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Specified Payment-Platform Fees and VAT in Kenya: What Section 32 of the Finance Act 2026 Changes

📅 28 August 2026 · ✅ Last verified: 12 October 2026 · 📖 9 min read · Tax & KRA
Black Kenyan merchant reconciling a payment terminal, invoice, receipt, and calculator
Original editorial artwork; no official interface or endorsement depicted.

Section 32 of the Finance Act 2026 removes specified services — payment processing, settlement, merchant acquiring, gateway and aggregation services, where supplied over software or a platform, for a fee or commission, by a payment service provider — from the VAT Act's paragraph 1(b) financial-services exemption, effective 1 July 2026. It does not automatically make every related fee taxable at 16% — VAT applies only where the particular supply is taxable under the ordinary VAT rules — the applicable rate (normally the standard rate) must then be determined under the Act. If your business pays merchant-acquiring fees, gateway fees or aggregator commissions, this change matters to your costs. Here is the statutory wording with worked examples.

⚠️ The key distinction: The amendment removes the fees and commissions that payment service providers charge for processing, settlement, acquiring, gateway and aggregation services (supplied over software or a platform) from the paragraph 1(b) exemption. Removal from the exemption makes the fee potentially taxable — whether it is chargeable to VAT depends on the ordinary VAT rules. It does not, by itself, impose VAT on the principal amount of your customers' payments — but providers may revise their published fees, so what you pay can still change. Your actual impact depends on your provider's pricing and VAT status.

1. What the Law Says

The VAT Act contains exemptions for specified financial services, including the money-dealing exemption amended by section 32. The Finance Act 2026 (section 32) amended paragraph 1 of Part II of the First Schedule to the VAT Act, replacing subparagraph (b) — the exemption for "the issue, transfer, receipt and other dealing with money". The revised subparagraph now excludes from the exemption:

"payment processing, settlement, merchant acquiring, gateway, aggregation services supplied over a software or platform for a fee or commission by a payment service provider"

The Act also inserts a definition for this purpose. A "payment service provider" means:

  • (a) a person, company or organisation which owns, possess, operates, manages or controls a public switched network for the provision of payment services; or
  • (b) any other person, company or organisation that processes or stores data on behalf of such a payment service provider or users of such payment services.

The amended provision also excludes cash-handling services ("the services of carriage of cash, restocking of cash machines, sorting or counting money") from this exemption limb. The operative words for payment services are the five service categories, supplied over software or a platform, for a fee or commission, by a payment service provider. A service that does not fall within this exclusion may remain exempt under the applicable financial-services provisions — its treatment depends on the precise legal and contractual characterisation of the supply.

Section 32 came into operation on 1 July 2026 (the Act's general commencement date for all sections not specifically listed in section 1).

2. What This Is NOT

  • Not a tax on payments themselves. The amendment does not by itself impose 16% VAT on the KES 1,000 a customer pays you — though any VAT on the goods or services you sell remains governed by the normal VAT treatment of your underlying supply. The amendment's effect is at the level of the provider's fee, where that supply is taxable.
  • Not an automatic 16% increase on M-Pesa. The amendment does not tax payments themselves — provider tariffs are a commercial matter (see our M-Pesa charges guide for the current published position, and note third-party aggregators, banks and gateways set their own fees). Where a VAT-registered provider makes a taxable standard-rated supply, VAT applies — subject to any applicable collection or reverse-charge rules (not examined here) — and the pricing choice is whether to absorb it, quote VAT-inclusive amounts, or raise the customer-facing price.
  • Who accounts for VAT depends on the applicable mechanism. Where the supplier makes a domestic taxable supply and no reverse-charge, VAT-withholding or other statutory collection mechanism applies, responsibility for accounting for the VAT depends on the applicable VAT mechanism and the transaction facts — the amendment alone does not make your business the person accounting for the provider's VAT. Cross-border arrangements raise questions (such as place of supply and imported-services treatment) that this guide does not address and that require review under the VAT Act and current KRA guidance. Check your specific arrangement with an accountant; and your existing VAT-return obligations (including input-tax claims, below) continue as normal.

3. Worked Examples

⚠️ Assumptions for every row: the fee is consideration for a listed service supplied over software or a platform by a payment service provider; the supply is taxable (not exempt, zero-rated or outside scope); the standard rate applies; and the provider is registered and required to charge VAT. If any of these is not true, the figures below do not apply.
Scenario Before — assuming the fee was exempt under the applicable financial-services provision After — assuming the fee is a taxable standard-rated supply by a VAT-registered provider
Provider fee of KES 100, VAT-exclusive, provider VAT-registered KES 100 KES 116
Provider fee quoted KES 100 VAT-inclusive KES 100 KES 100 total (VAT component ≈ KES 13.79)
Your business is VAT-registered and claims input tax KES 100 (no VAT to claim) Up to KES 100 net — a simplified illustration assuming the KES 16 credit is fully valid, timely and usable against output VAT; apportionment, timing or documentation issues can reduce this
Your business is not VAT-registered KES 100 KES 116 — you bear the full cost
Provider absorbs the VAT and keeps the fee at KES 100 all-in KES 100 KES 100 (provider bears the VAT)
💡 How to know your real cost: Ask your provider two questions — is the fee quoted VAT-exclusive or VAT-inclusive, and is the provider VAT-registered? Then check your next statement or tax invoice — where VAT is charged, obtain the tax documentation required under the current VAT and KRA invoicing rules.

4. Can You Claim the VAT Back?

Recovery of input tax is governed by the current VAT Act and KRA requirements — including the nature of the supply, documentation, timing and apportionment rules — which this guide does not restate. Do not assume the VAT is recoverable; do not claim without checking those rules. If you are VAT-registered, raise the question with your accountant or KRA; if you are not registered or make only exempt supplies, any VAT passed through to you is generally a cost. For the registration question itself, see our VAT registration guide and confirm the current threshold and rules with KRA.

5. Which Businesses Are Most Likely Affected?

Marked "potentially affected" deliberately — whether a specific fee is within scope depends on the actual service, supplier and contractual terms:

  • Card-accepting retailers and restaurants paying merchant acquiring fees on card settlements
  • Online businesses using payment gateways and aggregators whose fees are charged for processing or aggregation over a platform
  • Businesses using checkout or platform payment services where the fee is a processing/settlement commission
  • Banks, fintechs and PSPs — may be affected to the extent that they supply the specified processing, settlement, acquiring, gateway or aggregation services over software or a platform for a fee or commission. Note the same Act (section 2) amended the Income Tax Act's definition of "management or professional fee" to expressly include interchange fees and merchant service fees arising from transactions that use a card as a means of payment. This definition change may affect withholding-tax analysis for such fees — it does not by itself determine any liability; obtain advice on the specific payment (see our withholding tax guide).

6. What You Should Do Now

  1. Ask your provider how they applied the change — absorbed into pricing, itemised, or VAT-exclusive; and whether they are VAT-registered
  2. The amendment applies from 1 July 2026, but supplies spanning that date may require a separate time-of-supply and transitional analysis under the VAT Act — obtain and retain the required tax documentation
  3. If you are VAT-registered: if VAT has been validly charged and you meet the input-tax conditions, record the amount for possible input-tax deduction, subject to documentation, timing and apportionment rules
  4. If you are not registered: quantify the annual cost for pricing purposes
  5. For services spanning 1 July 2026 — ask your accountant to review the specific facts against the VAT Act and any transitional guidance; the treatment is not resolved by the commencement date alone

Frequently Asked Questions

Does the 16% VAT on payment processing apply to every M-Pesa transaction?

No. The Finance Act 2026 amendment removes the VAT exemption from fees and commissions charged for payment processing, settlement, merchant acquiring, gateway and aggregation services supplied over software or a platform by a payment service provider. The amendment does not by itself impose 16% VAT on the principal amount of a customer's payment — but a provider may revise its published fees, so the amount you pay can still change.

What services are now excluded from the VAT exemption?

Payment processing, settlement, merchant acquiring, gateway and aggregation services supplied over software or a platform for a fee or commission by a payment service provider. For purposes of this exemption paragraph, the Act defines a payment service provider as a person, company or organisation that owns, possess, operates, manages or controls a public switched network for the provision of payment services, or any other person that processes or stores data on behalf of such a provider or its users.

Can my business claim back the VAT on payment fees?

Recovery depends on the current VAT Act input-tax rules — the supply must be taxable, the documentation and timing requirements must be met, and apportionment applies where you also make exempt supplies. This guide does not restate those rules; confirm eligibility with KRA or an adviser before claiming.

When did the change take effect?

Section 32 of the Finance Act 2026, which made the amendment, came into operation on 1 July 2026 under the Act's general commencement provision (section 1(1)(c)). The commencement date does not by itself resolve every transitional fact pattern (contracts, invoices, advances, continuous supplies); confirm the treatment of services spanning the change with your accountant.

Will M-Pesa tariffs change because of this?

Not automatically. The amendment does not tax the principal transaction at 16%. Published tariffs or provider fees may still change for their own reasons — check your provider's current published tariff schedule.

Related Guides

⚠️ Disclaimer: This guide is for informational purposes and is accurate as of 12 October 2026. Quoted provisions are from the Finance Act 2026 as published in the Kenya Gazette Supplement No. 157 (Acts No. 19). Kenyan tax rules change — always verify current requirements on the official websites (KRA, Kenya Law) or consult a qualified professional before acting.

Sources and update record