Treasury Proposes 16% VAT on M-Pesa and Digital Payments — What It Means for Kenyan Retailers
Treasury Proposes 16% VAT on M-Pesa and Digital Payments — What It Means for Kenyan Retailers
The National Treasury has proposed a 16 per cent Value Added Tax on digital payment platforms including M-Pesa, Airtel Money, Pesapal, and other mobile money services under the Finance Bill 2026. If passed, this will be the first time mobile money transaction fees attract VAT — and it will change how much it costs to run a business that relies on digital payments.
The Bill, now before the National Assembly, also proposes a 25 per cent excise duty on mobile phones activated on Kenyan networks, expanded KRA integration with M-Pesa transaction systems, and new taxes on imported second-hand clothes. Public participation memoranda must be submitted by May 25. Here is what matters for your business.
What Exactly Is Being Proposed?
The Finance Bill 2026 introduces a 16 per cent VAT on "the supply of digital payment services" — a category that includes transaction fees charged by mobile money operators, payment gateways, and digital financial platforms. This means the charges you already pay for sending money via M-Pesa, receiving payments through your till number, or using payment gateways will increase by 16 per cent.
Practical Impact on Your Daily Business
- M-Pesa send fees go up. If sending Ksh 1,000 currently costs a certain fee, that fee itself becomes subject to 16% VAT. Your total cost per transaction rises.
- Till number transaction charges increase. Every customer payment you receive via Lipa na M-Pesa incurs a merchant fee. That fee gets more expensive.
- Payment gateway costs rise. If you use Pesapal, Intasend, or any digital payment gateway, the service fees are also subject to the new VAT.
- Businesses will absorb or pass on the cost. Most small retailers operate on thin margins. A 16 per cent increase in payment costs either cuts directly into profit or forces you to raise prices.
Source: Business Daily — Treasury hits M-Pesa, Pesapal with 16pc VAT (May 13, 2026)
The Mobile Phone Tax: Another Cost Coming Down the Line
The Finance Bill also proposes a 25 per cent excise duty on mobile phones and communication devices. The tax would be charged at the point of network activation — meaning when you buy a phone and insert a Kenyan SIM card for the first time.
For a retailer, this is bad news on two fronts. First, your own phone — your primary business tool — becomes more expensive to replace when it breaks or gets stolen. Second, your customers' ability to use mobile money depends on them having a functioning smartphone. Higher phone prices mean fewer customers can transact digitally.
Source: TechCabal — Kenya proposes new 25% tax on mobile phones (May 13, 2026)
KRA Integration with M-Pesa — Real-Time Tax Monitoring
Beyond the new VAT, the Bill reflects KRA's ongoing push to connect its eTIMS system directly with M-Pesa and other payment platforms. Under the proposed framework, transaction data from M-Pesa till numbers and paybills would be accessible to KRA in real time for compliance and tax assessment purposes.
For retailers who have been running under the radar — not issuing eTIMS invoices, mixing personal and business M-Pesa transactions — this means the gap is closing. KRA is building the infrastructure to see your business transaction volume whether you declare it or not.
This is not a new direction. KRA has been working toward M-Pesa integration for years. The Finance Bill 2026 formalises it as law rather than a technical pilot.
Source: Mpasho — The Real Cost of Kenya's Proposed 2026 Tax Reforms (May 12, 2026)
What You Should Do Between Now and May 25
Public participation on the Finance Bill 2026 is open until May 25. The National Assembly has invited memoranda under Article 118 of the Constitution. Here is what matters for your business in the short term:
- Submit your views to Parliament. Write a short memo explaining how a 16% VAT on M-Pesa fees and a 25% mobile phone tax would affect your daily operations. Even a single paragraph from a real duka owner carries weight during public participation.
- Review your payment cost structure. Calculate how much you spend monthly on M-Pesa fees, payment gateway charges, and bank transfer costs. If VAT passes, add 16 per cent to that figure and see what it does to your margins.
- Separate business and personal M-Pesa transactions now. KRA's integration with M-Pesa is coming. The sooner you start keeping clean records, the less you will scramble when real-time monitoring goes live.
- Plan for a backup payment strategy. If M-Pesa costs rise significantly, alternatives like direct bank transfers (PesaLink) or cash might become relatively cheaper for large transactions.
The Bottom Line
The Finance Bill 2026 is not a done deal — it still needs to go through parliamentary debate and public participation. But the direction is clear: the government sees digital payments as a revenue source and is building the infrastructure to tax them directly.
For Kenyan retailers, the takeaway is simple. Your payment costs are going up. Your transaction data is becoming visible to tax authorities. And your ability to run your business entirely on cash and informal M-Pesa is shrinking. Plan accordingly.
