Kepsa fights 16% VAT on digital financial services in finance bill

KEPSA chairman Jaswinder Bedi, Kenya Bankers Association CEO Raimond Molenje and other private sector leaders during a press briefing at the Glee Hotel in Kiambu on May 25, 2026. /CHRISTABEL ADHIAMBO

The Kenya Private Sector Alliance has called for the complete deletion of proposed amendments in the Finance Bill, 2026 that would impose a 16 per cent VAT on digital financial services, warning that the move could cripple digital payments, raise the cost of doing business and drive traders back to cash transactions.

Addressing the media at the Glee Hotel in Kiambu during a joint press briefing with other business lobby groups, Kepsa chairperson Jaswinder Bedi said the private sector was concerned that the proposed tax measures would undermine financial inclusion and hurt Kenya’s competitiveness under Clause 31.

Under Clause 31 of the Finance Bill, 2026, the government proposes to remove VAT exemptions on money dealings and financial services, introducing a 16 per cent VAT on digital payment processing, transfers and merchant acquiring services offered by payment service providers.

The clause also seeks to expand withholding tax on card network interchange fees within the merchant discount rate by reclassifying operational settlement flows as royalties or management fees.

Bedi said the Finance Bill proposes to remove the broad VAT exemption on money dealings and financial services, effectively introducing a 16 per cent VAT on digital payment processing, transfers and merchant acquiring services supplied by payment service providers.

“Structural economic stability demands an intentional balance between aggressive domestic revenue mobilisation and the preservation of private sector competitiveness,” Bedi said.

He said the private sector supports the government’s Bottom-Up Economic Transformation Agenda but warned that overtaxing key sectors would weaken economic growth instead of expanding the tax base.

Kepsa also opposed a proposal seeking to expand withholding tax to card network interchange fees within the Merchant Discount Rate by reclassifying operational settlement flows as royalties or management fees.

“The advocacy position that Kepsa holds is that we strongly demand an absolute deletion of these amendments,” Bedi said.

According to Kepsa, the proposed changes would trigger a cascading tax effect by taxing intermediate digital payment processes instead of final consumption, ultimately increasing transaction costs for businesses and consumers.

The alliance warned that the proposals would reverse gains made in promoting cashless payments and financial inclusion across the country.

“Combined with the proposed VAT, the total tax cost on a Sh100 Merchant Discount Rate would jump from Sh15 to Sh53.4, threatening the fiscal viability of digital payment systems and driving vendors back into informal cash channels,” Bedi said.

He said overturning judicial decisions through legislation would create legal uncertainty and discourage investment in payment infrastructure.

The business lobby said the proposals contradict the National Payment Strategy 2022-25, which seeks to deepen digital financial access and modernise payment systems.

Beyond digital financial services, Kepsa raised concerns over several other proposals contained in the Finance Bill 2026, saying some of them risk creating what it termed as “significant deadweight loss” to the economy.

Among the proposals the private sector wants reviewed is the Pay As You Earn structure. Kepsa proposed reducing the maximum PAYE rate from 35 per cent to 30 per cent while increasing monthly personal relief to Sh3,000 to create a tax-free threshold of Sh30,000.

The alliance said salaried Kenyans have suffered declining purchasing power due to inflation and additional deductions such as the Housing Levy and Social Health Insurance Fund contributions.

Bedi said reducing the tax burden on workers would stimulate household spending, boost tax collection indirectly and support job creation.

“What we are pushing forward for is consumption tax, which I think is going to have a far bigger multiplying effect than the current taxation regime,” he said.

Kepsa also criticised proposals affecting manufacturing, aviation and e-mobility sectors.

The alliance warned that introducing a 25 per cent excise duty or Sh50 per kilogramme tax on unbleached Kraft paper would significantly increase packaging costs and make Kenyan vegetable exports uncompetitive.

It further opposed the removal of VAT exemptions on electric motorcycles, bicycles and lithium-ion batteries, arguing that the move would hurt green mobility adoption and discourage environmentally focused investments.

On the aviation sector, Kepsa said removing VAT exemptions on aircraft and aircraft parts would expose operators to additional taxes including Import Declaration Fees and Railway Development Levy charges, making Kenya less competitive as a regional aviation hub.

The alliance also rejected proposals under the Tax Procedures Act that would allow the Kenya Revenue Authority to freeze bank accounts even when tax disputes are still under appeal in court.

“Parliament must ensure that the Finance Bill 2026 acts as a definitive catalyst for industrialisation and job creation, not an insurmountable barrier to entry,” Bedi said.

Kepsa said Kenya should shift from what it described as a regime of “taxing for survival” to a predictable framework focused on “taxing for growth” to strengthen the country’s position as the competitive business hub of the East African region.