Kenya's Finance Act 2026 (Act No. 19 of 2026), assented to on June 23, 2026, removed a defined group of digital payment services from the VAT exemption for financial services with effect from July 1, 2026. Commissions charged by payment service providers (PSPs) for processing, settlement, merchant acquiring, gateway, and aggregation services are now standard-rated at 16%. 

The amendment occupies a few lines of statute but reaches every mobile money platform, gateway, and aggregator in the market, and displaces a High Court judgment delivered ten months earlier. In this article we will set out the legal framework, the litigation behind it, the apportionment problem it creates, and what businesses should do now.

Legal Framework and Scope

The exemption for financial services sits in Part II of the First Schedule to the VAT Act, 2013. It has historically been drafted by reference to the activity rather than the licensing status of the supplier, which is why intermediaries in the payment chain could rely on it. The Finance Act 2026 narrows it so that it no longer covers payment processing, settlement, merchant acquiring, gateway services, or aggregation supplied over a software or digital platform for a fee or commission by a PSP.

Core money transfer remains exempt, a distinction confirmed by PwC in its summary of the enacted position. What has become taxable is the charge for facilitating the movement of money, not the movement itself. The Kenya Revenue Authority registration threshold of KES 5 million continues to apply to resident suppliers. Non-residents supplying services over the internet or through a digital marketplace remain subject to the VAT (Electronic, Internet and Digital Marketplace Supply) Regulations, 2023, under which that threshold does not apply.

Parliament Legislating Over the Courts

The amendment did not emerge from a policy vacuum. In Pesapal Limited v Commissioner of Domestic Taxes [2025] KEHC 12284 (KLR), decided on August 27, 2025, the High Court held that commissions earned by a PSP licensed by the Central Bank of Kenya were exempt financial services. It set aside a Tax Appeals Tribunal decision that had treated the provider as a payment system operator rather than a financial one, together with a principal VAT assessment of KES 76.8 million and penalties and interest of KES 33.9 million.

As KPMG noted in its analysis of the judgment, the court affirmed that exemption depends on the nature of the service rather than the provider's licensing status or use of digital platforms, treated the list of exempt financial services as open-ended, and applied the principle that ambiguity in a taxing provision is resolved in favor of the taxpayer. The National Treasury did not appeal; it proposed the amendment now in force, removing the wording on which the ruling depended.

The same Act rewrites the Income Tax Act to classify payments to card companies as royalties and interchange fees as management or professional fees, displacing Barclays Bank of Kenya (now Absa Bank Kenya) v Commissioner for Domestic Taxes [2025] KESC 70 (KLR), in which the Supreme Court held on December 5, 2025 that neither attracted withholding tax. The court had grounded that decision on the constitutional requirement that a tax be imposed in clear legislative language; as Cliffe Dekker Hofmeyr observed, the amendment supplies the language the court found missing. That is two judgments on payment infrastructure displaced by a single Finance Act, each within a year of being handed down. Planning built on a favorable reading of an exemption should assume that reading survives only to the next Finance Bill.

The Carve-Out That Creates the Complexity

The Bill as published went further than the Act as passed. A proposal to apply VAT to person-to-person transfers was dropped before assent, after a public participation exercise drawing submissions from more than 170 organizations and over 100,000 citizens. At the signing ceremony, the President stated that the law introduces no new tax on mobile money transfers, which is accurate as to the transfer itself and easily misread as covering the fee.

That spared millions of low-value users, but it left a line running through the middle of a single transaction: the transfer leg is exempt, the fee leg is taxable. Providers must separate the two on the tax invoice and defend the split if questioned. For a bank charging a discrete, itemized fee, this is manageable. For platforms with bundled pricing, tiered tariffs, waivers, or consideration embedded in a spread, it is harder, and a documented apportionment methodology is necessary. As at August 3, 2026, the KRA had published no guidance on acceptable apportionment methods.

Stacking on an Already-Taxed Fee

Mobile money transfer fees already carry excise duty at 15%, and VAT now applies on the excise-inclusive amount. In submissions to the National Assembly on the Bill, Safaricom put the combined effect at 33.4% of the fee, against 15% before the change. That is the clearest available measure of what the amendment does to transaction costs. Note that the 20% excise rate applied to certain other financial fees is separate and does not govern transfer fees.

Compliance and Reporting Obligations

  • Reclassify the supply. Test each fee line against the five newly taxable categories; the contractual description is not determinative; the character of the service is.
  • Correct the invoicing. Exempt and taxable consideration must be separately identifiable, and taxable elements must be captured accurately in eTIMS. Aggregators should be clear about whose supply they are invoicing.
  • Document the apportionment. Where pricing is bundled, record the methodology and its rationale before an audit calls for it.
  • Review pricing and contracts. Agreements drafted on the assumption of an exempt supply may not permit unilateral recovery of the 16% from customers.
  • Claim the input tax. Registered businesses paying gateway and acquiring fees have a recovery position that many have not reflected in their VAT accounts.

A Template for the Region

Revenue authorities across Africa are converging on the payment layer as a tax base through digital services taxes, compliance fees, and registration obligations on non-resident platforms. What distinguishes the Kenyan measure is that it targets domestic licensed intermediaries rather than foreign suppliers, and removes an exemption rather than creating a levy. That makes it readily exportable, since no new tax and no new collection mechanism are required.

Key Takeaways and Practical Implications

The distributional effect has drawn less comment than the headline rate. A registered merchant can recover the input tax on a processing fee where it relates to taxable supplies and is supported by a valid eTIMS invoice. A trader below the KES 5 million threshold cannot. The measure is therefore broadly neutral for the formal sector and a cost increase for the informal one, the segment Kenya's digital payment infrastructure was built to draw into the tax system.

What this means in practice depends on which side of the transaction you sit. PSPs need invoicing that holds up and an apportionment method they can defend if questioned. Merchants need to check they are actually claiming the input tax, and to reread pricing terms that were drafted when the supply was exempt. Non-residents need to work out whether they now fall inside the registration net. 

From here, two things will show how the rule works in practice: whether the KRA publishes guidance on acceptable apportionment methods, and how the first audits under the new treatment are handled.