VAT on Fintech and Digital Payments in Kenya 2026

The Finance Act 2026 made one of the most significant changes to Kenya's VAT landscape in years: digital payment processing, gateway, merchant acquiring, settlement, and aggregation services are now subject to 16% VAT effective 1 July 2026. If your business uses M-Pesa till numbers, Pesapal, iPay, Flutterwave, or any payment gateway, the fees you pay just got 16% more expensive — and the compliance landscape has shifted.

This guide explains exactly what changed, which services are affected, what remains exempt, and how to handle input VAT recovery on payment processing fees.

What Changed Under the Finance Act 2026

The Finance Act 2026 amended Paragraph 1, Part II of the First Schedule to the VAT Act to remove the VAT exemption for a specific subset of financial services: those provided by a payment service provider (PSP) acting as an intermediary.

Before 1 July 2026, the exemption for “the issue, transfer, receipt and other dealing with money, including money transfer services” broadly covered all payment-related activities. The amendment carves out payment processing, gateway, merchant acquiring, settlement, and aggregation services supplied through software or over a platform for a fee or commission. These are now standard-rated at 16%.

Which Services Are Now Taxable at 16%

The amendment targets services supplied by a payment service provider (PSP) through software or over a platform for a fee or commission. The following are now standard-rated:

• Payment processing — transaction routing, authorisation, and clearing of digital payments
• Payment gateway services — technology that authorises payments for e-commerce and mobile transactions
• Merchant acquiring — services enabling merchants to accept card and digital payments
• Settlement services — final transfer of funds between acquirer and issuer
• Payment aggregation — bundling multiple merchants under one account (iPay, Pesapal model)

Every Provider Affected

The following payment service providers are directly affected. Their transaction fees, gateway commissions, merchant discount rates, and settlement fees must now include 16% VAT.

Transaction-by-Transaction Guide

Can You Claim Input VAT on Payment Processing Fees?

Whether you can claim input VAT on the 16% charged on your payment processing fees depends on what your business sells:

• Businesses making taxable supplies (selling goods at 16% or 0%) — can claim full input VAT on PSP fees with a valid eTIMS invoice
• Businesses making mixed supplies — must apportion input VAT, claiming only the portion attributable to taxable supplies
• Banks, insurers, and other exempt-sector businesses — cannot claim input VAT. The 16% VAT on PSP fees is a net cost
• Non-resident PSPs without a fixed place in Kenya — cannot deduct input VAT incurred from Kenyan suppliers

Compliance Requirements for Fintech Companies

If you operate a payment service provider, payment gateway, or fintech platform, here is what you need to do:

1. Reassess VAT treatment — Review all commissions, transaction fees, and merchant discount rates to determine which are now taxable at 16%. Get professional advice if uncertain.
2. Register for VAT if not already registered. The standard KES 5 million threshold applies for domestic PSPs. Non-resident digital suppliers must register regardless of turnover.
3. Update billing systems — Configure invoicing to charge and collect 16% VAT on affected services. All invoices must be eTIMS-compliant.
4. Review contracts — Determine whether VAT will be absorbed, passed to merchants, or passed to end-consumers. Update your terms and conditions accordingly.
5. File monthly VAT returns via iTax by the 20th of each following month. Late filing attracts a penalty of KES 10,000 or 5% of the tax due (whichever is higher) plus 1% monthly interest.
6. Onboard eTIMS — All VAT-registered persons must use the electronic tax invoice management system. See our eTIMS onboarding guide.

Related Withholding Tax Changes

The Finance Act 2026 also expanded the definition of management or professional fee and royalty under the Income Tax Act to include interchange fees and merchant service fees from card-based payment infrastructure. This creates parallel withholding tax obligations:

These changes override the Supreme Court decision in Barclays Bank v Commissioner of Domestic Taxes (2022) which had held that interchange and network fees were not royalties. See our withholding VAT guide for more.

Estimated Cost Impact

The cost impact varies depending on your business model:

• Business accepting M-Pesa payments — the merchant fee (typically 0.5-1.5%) now has 16% VAT added. If your monthly M-Pesa fees are KES 10,000, expect an extra KES 1,600 in VAT
• E-commerce store using Pesapal — the gateway commission now attracts 16% VAT. If you pay KES 50,000/month in gateway fees, expect KES 8,000 extra in VAT
• PSP passing VAT to merchants — merchants see a direct cost increase. PSPs absorbing VAT — margin is compressed
• Banks and insurers — cannot recover the VAT, making this a permanent cost increase for the financial sector

Frequently Asked Questions

Related Resources

• Finance Act 2025 and 2026 VAT Changes in Kenya — Complete summary of all VAT changes from both Finance Acts
• VAT on Digital Services in Kenya — VAT treatment of SaaS, software, and digital products
• Withholding VAT in Kenya — Guide to withholding VAT obligations and refunds
• eTIMS Onboarding Guide — How to onboard KRA's electronic tax invoice system