Relief for taxpayers as Finance Bill focuses on compliance and incentives

The proposed Finance Bill, 2026, sets the stage for far-reaching changes to the country’s tax framework.

It signals a shift towards tighter compliance, broader tax coverage and targeted incentives for emerging sectors.

If adopted in its current form, the measures will reshape how businesses, investors and individuals interact with the tax system, with both immediate and long-term implications for economic activity.

At the heart of the proposals is a new regime targeting the country’s vast second-hand clothing trade.

Importers of mitumba will now be required to pay income tax based on a deemed profit of five per cent of the customs value, settled upfront before goods are released.

In the current system, many traders declare profits after sale, leaving room for underreporting.

The new approach effectively guarantees tax collection at the point of entry, a move expected to formalise the sector and stabilise revenue flows.

However, it is likely to raise operating costs, potentially pushing up prices for low-income consumers who rely heavily on affordable clothing.

The country is the leading importer of second-hand clothes in Africa, bringing in 177,000 tonnes worth $265 million (Sh34.28 billion).

The steady flow of mitumba into Kenya contrasts with the approach taken by neighbouring countries such as Uganda, Rwanda and Ethiopia, which have imposed restrictions on the trade to promote local textile manufacturing.

The proposed tax measure also pushes for a significant shift in compliance timelines, with the tax return filing deadline reduced from six months to four months after the end of a financial year.

For taxpayers with a December year-end, this moves the deadline to April 30.

While this compresses reporting timelines compared to the current framework, the long-term effect is likely to improve revenue predictability for the government and align Kenya more closely with faster reporting jurisdictions.

However, businesses may face short-term strain as they adjust internal accounting processes to meet tighter deadlines.

In the investment space, the proposed expansion of Capital Gains Tax marks a decisive attempt to capture value from offshore transactions linked to Kenyan assets.

Any sale of shares by a non-resident that derives value from Kenya, or results in a change of control of a Kenyan company, will now be taxable.

Currently, such indirect transfers can escape the tax net.

Over the long term, this change is expected to plug revenue leakages and ensure fairness between local and foreign investors, though it could also make Kenya a more complex jurisdiction for cross-border deal structuring.

Trust taxation is set for simplification.

Under the proposed rules, income received by trustees, executors or administrators will be taxed at the trustee level, eliminating the need for beneficiaries to pay additional tax on the same income.

Compared to the current system, which can involve multiple layers of taxation and compliance, this reform reduces administrative burden and legal ambiguity.

In the long term, it may encourage greater use of formal trust structures in estate planning and investment.

The proposed law introduces a mixed bag of incentives and adjustments under Value Added Tax.

Key clean-energy and digital economy products, including mobile phones, electric motorcycles, electric bicycles, solar batteries, electric buses and electric cooking stoves, are proposed to be VAT-exempt.

This represents a shift from the current regime, where many of these items are taxable, and signals a policy tilt towards green energy adoption and digital inclusion.

This is expected to lower consumer prices and accelerate the uptake of clean technologies.

However, businesses holding unsold stock will be required to reverse previously claimed input VAT, creating a one-off cost that may affect cash flows.

Digital finance is another focal point, with providers of virtual asset services required to submit annual returns detailing user information. The country is also exploring cross-border data-sharing agreements on cryptocurrency transactions.

This marks a departure from the relatively light-touch environment that has characterised the sector.

The move is expected to bring cryptocurrencies firmly within the regulatory and tax framework, enhancing transparency but potentially deterring informal or speculative activity.

To ease compliance pressures, the government is offering the end of 2026 settling penalties and interest for liabilities incurred up to December 31, 2025, provided the principal tax is paid.

This offers taxpayers a pathway to regularise their affairs. The long-term benefit for the state lies in unlocking previously disputed or unpaid taxes, though its success will depend on taxpayer uptake.

Administrative changes are also proposed in VAT record-keeping. The retention and refund claim period will be extended from two to three years, giving businesses more time to reconcile transactions and claim refunds.

This is likely to improve compliance accuracy and reduce disputes over expired claims, addressing a long-standing concern among taxpayers.

Regionally, the Bill reinforces integration within the East African Community by proposing that goods meeting rules of origin from partner states will not be treated as imports for excise duty purposes.

This shifts away from the current treatment that can impose additional tax layers and, in the long run, is expected to boost intra-regional trade and support local manufacturing value chains.

The classification of interchange and merchant service fees from card transactions as management or professional fees brings them squarely into the withholding tax net. This follows past legal disputes where the tax authority struggled to enforce such taxation.

By clarifying their status, the proposal aims to secure a steady revenue stream from the rapidly growing digital payments ecosystem, though it may increase transaction costs for businesses and consumers over time.