Delicate balance in Ruto's Sh4.79 trillion budget

Kenya's Finance Bill 2026 is shaping up as one of the most delicate balancing acts yet for President William Ruto’s administration, a proposal that attempts to widen the tax base without triggering the public outrage that greeted previous proposals.

Unlike the controversial Finance Bills of 2023 and 2024, this year’s proposals appear more cautious, with the National Treasury avoiding sweeping increases in direct taxes on households even as the 2026-27 budget expands to Sh4.79 trillion.

Instead, the government is targeting what it sees as untapped revenue streams in the digital economy, imports, offshore investments and informal trade.

The proposed tax law is emerging as a mixed bag, carrying relief measures for salaried workers and businesses on one hand, while introducing controversial proposals that could raise the cost of living and deepen concerns about aggressive tax enforcement.

At the centre of the debate is Treasury’s attempt to collect more revenue while the economy remains under pressure from high living costs, heavy public debt and subdued private sector growth.

Kenya's annual inflation rate reached 5.6 per cent in April, marking an increase from 4.4 per cent in March and a two-year high.

This acceleration reflects rising costs for food, petroleum products, and transport.

The National Treasury expects Kenya Revenue Authority to collect nearly Sh3 trillion in taxes in the financial year starting July 1 as the government seeks to narrow the fiscal deficit and reduce dependence on borrowing.

Tax relief for salaried workers is emerging as the biggest topic for 2026 Finance Bill.

In February, the exchequer boss, John Mbadi, promised a tax relief on Pay As You Earn (PAYE), sparking excitement among employees.

Although he indicated the measure was to be part of the Finance Bill, 2026, a move that could have benefited low-income earners and expanded income tax bands to boost disposable incomes, the item was omitted from the drafted Finance Bill.

He has cited a projected Sh35 billion revenue shortfall as the reason for holding back on the cuts.

Employees who spoke to the Star want the government to keep the promise, saying that heavy taxes on salaries have put them on a survival mode.

Lucy Gathara, a receptionist at a tiles manufacturing firm in Embakasi, said taxes take up to Sh10,000 of her Sh32,000 gross salary.

"Mine is the perfect example of hand-to-mouth. I haven't saved a shilling from my salary since 2024. It pains," she said.

Her colleague, Mary Warui, said she has already tabled her views to the Parliamentary Committee collecting public views on the Bill.

"I just want the National Treasury to keep its word on tax relief on PAYE. That is my biggest wish. I earn a gross salary of Sh27,800. I'm left with nothing after paying rent and school fees for my two children."

Last week, professional bodies and lobby groups, including the Institute of Certified Public Accountants of Kenya and the Kenya Bankers Association, urged Parliament to reduce the top PAYE rate from 35 per cent to 30 per cent.

They also want tax bands widened to cushion employees already weighed down by deductions such as the Housing Levy, SHIF and increased NSSF contributions.

They argue that Kenya’s current PAYE structure pushes workers into higher tax brackets too quickly, leaving formal sector employees carrying a disproportionate share of the tax burden.

A tax expert, Steve Mwaura, said widening tax bands could restore purchasing power and stimulate consumer spending at a time when households are struggling with reduced disposable income.

Tax advisory firms, including PwC Kenya and Deloitte Kenya, have also backed measures that simplify taxation and improve predictability for businesses, saying stability is critical for investment and long-term planning.

As they root for tax relief on salaries, several stakeholders have praised the tax amnesty programme targeting penalties and interest on historical tax liabilities.

The Bill proposes waiving penalties and interest for taxpayers who clear their principal taxes by December 2026.

Tax experts say this could encourage businesses and individuals locked out of compliance due to huge accumulated penalties to return to the tax system.

The Finance Bill 2026 also attempts to modernise Kenya’s tax framework by expanding taxation in the digital economy.

The proposed amendments broaden the definition of royalties and management fees to cover software services, digital payment systems, platform services and card transaction infrastructure.

This means multinational technology firms, payment processors and digital service providers operating in Kenya could face higher withholding tax obligations.

Initially, the government argued that the digital economy had expanded rapidly and should contribute more fairly to government revenue.

Even so, the National Treasury has denied claims that the Bill introduces a five per cent withholding tax on digital content monetisation, saying no such provision exists in the Finance Bill 2026.

The clarification is likely to reassure content creators, influencers and digital entrepreneurs who had feared a fresh tax hit.

Both members of the public and tax experts are afraid that those firms will pass the bill to consumers, a move likely to hurt the youthful population relying on the sector.

Kenya’s digital economy is expanding rapidly, with the wider Sub-Saharan Africa digital space valued at approximately $35 billion (Sh4.5 trillion).

The country's digital ecosystem is anchored by mobile money, digital commerce, and content creation. It is projected to contribute over $4 billion annually.

There are also proposals targeting the gig economy and virtual asset transactions.

Virtual asset service providers would be required to submit annual user information returns, signalling a major shift towards regulation of cryptocurrency and digital asset transactions.

Independent analysts on social media say the move reflects global trends where governments are tightening oversight on crypto-related activities to combat tax evasion and illicit financial flows.

However, critics warn that excessive taxation of digital transactions risks slowing innovation and increasing operating costs for fintech firms and startups that have positioned Kenya as a regional technology hub.

The proposed taxation of dividends and offshore transactions has also sparked intense debate among investors.

The Bill seeks to expand capital gains taxation to offshore share transfers linked to Kenyan assets, a move Treasury says is aimed at sealing loopholes where companies avoid paying taxes through foreign-based transactions.

On Thursday, Treasury mandarins argued that the proposal could improve fairness by ensuring foreign investors pay taxes on gains derived from Kenyan assets.

However, legal experts at Bowmans have warned that some provisions could create uncertainty and expose businesses to possible double taxation, potentially hurting Kenya’s attractiveness to investors.

The law firm has particularly raised concerns over tighter compliance timelines and broader tax enforcement powers being handed to KRA.

Among the most contentious proposals is the shortening of tax filing deadlines from six months to four months after the end of the financial year.

Businesses argue that the shorter timelines could increase compliance pressure, especially for firms dealing with complex audits and reconciliations.

The proposed tax framework on mitumba imports has also sparked a huge debate amongst Kenyans.

Treasury wants importers of second-hand clothes and shoes to pay tax based on a presumed profit margin at the point of importation.

Government officials insist the measure was developed after consultations with traders and is intended to simplify compliance while addressing under-declaration.

According to the exchequer, the framework would shift taxation to clearly defined entry points, making revenue collection easier and reducing disputes with traders.

Even so, several sector players and the public are worried that the move will ultimately raise the cost of mitumba products that millions of low-income Kenyans rely on for affordable clothing.

Traders have also warned that higher taxes on second-hand imports could disrupt small businesses and informal traders already struggling with reduced purchasing power.

The proposed taxation of mobile phones has triggered even stronger reactions, even as the D- Day for the submission of public views on the proposed tax amendment law draws closer.

Under the Bill, smartphones and communication devices could attract a 25 per cent excise duty, with taxation shifting to the point of activation rather than importation.

The government says the approach would improve enforcement and ensure all devices in use are captured within the tax system.

However, digital rights advocates and technology players warn that higher taxes on phones could undermine Kenya’s digital inclusion agenda.

Kenya has spent years positioning itself as Africa’s Silicon Savannah, with mobile phones serving as the backbone of financial inclusion, e-commerce and online learning.

Internet expert, Jerry Mutunga says making smartphones more expensive could slow internet penetration, particularly among low-income users and young people who depend on affordable devices for work and education.

There is also a concern over proposals affecting digital financial transactions.

The Bill broadens the scope of taxable digital payment services, potentially increasing costs for mobile money, card transactions and payment processing systems.

Banks, fintech firms and payment processors fear the changes could raise transaction costs in an economy heavily dependent on mobile money.

Kenya’s financial sector has for years, been praised globally for driving financial inclusion through digital payments.

Last week, the Kenya Bankers Association (KBA) argued that excessive taxation of digital transactions risks reversing gains achieved through platforms such as M-Pesa and other mobile banking services.

At the same time, Treasury is under pressure to demonstrate that the tax burden is being distributed more fairly.

For years, salaried workers and compliant businesses have complained that they shoulder the largest share of taxes while huge segments of the informal economy remain outside the tax net.

The Finance Bill 2026 appears designed to respond to those concerns by expanding taxation into sectors previously considered difficult to monitor, including digital services, offshore investments and informal trade.

Independent analysts say this represents a strategic shift away from blanket tax hikes towards targeted expansion of the tax base.

Still, fears remain over the growing powers proposed for KRA.

Various groups have raised concerns about proposals allowing the tax authority to rely more heavily on digital transaction records, ETIMS data and third-party information to generate tax assessments.

While a few are of opinion that the measures could improve efficiency and reduce tax evasion.

But critics warn they could create a “surveillance-style” tax system where taxpayers are forced to prove their innocence against automated assessments.

Treasury has, however, said it has dropped controversial proposals amid public outcry, while moving to calm public anxiety through a series of clarifications aimed at countering what it says are misconceptions surrounding the tax measures.

The biggest relief for landlords and property investors came after Treasury withdrew a proposal seeking to raise the monthly residential rental income tax rate from 7.5 per cent to 10 per cent. The proposal had attracted concern from landlords already grappling with a challenging real estate market and rising operational costs. 

Even as Treasury retreated on some fronts, the government moved aggressively to address confusion over digital taxation and consumer concerns.

Treasury has defended the proposal, arguing that it is not introducing a new tax burden but replacing several existing levies — including VAT-related charges, Import Declaration Fee and Railway Development Levy — with a consolidated excise framework that could ultimately lower prices. 

The government further sought to allay fears over privacy concerns linked to device activation rules, stating the framework is intended to improve tax compliance rather than surveillance, with implementation safeguards expected under regulations by the Communications Authority of Kenya. 

Similarly, the government said there is no proposal to impose VAT on bread or reintroduce a motor vehicle circulation tax, both of which had generated public concern after resurfacing in online discussions tied to earlier finance bills. 

The Treasury’s latest clarifications signal a balancing act between broadening the tax base and avoiding the backlash that characterised previous finance bills, as lawmakers prepare for debate on measures that could shape Kenya’s fiscal direction and business environment in the coming year.