Businesses and households face higher digital payment costs after banks and fintech companies began adding a 16 percent value added tax (VAT) to fees charged for processing electronic payments, settling card transactions and operating payment gateways.
A spot check by this publication established that banks and payment companies have configured their systems to reflect the new VAT levies on digital payment transaction fees which took effect from July.
This has raised the cost of services used by businesses to receive payments through card machines, merchant tills and commercial Paybills.
“Dear Customer, we wish to inform you that effective 1st November 2026, a 16 percent VAT will be charged on all digital payment transaction fees, as required under the Finance Act 2026,” read a text message sent by one of leading commercial banks to customers.
The tax targets fees earned by companies that help businesses receive and process electronic payments, including payment gateways such as Pesapal and networks that connect merchants, banks and card companies.
The additional cost is likely eat into business profits or force the firms to raise prices, passing part of the burden to consumers who already face pressure from the increasing cost of living.
However, the law exempts ordinary money transfers, meaning the new VAT does not apply to the transfer services offered through mobile-money platforms such as M-Pesa and Airtel Money. The distinction is that sending money from one person to another is spared from VAT, while payments to the systems that help businesses receive, process and settle electronic payments are subject to the levy.
This means customers sending money through exempt mobile-money transfer services are treated differently from businesses paying fees to accept card payments or use payment-processing services. This comes after the Court earlier this month removed a legal challenge by the Consumer Federation of Kenya (Cofek) and others that had sought to stop the implementation of the Finance Bill 2026.
Justice David Mburu struck out the case, ruling that Cofek had gone to court in June when the Finance Bill was still being debated by Parliament and had not yet become law.
“This petition, as filed, is premature,” the judge ruled, adding that Cofek could challenge the Finance Act 2026 after Parliament enacted it.
The tax marks a turnaround for payment companies that had previously won court battles against the Kenya Revenue Authority (KRA), which sought to collect VAT on fees earned from processing electronic payments.
In August 2025, the High Court ruled in favour of Pesapal in a dispute over a Sh110.8 million tax demand, including the principal tax, interest and penalties.
KRA had argued that Pesapal was providing taxable technology services. However, the court ruled that the tax treatment depended on what the company actually did, rather than the technology it used.
The decision found that the relevant activities qualified as exempt financial services under the VAT law.
In October 2025, the Tax Appeals Tribunal also ruled against KRA in a separate dispute with Kenswitch, which operates a network that helps banks, ATMs and card machines communicate when processing payments.
The Treasury later introduced changes through the Finance Act 2026 to make it clear that fees for processing payments, settling transactions, connecting merchants to payment networks and operating payment gateways would attract VAT.
The changes mean that payment companies must now account for the tax on these services, even though similar charges had previously benefited from exemptions upheld in court.
In a report on the Finance Act 2026, professional services firm PwC warned that the tax would increase costs across the payments industry, with merchants and consumers likely to bear part of the increase.
“This brings fintechs and payment intermediaries into the VAT net, increasing costs across the payments ecosystem that are likely to be passed on to merchants and consumers,” PwC said.
KPMG said the new law would give payment companies clearer rules on how their services should be taxed and reduce disputes with the KRA.
“Nevertheless, the changes are also expected to increase transaction costs and could ultimately lead to higher prices for consumers,” KPMG said.
The tax comes at a time when regulators are pushing to make digital payments more affordable. The Central Bank of Kenya’s National Financial Inclusion Strategy 2025–2028, for instance, seeks to reduce the average cost of sending money between individuals from Sh23 in 2024 to Sh10 by 2028.
