By Kenya’s Finance Act 2026 took effect on July 1, introducing changes to income tax, value-added tax and excise duty as the government seeks to broaden the tax base and strengthen revenue collection.
The Finance Act 2026 Kenya was assented to by President William Ruto on June 23 and published in the Kenya Gazette on June 26 as Act No. 19 of 2026.
The law amends several tax statutes, including the Income Tax Act, Value Added Tax Act, Excise Duty Act, Tax Procedures Act and Miscellaneous Fees and Levies Act, and sets different commencement dates for some provisions.
The Finance Act 2026 expands taxation of digital financial services, changes the treatment of some goods and services for VAT and excise purposes, and gives the Kenya Revenue Authority (KRA) greater powers to use information from electronic tax systems.
Digital Payments Face New Tax Rules.
One of the significant changes affects digital payment transactions.
The Act expands the definition of management or professional fees to include interchange fees and merchant service fees arising from transactions where a card is used as a means of payment. The payments are therefore brought within the withholding tax framework.
The change follows a Supreme Court ruling concerning the taxation of such fees and provides an explicit statutory basis for their treatment under withholding tax, according to EY.
The Finance Act 2026 also broadens the definition of royalties to include payments for the use of, or right to use, proprietary digital payment card networks or platforms.
The changes are relevant to banks, fintech companies, payment service providers, card networks and merchants because they affect how certain payments are classified and taxed.
The VAT Act has also been amended to impose 16% VAT on specified payment and money-transfer services provided by payment service providers, including payment processing, settlement, aggregation and payment gateway services, according to an analysis published by The Star.
The measures could increase compliance requirements for businesses operating payment platforms and may affect transaction pricing, depending on how providers treat the additional tax costs.
KRA Gets Wider Powers Over Tax Returns.
The Finance Act 2026 Kenya framework also gives KRA authority to generate prepopulated tax returns using information available to the tax authority.
The measure allows KRA to use data from sources such as payroll records and the electronic Tax Invoice Management System, known as eTIMS, to prepare returns for taxpayers. Taxpayers can then review and amend the information before filing.
The change is part of a broader effort to increase the use of electronic information in tax administration and improve compliance.
The Act also introduces an amnesty on penalties and interest relating to tax obligations for periods up to Dec. 31, 2025, provided the principal tax is fully paid by Dec. 31, 2026.
KRA can also waive penalties and interest arising from an error generated by an electronic tax system where the liability does not exceed 2 million Kenyan shillings.
Changes To VAT And Excise Duty
The Finance Act 2026 changes the VAT treatment of several goods and services.
Electric bicycles and solar batteries were moved from zero-rated to standard-rated VAT, while aircraft spare parts and services related to construction of large-scale tourism and convention facilities were also moved to the standard-rated category.
Other products, including dialyzers and scrap metal, moved from standard-rated to exempt status.
The Act also removes excise duty on bottled water from July 1, KRA said in a public notice. Bottled water manufactured or imported from that date is no longer subject to the duty or excise stamps.
At the same time, excise duty has been expanded to cover services offered by licensed virtual asset service providers, while some imported goods from East African Community partner states have been brought into the excise duty framework.
The legislation also changes the basis for calculating excise duty on betting and raises excise rates on some products, including imported sugar, cigars and certain tobacco products.
New Rules for Businesses and Non-Residents.
The Finance Act 2026 introduces a new tax framework for non-resident persons earning rental income from property in Kenya.
Non-resident rental income is subject to a final withholding tax of 30% on gross rent from immovable property and 15% on rent from movable property.
The law also changes the taxation of non-resident companies operating in the extractive and petroleum sectors. The income tax rate for such companies is reduced from 37.5% to 30%, while a 15% tax on repatriated income is introduced for non-resident licensees and contractors.
Some measures are designed to encourage investment while others broaden the government’s revenue base.
The Act provides, for example, a 100% first-year investment allowance for capital expenditure exceeding 10 billion shillings on petroleum or gas storage facilities. It also allows indefinite carry-forward of certain pre-2025 tax losses for taxpayers that had invested at least 10 billion shillings before July 1, 2025.
Filing Deadlines to Change In 2027
Not all provisions took effect in July.
Sections covering changes to income tax return deadlines and certain non-resident repatriation tax provisions take effect on Jan. 1, 2027, while the new export declaration regime begins on Sept. 1, 2026.
From January 1, 2027, Kenya will move away from a single tax filing deadline of June 30 for all taxpayers, adopting instead a phased system with different deadlines depending on taxpayer category.
Those filing nil returns will be required to submit by January 31, individuals and salaried employees under PAYE will have until April 30, and corporate entities will continue to file within six months of their financial year-end, as before.
The Finance Act 2026 Kenya also introduces new compliance requirements for importers. From Sept. 1, importers will be required to obtain and retain an export declaration or equivalent customs documentation from the country of export for imported goods. Failure to produce the required documentation could allow KRA to reject customs declarations or reassess tax liabilities, according to tax advisers.
For financial institutions, the Finance Act 2026 Kenya clarifies the treatment of bad debts. Banks, licensed financial institutions and qualifying money lenders may treat the principal, interest and other amounts relating to a debt as part of a bad debt where the debt has become bad under guidelines issued by the Commissioner.
Another measure provides an exemption for qualifying gratuity contributions. The exemption applies where the employment contract lasts at least three years, including qualifying renewals or extensions, and the gratuity does not exceed 31% of the employee’s emoluments for the contract period.
The Finance Act 2026 does not change Kenya’s PAYE tax bands, personal income tax rates or personal reliefs.
The government has been under pressure to raise domestic revenues while managing a large fiscal deficit and substantial debt-servicing obligations. Kenya’s Treasury has also been exploring new domestic and international borrowing options to finance its budget and manage debt costs.
The implementation of the Finance Act 2026 Kenya measures therefore comes as the government seeks to improve tax collection while limiting additional pressure on households and businesses.
