Businesses that accept card and other electronic payments will pay more from Sunday after banks and payment companies began notifying customers that a 16 per cent value added tax (VAT) will be added to digital payment transaction fees from November 1.

"Effective 1st November 2026, a 16 percent VAT will be charged on all digital payment transaction fees, as required under the Finance Act 2026," reads a text message one of the leading commercial banks sent to its customers, according to the Business Daily, which reported that lenders and payment firms have already configured their systems for the new charge.

What is being taxed

The VAT applies to the fees that banks, fintechs and payment service providers charge for helping businesses receive and settle electronic payments, not to the value of the goods being bought. The services now caught by the tax include:

  • processing of electronic payments;
  • settlement of card transactions;
  • operation of payment gateways such as those used by online shops;
  • network connectivity linking merchants, banks and card companies.

Ordinary person-to-person money transfers, including standard M-Pesa and Airtel Money transfers, remain exempt. The tax mainly hits fees paid by businesses for card machines, merchant tills, commercial paybills and online checkouts.

A reversal after court wins

The change closes a long-running dispute between payment firms and the Kenya Revenue Authority (KRA). In August 2025 the High Court sided with payment gateway Pesapal over a Sh110.8 million VAT demand, ruling that its services qualified as exempt financial services. In October 2025 the Tax Appeals Tribunal ruled against the taxman in a separate case involving Kenswitch, which links banks, ATMs and card machines.

Treasury then used the Finance Act 2026 to state expressly that payment processing, settlement and gateway fees attract VAT, effectively overriding the effect of those rulings.

A bid by the Consumer Federation of Kenya (Cofek) and others to block the Finance Bill was struck out earlier this month by Justice David Mburu, who said the petition was premature because it was filed in June while the Bill was still before Parliament. The ruling did not decide whether the tax is constitutional, leaving room for a fresh challenge against the Act.

Who will feel it

Tax advisers expect the cost to travel down the payment chain. PwC said the change "brings fintechs and payment intermediaries into the VAT net", increasing costs that are likely to be passed on to merchants and consumers. KPMG said the law gives payment firms clearer rules and should reduce disputes with KRA, but warned it could ultimately lead to higher prices.

Small traders running on thin margins and high transaction volumes are likely to feel the impact most, as are online sellers that rely on third-party gateways.

The new levy also sits awkwardly with the Central Bank of Kenya's financial inclusion strategy, which aims to cut the average cost of sending money between individuals from Sh23 in 2024 to Sh10 by 2028, although that target concerns person-to-person transfers that remain VAT-free.

Photos: TechTrendsKE (card payment); Kenyans.co.ke (KRA service hall). Thumbnail design: HAMASTA MEDIA.