Kenya’s new digital payment tax puts banks, fintechs and merchants under pressure to manage costs
Banks and fintechs in Kenya are preparing to apply a 16% Value Added Tax (VAT) to fees charged for digital payment services, including payment processing, card settlement and payment gateway operations. The change under the Finance Act 2026 alters the tax treatment of services used to move money between customers, merchants, banks and payment networks, adding a new cost for businesses that rely on electronic payments.
Banks have notified customers about the tax, with one notice citing November 1, 2026, as the date the charge takes effect. The VAT applies to fees for specified payment services, rather than automatically applying to the full value of every electronic transaction. Ordinary person-to-person money transfers, including standard M-Pesa and Airtel Money transfers, are treated separately from the payment-processing services covered by the change.
The new tax follows disputes over whether certain electronic payment services qualified as exempt financial services under Kenya’s previous VAT framework. The Finance Act 2026 changed the statutory treatment of payment processing, settlement, merchant network connectivity and payment gateway services, bringing the fees charged for those activities within the VAT framework.
Finance Act 2026 changes VAT treatment of payment services
The Finance Act 2026 revised the tax treatment of services that support electronic payments, including the processing and settlement of card transactions and the operation of payment gateways. These services connect merchants with banks, card companies and payment networks, enabling electronic payments to be authorised, processed and settled.
Payment gateways such as Pesapal provide infrastructure that allows businesses to accept electronic payments through connected systems. The fees charged for providing these services are distinct from the amount a customer pays for goods or services, meaning the VAT applies to the relevant service charges rather than automatically adding 16% to the underlying purchase.
The changes affect a range of businesses involved in the digital payments chain. Banks, fintechs and payment service providers that charge for covered services must account for the revised VAT treatment, with the resulting cost potentially reaching merchants through higher service fees.
For businesses that accept card payments or use third-party payment infrastructure, the effect will depend on the services they use and the fees charged. The tax therefore reaches beyond the relationship between a bank and its account holder to the payment systems that support online purchases, retail transactions and merchant collections.
Which digital payment services attract VAT?
The covered services include electronic payment processing, card transaction settlement, payment gateway operations and merchant network connectivity. These activities form part of the infrastructure used to accept payments, route transaction information and settle funds between participants in the payment system.
Payment processing fees are different from the value of the goods or services purchased. When a customer pays a merchant electronically, the payment provider may charge a fee for processing or settling that transaction. It is that service fee, where covered by the new rules, that attracts VAT.
The distinction also matters for mobile money. The supplied tax reporting separates ordinary person-to-person transfers from the payment services brought into the VAT net. A customer sending money to a friend is not automatically subject to the same VAT treatment as a merchant or business paying for a covered payment-processing service.
This separation is important in a market where consumers and businesses use the same digital platforms for different purposes. The tax treatment depends on the service being supplied, rather than simply on whether money moves electronically.
Court disputes preceded the tax change
The revised rules follow disputes between payment service providers and KRA over the tax treatment of electronic payment services. In August 2025, the High Court ruled in favour of Pesapal in a dispute involving a KSh110.8 million tax demand. The case concerned whether the company’s services qualified as exempt financial services under the VAT law then in force.
The court’s ruling focused on the nature of the service rather than the technology used to deliver it. That distinction was central to the debate over whether payment-related services should be treated as exempt financial services or as taxable services supplied by technology-enabled businesses.
In October 2025, the Tax Appeals Tribunal also ruled against KRA in a dispute involving Kenswitch. The cases highlighted disagreements over how the existing VAT framework applied to businesses operating the infrastructure behind electronic payments.
The Finance Act 2026 subsequently changed the statutory treatment of payment processing, settlement, merchant network connectivity and payment gateway services. Those changes provide the basis for applying VAT to the fees charged for the covered services, moving the debate from the interpretation of the previous framework to the treatment established by the new law.
A separate legal challenge by Cofek and others was struck out by Justice David Mburu as premature because it had been filed in June while the Finance Bill was still before Parliament. The ruling did not determine the constitutionality of the tax provisions.
Merchants and consumers face higher payment costs
The VAT change introduces an additional charge on covered payment-service fees, with potential consequences for businesses that rely on electronic payment systems. Merchants may face higher costs for accepting card payments, using payment gateways or accessing other services covered by the revised rules. The extent of the impact will depend on their payment arrangements and the fees charged by their providers.
Tax and advisory firms have warned that the cost could be passed along the payment chain. PwC has said fintechs and intermediaries fall within the tax net, with the burden potentially reaching merchants and consumers. KPMG has pointed to clearer rules alongside higher costs for the affected services.
For small businesses, payment fees are one component of the cost of accepting digital transactions. An additional tax on those fees may affect the economics of using particular payment channels, especially for businesses processing many transactions or operating on narrow margins. Larger merchants may also need to review how payment service charges are reflected in their operating costs.
Consumers may encounter the effect indirectly if businesses adjust prices or other charges to account for higher payment expenses. However, the VAT on a payment-processing fee is distinct from VAT on the goods or services being purchased, and the two should not be treated as the same tax charge.
The tax change meets Kenya’s push for cheaper digital payments
The new VAT treatment comes as Kenya pursues a financial inclusion agenda that includes reducing the cost of sending money. The Central Bank of Kenya’s National Financial Inclusion Strategy 2025–2028 sets a target of lowering the average cost of sending money between individuals from KSh23 in 2024 to KSh10 by 2028.
That target concerns person-to-person transfers, while the new VAT applies to specified payment-processing services. The distinction matters because the costs associated with merchant payment infrastructure and the fees charged for sending money between individuals are not identical, even when both form part of the wider digital payments ecosystem.
The policy questions nevertheless intersect. Banks, fintechs and payment service providers support the infrastructure through which consumers and businesses transact, while fees influence the cost of accepting and making payments. Tax treatment is one factor affecting those costs, alongside the commercial pricing of payment services.
For businesses, the immediate consideration is how the revised VAT treatment affects the fees they pay to banks and payment providers. For the wider payments sector, the change establishes a different tax framework for services that underpin electronic commerce, card acceptance and merchant payments in Kenya.
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