Kenya's Finance Act 2026 has introduced a 16% Value Added Tax on fees charged for digital payment services, including processing, card settlement, and payment-gateway operations. This change, effective November 1, 2026, will impact banks and fintech companies operating in the country. The new tax regime was announced by Kenya Today Newsroom on October 29, 2026.
The tax applies specifically to the service charges levied by banks and fintech companies for electronic payment processing, settlement, and gateway services. However, it does not apply to the full value of each electronic transaction. Person-to-person transfers, such as standard M-Pay or Airtel Money, remain exempt from this tax. The tax authorities have clarified that only the service charge itself will be subject to the 16% VAT.
The Finance Act 2026 reclassifies payment-processing, settlement, merchant-network connectivity, and gateway services as taxable supplies. This move marks a shift from the previous exemption for financial services. The change in tax status had been a subject of legal dispute, with a High Court ruling in August 2025 favoring payment gateway Pesapal in a KSh110.8 million tax demand.
Tax advisers have warned that the added VAT could lead to increased costs for merchants, particularly small businesses operating on thin margins. The new levy may be passed through the payment chain, raising costs for card acceptance and gateway usage. This could have a significant impact on the operations of small businesses and other merchants who rely heavily on digital payment services.
Despite the potential impact on merchants, the new levy aligns with Kenya's broader financial-inclusion agenda. The agenda seeks to lower the cost of person-to-person transfers, promoting greater financial inclusion. However, the two cost components – transaction fees and service charges – remain distinct and subject to different tax treatments.
The introduction of the 16% VAT on digital payment service fees is expected to generate additional revenue for the Kenyan government. The government has been seeking to increase its revenue streams, and this new tax regime is seen as a way to achieve this goal. The impact of the new tax on the digital payment ecosystem and the broader economy remains to be seen.
The Kenyan government has been working to promote financial inclusion and digital payments in recent years. The introduction of the 16% VAT on digital payment service fees may have a short-term impact on the growth of digital payments, but it is also seen as a step towards creating a more sustainable and inclusive financial system. The government will need to balance its revenue goals with the need to promote financial inclusion and economic growth.
Key points
- The Kenyan government has introduced a 16% VAT on digital payment service fees, effective November 1, 2026.
- The tax applies specifically to service charges levied by banks and fintech companies for electronic payment processing, settlement, and gateway services.
- The new levy is expected to generate additional revenue for the Kenyan government and may have a significant impact on merchants, particularly small businesses operating on thin margins.
