MPs Spare M-Pesa Transfers From VAT as Mobile Money Matures

Kenyan lawmakers have moved to preserve the M-Pesa VAT exemption proposed under the Finance Bill 2026, shielding mobile money transfers from a tax change that industry players warned could make digital payments more expensive and undermine financial inclusion.

The recommendation by the National Assembly’s Finance Committee would exempt money transfer services offered by payment service providers such as M-Pesa and Airtel Money from the proposed 16 percent value added tax. While the amendment still allows taxation of certain support services including payment processing and cash handling, MPs drew a distinction between those activities and the actual transfer of funds between users.

The decision marks one of the most consequential changes to the Finance Bill because it touches a financial service used daily by millions of Kenyans.

Parliament Moves to Protect Mobile Money Transfers

The debate began after the Finance Bill proposed changes that would have expanded the scope of VAT on services offered by payment service providers. Industry stakeholders, including Safaricom, Airtel Money, Pesapal and Kenswitch, argued that the proposal would inevitably increase costs for consumers because the revenues earned by payment providers are derived from transaction fees paid by users.

Although the National Treasury maintained that the tax was aimed at service providers rather than consumers, critics argued that the additional cost would ultimately be passed through to customers.

The Finance Committee sided with those concerns, recommending a broader framework that preserves VAT exemption for money transfer services while creating a clearer distinction between transfers and other taxable activities.

The committee also called for a more precise legal definition of payment service providers to reduce uncertainty around future tax administration.

The Debate Was About More Than Transaction Costs

At first glance, the disagreement appeared to revolve around the cost of sending money.

For consumers, a VAT charge on transaction fees would have raised the cost of using mobile money platforms that have become deeply embedded in everyday economic activity. Kenyans use mobile money to pay suppliers, settle transport fares, support relatives, receive salaries and conduct retail transactions.

Yet the wider concern was not simply about higher fees. Policymakers and industry groups increasingly view digital payments as an important tool for moving economic activity into formal and traceable channels.

That broader concern became central to the argument against the tax proposal.

Why Banks Warned of a Return to Cash

During consultations on the Finance Bill, the Kenya Bankers Association warned that higher digital transaction costs could encourage consumers and businesses to rely more heavily on cash.

According to the association, digital payments have given both businesses and government greater visibility into economic activity that previously occurred outside formal financial channels. Raising the cost of those transactions, industry groups argued, risks slowing adoption and encouraging a shift back toward cash-based trade.

The concern comes at a time when Kenya continues to depend heavily on mobile money infrastructure. Data from the Kenya National Bureau of Statistics shows person-to-person mobile money transfers reached Sh8.66 trillion in 2025, underscoring the scale of digital payments within the economy.

For business groups, the issue is therefore tied to formalisation as much as taxation. A system that encourages digital transactions creates records, supports financial access and broadens participation in formal financial services.

Treasury and CBK Are Pursuing Different Goals

The debate also exposed competing policy priorities within government.

The National Treasury has been under pressure to expand revenue collection as it seeks additional resources to support public spending commitments. Digital payments represent a growing area of economic activity and therefore a potentially attractive source of tax revenue.

The Central Bank of Kenya has largely focused on a different objective. Through the Kenya National Financial Inclusion Strategy 2025–2028, the regulator has backed efforts to reduce transaction costs and encourage wider use of digital financial services.

The strategy aims to lower the average cost of mobile money transactions over the coming years, reflecting a belief that affordability remains central to financial inclusion.

A VAT increase on mobile money fees would have moved policy in the opposite direction.

Mobile Money Has Become National Infrastructure

The Finance Committee’s recommendation ultimately reflects a broader shift in how policymakers view mobile money.

When M-Pesa launched nearly two decades ago, it was largely seen as a telecommunications innovation. Today it functions as critical financial infrastructure, supporting payments, commerce and financial access across the country.

Recent Communications Authority data illustrates how deeply embedded mobile money has become in the economy. Mobile money subscriptions reached 53.4 million during the third quarter of the 2025/26 financial year, equivalent to penetration of 100.1 percent of the country’s estimated population. The milestone does not mean every Kenyan actively uses mobile money, but it signals a market that has moved well beyond the adoption phase.

That shift is important because it changes how growth in the sector is measured. In the early years, success was driven by attracting new users. Today, growth increasingly depends on encouraging more activity within the ecosystem through merchant payments, business transactions, digital commerce, savings products and recurring payments.

In that environment, transaction costs become more significant. The policy challenge is no longer simply expanding access to mobile money but increasing the volume of economic activity flowing through digital channels.

The scale of the supporting infrastructure reinforces that reality. Registered mobile money agents rose to 602,470 during the quarter, highlighting the extent to which mobile money has become embedded in daily commerce across the country. The network provides cash-in and cash-out services, supports transactions and serves as a critical link between digital finance and the physical economy.

That reality helps explain why lawmakers chose to preserve the VAT exemption despite Treasury’s push for additional revenue.

The decision suggests Parliament was persuaded by the argument that mobile money should be treated less as an ordinary taxable service and more as a foundational component of Kenya’s financial system. As the sector matures, policymakers appear increasingly focused on encouraging greater use of digital payments rather than imposing costs that could discourage activity within one of the country’s most important financial networks.

Whether the exemption survives the remaining legislative stages remains to be seen. But the committee’s position signals growing recognition that the long-term value of affordable digital payments may outweigh the short-term revenue gains that additional taxation could generate.

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