The Kenya Revenue Authority (KRA) has dealt a harsh blow to workers by increasing the tax rate for employers providing employee benefits.
As a result of this changes, the tax on taxable fringe benefits has been increased to 11 percent for the next three months, until September. This is the second consecutive increase since the period of April-June and is in reaction to the high market interest rates.
“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.
This tax is levied by employers on various perks provided to workers, their families, and business partners. In addition to a regular salary, it also includes welfare benefits including low-interest loans.
All wages and salaries received by an employee in Kenya are considered taxable employment income. This includes salaries, wages, bonuses, and fringe benefits received or enjoyed during employment.
Employers providing loans to employees at interest rates below the market rate are an example of taxable fringe benefits.
The difference between the interest rate on the loan and the market interest rate is the value of the fringe benefits subject to taxation.
KRA had kept the fringe benefits tax at 9% for the first three months of the year, through March, after increasing it twice in a row for the first six months of the year, through December.
The tax was consequently increased to 10% in the period that ended prior to March.
The tax on fringe benefits stayed at seven percent during the entirety of 2021, with the exception of the three-month period ending in June, when it was increased to eight percent for the subsequent three-month period ending in September.
Due to the high market interest rates at the time, the tax was later raised to nine percent for the months of October through December of 2022.
Meanwhile, the government has increased the presumed interest rate for the next three months till September to 11%, to be paid net of a 15% withholding tax on the 20th of each month.
Previously, the deemed interest rate had been raised to 10 percent for the three months until June.
The Central Bank of Kenya (CBK) hiked its indicative rate to 10.5% last month, a level not seen since July 2016.