KRA raises tax on employee benefits

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 Kenya Revenue Authority(KRA) 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.

Understanding Fringe Benefit

Loan facilities come in handy with the need for that extra cash. Some employers offer loans to their employees at interest rates lower than market rate. This is an employment benefit to the employee(s) which is subject to a tax known as Fringe Benefit Tax (FBT).

Fringe benefit tax is payable by every employer in respect of a loan provided to an employee, director or their relatives at an interest rate lower than the market rate. This law became effective from 12th June, 1998 in respect of loan provided to an employee, director or their relatives at an interest rate lower than the market interest rate.

What’s the taxable value of Fringe Benefit ?

The taxable value of fringe benefit tax is the difference between the market interest rate and the actual interest paid on the loan. Where the term of the loan extends beyond the date of termination of employment, it applies as long as the loan remains unpaid. Fringe benefit tax is charged on the taxable value of a fringe benefit provided by employer in a month and is due and payable on or before 9th of the following month. The prescribed rate of interest is based on the market lending rates as the Commissioner may prescribe every quarter of the year.

Fringe Benefit Tax, deemed interest Rate and low Interest Benefit.

According to section 12B of the income Tax Act, the Market interest rate is 11% and the rates shall be application for the months of July, August and September.

Deemed Interest Rates

In accordance with Section 16(2)(jA) of the Income Tax Act, the prescribed rate of interest is 11% which will be applicable in the months of July, August and September 2023.

Withholding tax rate of 15% on the deemed interest shall be deducted and paid to the commissioner on the 20th day of the month following the month of computation.

Low interest benefits

for purposes of section 5(2A), the prescribed rate of interest is 10% which will be applicable in the months of July, August, September, October, November and December this year (2023).