Finance Bill 2026: Why gov't wants to impose 16% VAT on digital payments

Added: 2026-05-28

[00:00:00]Finance Bill 2026 is here with us and several clauses have caused a stir among Kenyans recently. As we know, the bill contains revenue raising measures and tax proposals for the upcoming financial year. An interesting clause has been the proposal to introduce 16% VAT on digital payments.

[00:00:18]The bill proposes to remove VAT exemptions on money dealings and financial services by introducing a 16% VAT on digital payment processing. In simple terms, this means that right now, when you move money or pay for things digitally, the processing fees charged by the technology companies are exempt from VAT.

[00:00:37]The government wants to remove this exemption and slap a 16% tax on those fees. This targets payment service providers like companies that process online checkout pages, mobile money transfers, and point of sale card terminals. If a business or a provider pays a fee to process a digital transaction, that fee will now be 16% more expensive because of the VAT.

[00:01:00]Cost implications indicate that while the tax is levied on the financial providers, history shows that these costs are almost always passed down to the consumer or the merchant, potentially making digital transactions and online shopping more costly. The bill also seeks to expand withholding tax on card network interchange fees within the merchant discount rate by reclassifying operational settlement flows as royalties or management fees.

[00:01:25]To understand this, let's look at what happens when you swipe a credit or debit card at a supermarket. The supermarket doesn't get 100% of your money. They pay a small percentage fee, which is the merchant discount rate, to the bank that provided their card machine. That bank then shares a piece of that fee with your bank and the card network for routing the payment safely. This is called the interchange fee. Government is legally reclassifying the interchange fees as royalties or management fees. By changing the definition, the government can legally slap a withholding tax on those transaction fees before the money is moved between the banks and international card networks.

[00:02:00]Why is the government doing this? A few years ago, the Supreme Court of Kenya ruled that the Kenya Revenue Authority could not tax these interbank card fees under the old laws. By rewriting the definition in the Finance Bill 2026, the government is effectively closing the loophole so they can legally collect taxes from the massive volume of card transactions happening in the country.

[00:02:22]During the public participation forums, several stakeholders voiced their concerns over this clause. The Kenya Private Sector Alliance demanded the entire clause to be deleted citing that between the new VAT and this card fee tax, the total tax cost on a 100 shillings merchant fee will skyrocket from 15 shillings to 53 shillings, meaning over half the fee going to taxes. The Kenya Bankers Association warned Parliament that if you make digital payments too expensive, Kenyans will stop using apps and cards altogether. They'll go back to using paper cash and stuffing money under the mattress. And if the economy goes back to informal cash, the government won't be able to track or collect any taxes.

[00:02:59]In response, this is what CS Ambady had to say.

[00:03:02]>> Taxing money transfers through platforms such as M-Pesa and PesaPal.

[00:03:07]Whereas the VAT Act expressly exempts listed financial services, it does not address the VAT treatment of modern digital intermediaries such as payment service providers and other technology-based platforms that facilitate money transfer and financial transaction. Specifically targeted at the digital services that are ICT driven as opposed to the traditional financial services such as cash deposits, withdrawals, forex exchange, etc. It is worth noting that we had a discussion with Safaricom on Friday last week and explained that they are not among those we are targeting.

[00:03:45]>> So while the government is trying to raise revenue, experts have warned that Parliament should not merely rubber-stamp what Treasury has proposed and scrutinize every clause. What are your thoughts on the finance bill? Let us know in the comments below.