On 5th May 2026, the Cabinet Secretary for the National Treasury and Economic Planning tabled the Finance Bill, 2026 before the National Assembly as Kenya Gazette Supplement No. 113 (National Assembly Bills No. 26). The Bill introduces extensive amendments to Kenya’s tax framework and forms part of the Government’s fiscal strategy for the 2026/2027 financial year.
The proposed amendments affect the Income Tax Act, the Value Added Tax Act, the Excise Duty Act, the Tax Procedures Act, the Miscellaneous Fees and Levies Act, the Stamp Duty Act and the Road Maintenance Levy Fund Act. Collectively, the amendments demonstrate a policy objective of broadening the tax base, strengthening tax administration and enhancing revenue collection while offering targeted incentives in selected sectors of the economy.
Several proposals contained in the Bill are likely to have significant consequences for financial institutions, payment service providers, fintech companies, multinational enterprises, property investors, virtual asset service providers, importers and manufacturers. Of particular note are the proposed expansion of withholding tax obligations, the introduction of a statutory general anti-avoidance rule, enhanced reporting obligations relating to virtual assets, and the extension of Kenya’s taxing rights over certain offshore transactions involving Kenyan assets.
As with previous Finance Bills, the legislative process remains ongoing. The Bill is currently subject to public participation, parliamentary scrutiny and debate. The provisions discussed in this alert may therefore be amended before enactment. Businesses should nevertheless begin assessing the potential impact of the proposals on existing structures, contractual arrangements and compliance frameworks.
When the changes take effect
The Bill proposes two commencement dates. Most provisions are scheduled to take effect on 1st July 2026, coinciding with the commencement of the 2026/2027 financial year. Certain amendments relating to income tax, value added tax, excise duty and tax administration are deferred until 1st January 2027.
The staggered implementation dates are likely intended to provide taxpayers and the Kenya Revenue Authority with sufficient time to adjust systems and operational processes. Businesses should carefully identify which amendments affect their operations and begin preparing for compliance well in advance of the relevant commencement date.
Income Tax
Expansion of the Definition of Royalties
One of the most commercially significant proposals contained in the Bill is the expansion of the definition of “royalty” under the Income Tax Act.
The proposed amendment expressly includes payments made for software, whether proprietary or standardised, and irrespective of whether the payment is characterised as a licence fee, development fee, maintenance fee, training fee or support fee. More significantly, the Bill extends the definition to encompass payments made for access to, participation in or use of proprietary digital platforms, payment card schemes, payment networks and switching, clearing or settlement systems.
The drafting appears intended to address longstanding disputes concerning the tax treatment of payments made to foreign technology providers, payment network operators and digital platform owners. The proposed wording suggests that the substance of the payment, rather than its contractual description, will determine its tax treatment.
From a practical perspective, the amendment is likely to affect banks, card issuers, payment service providers, fintech companies, e-commerce businesses and multinational groups that make payments to foreign technology providers. Payments that may previously have been treated as service fees could now fall within the definition of royalties and become subject to withholding tax.
The proposal may also generate interpretative disputes regarding the distinction between payments for services and payments for the use of intellectual property. Similar issues have historically been the subject of litigation in several jurisdictions and may ultimately require judicial clarification in Kenya.
Expansion of Management and Professional Fees
The Bill further proposes to amend the definition of management and professional fees to expressly include interchange fees and merchant service fees arising from payment card transactions.
When read together with the expanded royalty provisions, the amendments indicate a coordinated effort by the Government to increase taxation within the payments ecosystem.
Affected businesses should immediately review agreements involving card schemes, payment processors, acquiring banks and foreign service providers to determine whether additional withholding tax obligations may arise if the Bill is enacted in its current form.
Introduction of Non-Resident Rental Income Tax
The Bill introduces a new tax regime applicable to rental income earned by non-residents from property situated in Kenya.
The proposed framework requires non-resident landlords to register through a simplified system to be prescribed by the Commissioner and to account for tax on a monthly basis. Returns and payments would be due by the twentieth day of the month following receipt of rental income.
The proposal reflects a broader international trend towards ensuring that non-residents deriving income from local assets contribute to domestic tax revenues.
Non-resident property owners, property management companies and agents acting on behalf of foreign landlords should assess the potential compliance burden associated with the proposed regime. Existing agency arrangements and property management contracts may also require review to ensure clear allocation of tax compliance responsibilities.
New Withholding Taxes on Scrap Metal and Gambling Winnings
The Bill introduces withholding tax obligations in relation to payments for scrap metal and gambling winnings.
Purchasers of scrap metal will be required to withhold tax at the rate of 1.5% of the gross amount payable, while gambling winnings will be subject to withholding tax at the rate of 20%.
Businesses operating within these sectors should evaluate whether existing accounting and payment systems are capable of identifying qualifying transactions and applying the appropriate withholding obligations. Failure to do so may expose withholding agents to penalties and enforcement action by the Kenya Revenue Authority.
Reliefs and Incentives
The Bill also introduces a number of taxpayer-friendly measures.
Employer contributions towards employee gratuity schemes may qualify for exemption where specified conditions are satisfied. Additional mortgage interest relief is proposed in respect of certain housing loans advanced through the Central Bank of Kenya. The Bill further introduces incentives aimed at encouraging the use of Real Estate Investment Trusts by exempting certain capital gains arising from transfers of property into qualifying REIT structures.
These incentives appear designed to encourage retirement savings, home ownership and institutional investment in real estate. Taxpayers seeking to benefit from the proposed reliefs should review the qualifying conditions carefully, as the availability of the exemptions remains subject to strict statutory requirements.
Capital Gains Tax on Indirect Transfers
A particularly noteworthy proposal is the extension of Kenya’s capital gains tax regime to certain indirect transfers involving Kenyan assets.
The amendment seeks to tax gains realised by non-residents from the disposal of shares where those shares derive their value from assets located in Kenya or where the transaction results in a change in ownership of Kenyan property or Kenyan resident companies.
The proposal effectively introduces an indirect transfer rule and aligns Kenya with a growing number of jurisdictions seeking to tax offshore transactions involving local economic value.
For multinational groups, private equity investors and foreign investors, the amendment has potentially significant implications. Offshore share transfers that may previously have fallen outside Kenya’s tax jurisdiction could become taxable in Kenya.
Businesses contemplating acquisitions, restructurings or exits involving Kenyan assets should review transaction structures carefully and assess potential exposure to Kenyan capital gains tax.
Accelerated Filing Deadlines
The Bill proposes to shorten the annual self-assessment filing deadline from six months to four months following the end of a taxpayer’s year of income.
In addition, nil returns would be required within one month after the end of the relevant tax period.
Although intended to enhance tax administration and improve revenue forecasting, the shorter timelines may create operational challenges for businesses with complex reporting obligations. Taxpayers should begin evaluating whether internal reporting, audit and tax compliance processes can accommodate the proposed deadlines.
Value Added Tax
The proposed Value Added Tax (“VAT”) amendments contained in the Finance Bill, 2026 represent a significant recalibration of Kenya’s VAT framework. Rather than altering the standard VAT rate, the Bill focuses on expanding the tax base, revising the treatment of specific goods and services, and strengthening compliance obligations.
The proposals are likely to affect a broad range of sectors including financial services, payment systems, manufacturing, healthcare, renewable energy, telecommunications, agriculture and infrastructure development. Businesses should pay particular attention to the movement of supplies between the exempt, zero-rated and taxable categories, as these changes may directly affect pricing, profitability and input tax recovery.
Recovery of Input Tax Where Supplies Become Exempt
One of the most significant amendments is the introduction of a new Section 17A of the VAT Act.
Under the proposed provision, where a registered taxpayer has previously claimed input VAT on goods that subsequently become exempt supplies and those goods remain unsold at the time the exemption takes effect, the taxpayer will be required to account for and repay the corresponding input tax.
The amendment effectively introduces a statutory clawback mechanism designed to prevent taxpayers from retaining the benefit of input tax deductions in circumstances where the resulting supply no longer attracts VAT.
From a legal and practical perspective, the provision reinforces the fundamental principle that input VAT recovery is only available where the related supply is taxable. Businesses holding significant inventories should therefore carefully monitor any changes to the VAT classification of their products, as inventory acquired before the effective date of the exemption may generate unexpected VAT liabilities.
Manufacturers, wholesalers and retailers are particularly likely to be affected by this provision where substantial stock remains on hand when the new law comes into force.
Expansion of VAT Exemptions
The Bill proposes a substantial expansion of the list of exempt supplies under the First Schedule to the VAT Act.
Among the proposed additions are scrap metal, dialyzers, specified inputs used in the manufacture of pharmaceutical products, inputs used in the manufacture of animal feeds, transportation of sugarcane from farms to milling factories, electric bicycles, electric buses, solar batteries, lithium-ion batteries, bioethanol cooking stoves and locally supplied second-hand clothing.
The exemptions appear to reflect broader governmental objectives relating to healthcare access, food security, renewable energy, clean cooking technologies and industrial development.
For businesses operating within these sectors, the proposed exemptions may reduce the cost of supplying qualifying goods and services. However, taxpayers should remain mindful that exemption from VAT does not necessarily translate into a commercial advantage. Unlike zero-rated supplies, exempt supplies generally do not permit recovery of input VAT incurred on related costs.
Businesses benefiting from newly introduced exemptions should therefore conduct a detailed assessment of the impact on their overall VAT position, particularly where substantial input costs are incurred.
Withdrawal of Existing Exemptions and Zero-Ratings
While the Bill introduces new exemptions, it simultaneously removes a number of existing exemptions and zero-rated treatments.
The practical consequence is that certain goods and services will migrate into higher VAT categories and become subject to taxation where no VAT previously applied.
The movement of supplies between VAT bands may significantly affect pricing structures, contractual arrangements and consumer demand. Businesses should avoid assuming continuity of treatment and should instead undertake a detailed review of the revised schedules once enacted.
In some cases, existing contracts may require amendment to address the allocation of additional VAT liabilities arising from legislative changes.
Taxation of Payment and Financial Services
The proposed amendments to the treatment of financial services represent one of the most commercially significant VAT developments in the Bill.
Historically, many financial services have benefited from VAT exemption. The Finance Bill narrows the scope of that exemption by excluding a range of payment-related services from the definition of exempt financial services.
The affected services include money transfer services, payment processing services, settlement services, merchant acquiring services and gateway or aggregation services supplied through software platforms in exchange for a fee or commission.
The amendment signals a deliberate policy shift towards taxing revenue streams generated within the digital payments ecosystem.
The proposal should be considered alongside the income tax amendments that expand the definitions of royalties and management or professional fees. Together, these measures suggest a coordinated effort by the Government to increase taxation of digital payment infrastructure and technology-enabled financial services.
Banks, fintech companies, payment service providers, card processors and digital platform operators should undertake a comprehensive review of their fee structures and service offerings to determine which supplies may become taxable.
Businesses should also consider whether VAT costs can be contractually passed to customers or whether the additional tax burden will need to be absorbed within existing pricing models.
Extension of VAT Refund Timelines
The Bill extends the period within which taxpayers may submit VAT refund claims from two years to three years.
This amendment is generally favourable to taxpayers and provides additional time to identify, quantify and substantiate refund claims.
Businesses engaged in export activities, large infrastructure projects and other VAT-intensive operations should review historic transactions to determine whether potential refund claims remain available under the extended limitation period.
The amendment may also reduce disputes arising from administrative delays that often prevent taxpayers from finalising refund applications within the existing two-year window.
Excise Duty
The excise proposals are a mix of rate changes, a notable shift in the point at which duty on mobile phones is collected, and the removal of several preferences for goods originating in the East African Community. The most eye-catching change concerns cellular phones: excise duty on telephones for cellular networks and other wireless networks of tariff heading 8517 is set at twenty-five per cent of the excisable value, and — importantly — the liability is to arise at the time the phone is activated rather than at import or manufacture, with the duty payable to the Commissioner by that point. The Cabinet Secretary is empowered to make regulations to give effect to this activation-based collection. For importers and network operators this changes both the timing of the cash-flow impact and the systems needed to track it.
The excise duty amendments proposed under the Finance Bill, 2026 reflect a combination of revenue raising measures, policy driven market interventions and administrative reforms. While several amendments are sector specific, the cumulative effect is likely to be felt across telecommunications, manufacturing, importation, tobacco, retail and regional trade sectors.
Businesses operating within affected industries should undertake a detailed review of supply chains, pricing models and compliance systems to assess the potential impact of the proposed changes.
Excise Duty on Cellular Phones
One of the most significant excise proposals concerns the taxation of cellular phones.
The Bill proposes to impose excise duty at the rate of 25% of the excisable value of telephones for cellular and other wireless networks falling under tariff heading 8517. More significantly, the duty will become payable upon activation of the device rather than at the point of importation or manufacture.
This proposal represents a fundamental departure from the traditional excise duty collection framework and introduces a novel activation based taxation model.
From a compliance perspective, the proposal raises several operational and legal questions. Importers, manufacturers, distributors and telecommunications operators will be required to establish systems capable of tracking device activation and accurately accounting for the corresponding excise duty liability.
The amendment may also have broader implications for affordability and consumer access to mobile technology, particularly in a market where mobile connectivity plays a critical role in financial inclusion and digital service delivery.
Businesses operating within the telecommunications ecosystem should closely monitor the regulations expected to be issued by the Cabinet Secretary to implement this framework.
Tobacco Products
The Bill revises excise duty rates applicable to tobacco products.
The proposed rates increase the tax burden on cigars, cheroots, cigarillos and other manufactured tobacco products. Consistent with previous policy initiatives, the measures appear designed both to generate revenue and discourage tobacco consumption through fiscal intervention.
Manufacturers, importers and distributors of tobacco products should evaluate the potential impact on product pricing, consumer demand and inventory management.
Removal of East African Community Excise Preferences
A particularly significant development is the proposed removal of excise duty preferences previously available to goods originating from East African Community Partner States and meeting the applicable Rules of Origin requirements.
The amendment affects a broad range of products including plastics, paper and paperboard products, labels, printing ink, glass products, ceramics and furniture.
The proposal may substantially alter the economics of regional supply chains and could increase the cost of importing products from within the East African Community.
Businesses that have historically relied on regional sourcing arrangements should reassess procurement strategies and evaluate the financial implications of the proposed changes. The amendment may also raise questions regarding regional trade integration objectives and the extent to which fiscal measures may affect the competitiveness of intra regional trade.
Other Excise Amendments
The Bill further proposes the removal of excise duty on fruit and vegetable juices, the extension of excise duty on sugar confectionery regardless of whether the product is imported or locally manufactured, and the introduction of a 5% excise duty rate on selected imported ceramic products.
In addition, the Bill introduces a statutory definition of an antique, vintage or classic vehicle. To qualify, the vehicle must have been first registered at least thirty years before acquisition and possess a minimum value of KES 10 million.
These amendments demonstrate an increasing focus on product specific taxation and suggest a continued move towards targeted excise policy interventions rather than broad based rate increases.
Tax Procedures and Administration
The Finance Bill, 2026 introduces some of the most consequential tax administration reforms seen in recent years. The proposed amendments strengthen the powers of the Commissioner, expand reporting obligations, facilitate data driven enforcement and further advance Kenya’s transition towards digital tax administration.
Businesses should not underestimate the significance of these provisions. Historically, procedural and administrative amendments have often had a greater practical impact on taxpayers than changes to substantive tax rates.
Virtual Asset Reporting Framework
The Bill introduces a comprehensive reporting regime for virtual asset transactions.
Under the proposed framework, virtual asset service providers will be required to submit annual information returns containing prescribed information relating to reportable users and controlling persons. The reporting obligations apply to entities facilitating virtual asset exchanges or providing trading platforms for customers.
The proposed penalties for non compliance are substantial. False statements, omissions and failures to file required returns attract significant financial penalties and, in some instances, criminal sanctions.
The introduction of these provisions reflects a growing international consensus that virtual asset markets should be subject to transparency and reporting standards comparable to those applicable to traditional financial institutions.
The Bill further empowers Kenya to enter into international agreements for the automatic exchange of virtual asset information, signalling alignment with emerging global standards governing crypto asset reporting.
Virtual asset service providers, digital asset exchanges and fintech businesses operating within this space should begin assessing whether existing compliance frameworks satisfy the anticipated reporting obligations.
Introduction of a General Anti Avoidance Rule
One of the most significant legal developments contained in the Bill is the introduction of a statutory General Anti Avoidance Rule (GAAR).
The proposed provision grants the Commissioner authority to disregard transactions or arrangements that are determined to constitute tax avoidance schemes and to reassess tax liability as though the arrangement had never been undertaken.
Importantly, the Bill adopts an expansive definition of both “scheme” and “tax benefit”. The Commissioner may therefore scrutinise a broad range of commercial arrangements where a tax advantage is perceived to be a significant motivating factor.
The introduction of a GAAR represents a major shift in Kenya’s tax enforcement landscape. While taxpayers remain entitled to arrange their affairs in a tax efficient manner, transactions lacking genuine commercial substance may face increased scrutiny.
Businesses should ensure that corporate restructurings, financing arrangements, acquisitions and tax planning strategies are supported by clear commercial justifications and contemporaneous documentation demonstrating legitimate business purposes.
Data Driven Assessments and Enhanced Enforcement
The Bill also introduces a new power allowing the Commissioner to issue assessments based on information obtained from third party and electronic data sources.
This reflects a broader trend towards technology enabled tax administration and increased reliance on data analytics to identify potential non compliance.
Taxpayers should expect greater scrutiny of information submitted through banking systems, digital platforms, electronic invoicing systems and other third party reporting channels.
The practical implication is that inconsistencies between tax filings and third party data are likely to become increasingly visible to the Kenya Revenue Authority.
Pre Populated Returns and Electronic Compliance
The proposed amendments further accelerate Kenya’s transition towards automated tax administration.
The Commissioner will be empowered to generate pre populated tax returns for taxpayers using available data sources. Taxpayers may rely on such returns when filing, subject to procedures to be prescribed by regulations.
While pre populated returns may reduce compliance burdens for some taxpayers, they also create additional risks where underlying data is inaccurate or incomplete. Taxpayers will remain responsible for ensuring the accuracy of information submitted to the Commissioner.
The Bill also introduces stricter penalties for failures relating to electronic invoicing, electronic filing and electronic payment obligations. Businesses should therefore ensure that internal tax systems remain fully compliant with evolving digital reporting requirements.
Extension of the Tax Amnesty Programme
The Bill extends the existing tax amnesty framework to principal tax liabilities arising on or before 31st December 2025 and extends the payment window to 31st December 2026.
The extension provides taxpayers with a valuable opportunity to regularise historic tax exposures and obtain relief from accumulated penalties and interest.
Businesses with unresolved tax liabilities should consider undertaking a comprehensive review of historic tax positions to determine whether participation in the amnesty programme may be advantageous.
Other Measures
The Bill also introduces a number of targeted amendments outside the principal tax statutes.
Under the Miscellaneous Fees and Levies Act, specified aircraft parts and imported cellular phones will be exempt from Import Declaration Fees and the Railway Development Levy. These measures may partially offset some of the increased costs arising from other tax proposals affecting the aviation and telecommunications sectors.
The Stamp Duty Act is amended to exempt transfers of beneficial interests in property to qualifying Real Estate Investment Trusts. This proposal complements the capital gains tax exemptions discussed above and further supports the Government’s policy objective of promoting institutional real estate investment structures.
The Road Maintenance Levy Fund Act is amended to reduce the amount allocated to the Road Annuity Fund from KES 3.00 to KES 1.50 per litre of petroleum products. While primarily an allocation measure, the amendment may have broader implications for infrastructure financing and public expenditure priorities.
Conclusion and Recommended Actions
The Finance Bill, 2026 signals a clear shift towards broader taxation of digital economic activity, enhanced enforcement powers for the Kenya Revenue Authority and increased reliance on technology driven tax administration.
Financial institutions, payment service providers and fintech companies should prioritise assessments of the proposed withholding tax and VAT changes affecting payment related services. Multinational groups should review cross border structures in light of the proposed indirect transfer rules and expanded royalty provisions. Real estate investors should evaluate the opportunities created by the proposed REIT incentives, while importers and manufacturers should reassess supply chains and pricing strategies in response to the excise duty amendments.
Equally important, all taxpayers should review governance, documentation and compliance frameworks in anticipation of the proposed General Anti Avoidance Rule, expanded reporting obligations and data driven assessment powers.
Although the Bill remains subject to parliamentary review and public participation, businesses should begin preparing now. Early assessment and proactive planning will place taxpayers in the strongest position to manage risk, participate effectively in the legislative process and adapt efficiently should the proposals be enacted substantially in their current form.
Prepared by:
B M Musau & Co., Advocates LLP
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Disclaimer:
This article is provided for informational purposes only and does not constitute legal advice. Readers are encouraged to seek professional legal counsel for specific guidance related to their business operations. B M Musau & Co., Advocates LLP disclaims any liability for actions taken based on the content of this publication. For further assistance, please contact our office directly.