further obtained from the company:

i) Legal expenses were analysed as follows:

Sh.

Renewal of factory lease for 10 years 12,500

Notices to defaulting debtors 37,000

Letters of authentication for overdraft 25,000

Purchase of directors private house 25,000

99,500

ii) Bad debts analysis:

BAD DEBTS ACCOUNT

Bad debts 154,000 Balances brought forward:

Balances carried forward: Specific provisions 4,000,000

Specific provisions 4,500,000 General provision 1,000,000

General provisions 700,000 Profitand loss account 354,000

5,354,000 5,354,000

iii) The profit on exchange was from an amount payable on 1 February 2022 to a foreign creditor of 10,000 US dollars.

iv) Rent, rates and taxes include Sh.421,000 paid to Kenya Revenue Authority as instalment tax for the year 2022.

v) The interest of Sh.150,000 was earned from deposits held in a Swiss account.

vi) Included in general expenses was the cost of renovations to the old factory costing Sh.1,000,000 done on 1 July 2022.

The companys writer down values of assets as at 31 December 2022 were as shown below:

Class I - 4,500,000

Class II - 500,000

Class III - 160,000

Class IV - 220,000

Required:

a) Taxable income of Thika leather ltd for the year ended 31 December 2022.

(b) Compute the tax liability

c) Comment on information not used