Businesses that receive payments through card machines, merchant tills and commercial Paybills will start paying 16 per cent VAT on transaction fees from Sunday, November 1, under the Finance Act 2026. Tax experts warn that the cost could reach consumers through higher prices.

Business Daily reported that one of the country's leading commercial banks has sent customers a text message saying that "effective 1st November 2026, a 16 percent VAT will be charged on all digital payment transaction fees." Banks and payment companies have reportedly already set up their systems to apply the tax.

What will be taxed

The amended VAT Act covers payment processing, settlement, aggregation and payment gateway services. That means the fees businesses pay to:

  • process electronic and card payments
  • settle card transactions
  • run payment gateways for online shops
  • connect merchants to payment networks

The tax is charged on the fee for handling a transaction, not on the money being sent.

Relief for ordinary transfers

Ordinary person-to-person money transfers on M-Pesa and Airtel Money are not affected. Parliament dropped a proposal in the Finance Bill to charge VAT on such transfers after strong opposition from telecoms, banks, chamas and the public. Citizen Digital and Capital FM reported at the time that the final Act left chama contributions and person-to-person transfers untaxed.

Who pays in the end

Tax firms say the cost is unlikely to stop with banks and fintechs. PwC said the change brings payment intermediaries into the VAT net and that the extra cost is likely to be passed on to merchants and consumers, while KPMG said the clearer rules should reduce disputes with the Kenya Revenue Authority but will raise transaction costs and could push up prices.

The tax ends years of disputes between KRA and payment firms. In August 2025, the High Court ruled in favour of payment gateway Pesapal in a dispute over a Sh110.8 million tax demand. In October 2025, the Tax Appeals Tribunal ruled against KRA in a separate case involving Kenswitch.

Court route still open

Earlier this month, Justice David Mburu struck out a challenge by the Consumer Federation of Kenya (Cofek), saying it was premature because it was filed while the Bill was still before Parliament. The ruling did not decide whether the tax is constitutional, so a fresh challenge is still possible now that the law is in force.

The new charge comes as households struggle with rising costs. Official data show inflation rose to 7.3 per cent in October, driven by food, fuel and transport. It also sits uneasily with the Central Bank of Kenya's target of cutting the average cost of sending money from Sh23 per transaction in 2024 to Sh10 by 2028.

Photos: TechTrendsKE; Business Daily. Thumbnail design: HAMASTA MEDIA.