Updates from KRA on Meal Benefit Taxation

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The Kenya Revenue Authority (KRA) issued a technical circular on April 4, 2024, to provide clarity on their interpretation of Section 5(4)(f) of the Income Tax Act (ITA), which deals with the taxation of meal benefits for employees.

The KRA’s position is that if an employer provides meals valued above KES 48,000 annually to an employee, the entire value of those meals no longer qualifies as a non-taxable benefit under Section 5(4)(f) of the Income Tax Act (ITA). Consequently, the entire amount will be subject to tax on the employee.

 Background

The Kenya Revenue Authority (KRA) released a technical circular on March 1, 2017, following the implementation of the Finance Act 2016, indicating that meals provided to employees up to KES 48,000 annually were not subject to tax.

This circular was issued in accordance with Section 5(4)(f) of the Income Tax Act (ITA), which specifies that employment gains or profits do not include the value of meals served to employees in an employer-operated canteen or cafeteria, or provided by a third-party registered taxpayer, as long as the meal value does not exceed KES 48,000 per year per employee, subject to conditions set by the Commissioner.

Some interpretations of this legislation suggested that the taxable meal benefit was the value of meals exceeding KES 48,000 annually (or KES 4,000 p er month) per employee, allowing employers to deduct KES 4,000 per employee per month from the total meal benefits and thus incur lower taxes.

To address the ongoing confusion regarding this provision’s interpretation and application, the KRA issued a clarification through a technical circular on April 4, 2024, to affirm its stance on the taxation of meal benefits.

 Implication

Based on the circular, Employers will be remitting a higher PAYE since there in no deduction of the tax-free threshold in determining the taxable meal benefit therefore a reduction in the employee salaries.

Additionally, this interpretation has opened up a new door for potential tax assessment on the taxation of employee meal benefits.

 Conclusion

If the intent of providing meals to employees is to cushion low-income earners, KRA’s interpretation ends up adding a tax burden on them. This is quite counterproductive.

It is important to note that since June 2014, the annual exempt threshold for meal benefits has not changed. It is common practice to set an exempt threshold beyond which the entire value becomes taxable. KRA’s position undermines the spirit of this common practice.