Businesses and households in Kenya are facing higher digital payment costs after banks and fintech companies began adding a 16 percent value-added tax (VAT) to fees charged for processing electronic payments. The new VAT levies on digital payment transaction fees took effect from July, according to a spot check by Business Daily Africa. This development has raised the cost of services used by businesses to receive payments through card machines, merchant tills, and commercial Paybills.
The tax targets fees earned by companies that help businesses receive and process electronic payments, including payment gateways such as Pesapal and networks that connect merchants, banks, and card companies. A leading commercial bank informed its customers via a text message that effective November 1, 2026, a 16 percent VAT would be charged on all digital payment transaction fees, as required under the Finance Act 2026. The additional cost may eat into business profits or force firms to raise prices, passing part of the burden to consumers who already face pressure from the increasing cost of living.
However, the law exempts ordinary money transfers, meaning the new VAT does not apply to transfer services offered through mobile-money platforms such as M-Pesa and Airtel Money. The distinction lies in the fact that sending money from one person to another is spared from VAT, while payments to systems that help businesses receive, process, and settle electronic payments are subject to the levy. This means customers sending money through exempt mobile-money transfer services are treated differently from businesses paying fees to accept card payments or use payment-processing services.
The implementation of the Finance Act 2026 had faced a legal challenge by the Consumer Federation of Kenya (Cofek) and others, which sought to stop the implementation of the Finance Bill 2026. However, the Court earlier this month removed the legal challenge, with Justice David Mburu striking out the case. The judge ruled that Cofek had gone to court in June when the Finance Bill was still being debated by Parliament and had not yet become law.
The tax marks a turnaround for payment companies that had previously won court battles against the Kenya Revenue Authority (KRA), which sought to collect VAT on fees earned from processing electronic payments. In August 2025, the High Court ruled in favor of Pesapal in a dispute over a Sh110.8 million tax demand, including the principal tax, interest, and penalties. The court ruled that the tax treatment depended on what the company actually did, rather than the technology it used.
The Treasury later introduced changes through the Finance Act 2026 to make it clear that fees for processing payments, settling transactions, connecting merchants to payment networks, and operating payment gateways would attract VAT. Professional services firm PwC warned that the tax would increase costs across the payments industry, with merchants and consumers likely to bear part of the increase. KPMG noted that the new law would give payment companies clearer rules on how their services should be taxed and reduce disputes with the KRA.
The tax comes at a time when regulators are pushing to make digital payments more affordable. The Central Bank of Kenya's National Financial Inclusion Strategy 2025–2028 seeks to reduce the average cost of sending money between individuals from Sh23 in 2024 to Sh10 by 2028. The implementation of the VAT on digital payment charges may have implications for this goal, as increased costs may be passed on to consumers.
Key points
- Kenyan banks and fintech companies have started charging a 16 percent VAT on digital payment transaction fees.
- The tax targets fees earned by companies that help businesses receive and process electronic payments.
- The law exempts ordinary money transfers through mobile-money platforms such as M-Pesa and Airtel Money.
