Economy

KRA raises tax on employee benefits

kra

Times Tower in Nairobi, the Kenya Revenue Authority headquarters. FILE PHOTO | DENNIS ONSONGO | NMG

The Kenya Revenue Authority (KRA) has dealt workers a blow by raising the tax rate charged to employers granting employee benefits.

In the adjustment, the taxman has raised the fringe benefits tax to 11 percent for the next three months until September on account of the prevailing high market interest rates —the second successive raise since the April-June window.

“For the purposes of Section 12B of the Income Tax Act, the market interest rate is 11 percent. This rate shall be applicable for the three months of July, August, and September 2023,” KRA said.

The levy is paid by employers on certain benefits offered to employees, their families, or other associates.

The fringe benefits tax is imposed on employees receiving extra welfare benefits such as cheap loans in addition to their wages.

Read: KRA starts crackdown on hidden employee perks

Taxable employment income in Kenya includes all payments made by an employer to an employee. This will include salaries, wages, bonuses, and fringe benefits received or enjoyed during employment.

For example, some employers offer loans to their employees at interest rates lower than the market rate — a provision that is subject to a fringe benefits tax.

The taxable value of fringe benefits tax is the difference between the market interest rate and the actual interest paid on the loan.

The KRA had retained the fringe benefits tax at nine percent for the three months to March this year—ending two consecutive raises for the six months to December last year.

It then raised the tax to 10 percent in the three-month window to March.

The fringe benefits tax had been retained at seven percent across 2021 until the quarter ended in June last year when the KRA raised it to eight percent for the three months to September.

The tax was then raised to nine percent for the period October to December 2022 on account of the prevailing high market interest rates.

The taxman also raised the deemed interest rate to 11 percent for the three months to September of which a withholding tax of 15 percent would be deducted and paid to it by the 20th day of each month.

The deemed interest rate had been raised to 10 percent for the three months to June.

The Central Bank of Kenya (CBK) last month raised its indicative rate to 10.5 percent which was last seen in July 2016.

The Monetary Policy Committee (MPC) of the CBK on June 27 made a surprise raise in the Central Bank Rate (CBR) by one percentage point from 9.5 percent, setting the benchmark lending rate at the highest level since July 2016 or an 82-month high.

The rate of increase was also the highest in nearly eight years since July 2015 when the CBR rose by 150 basis points (1.5 percent).

Read: State staff get tax-free benefits on asset buys

The increase in interest rates has also been reflected in the cost of borrowing between commercial banks which has hit the highest mark in 55 months amid tightening cash supply and pointing to fresh surges in the pricing of credit by the lenders.

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