Ratif Sheng Shah carries out a business in Nairobi. He deals with motor-vehicle spare parts. He sells spare parts obtained legally from Dubai and other authorized sources. To beat competition in the second-hand market he also accepts spare parts from freelance agents, many of whom do not pay tax. He is therefore able to sell such parts at a relatively lower price, since he also obtains them cheaply due to tax evasion by the freelance agents.

He experiences problems in maintaining accurate records regarding the freelance spare parts. He does not charge VAT on these spare parts.

Required:

Explain in brief what VAT Law states in relation to vatable goods obtained from illegal sources. ( 4 marks)

(b) Ratif Sheng Shah carried out the following transactions during the period January to August 2000:

January 4 April 3 May 6 June 15 July 19 August 3 August 17

Purchased spare parts from Dubai for Sh.5,000,000 Purchased spare parts from Kamau Mwangi, a freelance supplier, for sh.500,000 Sold spare parts to Mrs. Moshay for Sh.150,000 Sold second hand spare parts to Kariuki for Sh.300,000 on credit. Kariuki had a car accident and passed away the following day. Purchased spare parts from England for Sh.10,000,000 Sold new spare parts to Michael Birech for Sh.600,000 Unknowingly bought a stolen saloon car from Miss X for Sh.150,000 and sold it the same day to Mr. Y for sh.200,000.

All the above prices are exclusive of customs duty and VAT.

Required:

Calculate the VAT payable by Ratif Sheng Shah in the 8 months of year 2000. (12 marks)

Comment on VAT treatment of the credit sale to the late Kariuki. ( 2marks)

Comment on the tax position of the gain on sale of the stolen car. ( 2 marks)

(Total: 20 marks)