FINANCE BILL 2026: Income Tax Act • VAT Act • Excise Duty Act • Tax Procedures Act
Clauses 1–52 | Pages 953–989 | 26 May 2026
EXECUTIVE SUMMARY
The Finance Bill 2026 represents the most extensive restructuring of Kenya’s tax framework since the Finance Act 2023. Spanning 52 clauses across pages 953–989, it amends four statutes — the Income Tax Act (Cap. 470), the Value Added Tax Act (Cap. 476), the Excise Duty Act (Cap. 472), and the Tax Procedures Act (Cap. 469B) — with sweeping implications for consumers, small businesses, digital platform users, the gambling sector, and Kenya’s EAC treaty obligations. COFEK’s consolidated analysis identifies five overarching concerns:
(a)Hidden digital taxation: The expansion of ‘royalty’ and ‘management fee’ definitions to capture payments to digital payment platforms, switching systems, and card networks will impose withholding tax on every digital transaction — costs that will be invisibly passed to consumers.
(b)Retrogressive VAT changes: The mass deletion of nine zero-rating categories and multiple VAT exemption paragraphs removes consumer protections on basic goods without any compensatory relief mechanism, violating the non-retrogression principle under Article 43 of the Constitution.
(c)EAC treaty breach: More than 33 excise duty tariff descriptions have their EAC rules-of-origin exclusions deleted, subjecting EAC partner state goods to the same excise as non-EAC imports — a unilateral act that is ultra vires on Kenya’s obligations under the EAC Customs Union Protocol.
(d)Surveillance without safeguards: The new virtual asset reporting framework mandates mass disclosure of all crypto users’ financial data to KRA without data minimisation, purpose limitation, or independent oversight — engaging serious Article 31 privacy concerns.
(e)Disproportionate enforcement powers: The general anti-avoidance rule (GAAR) and best-of-judgment assessment provisions expand KRA Commissioner powers without commensurate due process protections, contrary to Articles 47 and 50 of the Constitution.
PART I: INCOME TAX ACT AMENDMENTS (CLAUSES 2–24)
Part II of the Finance Bill (clauses 2–24) amends the Income Tax Act across definitions, exemptions, withholding tax, filing deadlines, trust income, charitable organisations, and capital gains. A split commencement structure applies: certain sections take effect on 1 January 2027, while most others commence on 1 July 2026, requiring businesses and consumers to track two separate effective dates.
A. Digital Payments and Royalty Redefinition (Clause 2)
The most consequential single amendment in the Bill. The definition of ‘royalty’ is comprehensively rewritten to include payments for the use of proprietary digital platforms, payment networks, payment-card schemes, payment processing systems, switching systems, clearing systems, and settlement systems — regardless of whether the payment is described as a service fee, transaction fee, network fee, or processing fee. Simultaneously, ‘management or professional fee’ is expanded to include interchange fees and merchant service fees from card-based transactions.
Consumer impact: Banks and payment processors will pass withholding tax costs downstream through higher interchange rates and merchant service charges, ultimately borne by Kenyan consumers on every digital transaction. This is a hidden tax with no transparency mechanism, contrary to Article 46(1)(b) of the Constitution. COFEK calls for a regulatory impact assessment quantifying the per-transaction consumer cost pass-through, and for a statutory disclosure obligation on financial institutions.
B. Withholding Tax on Scrap Metal and Gambling Winnings (Clauses 7, 17, 22)
New withholding tax categories are introduced for scrap metal sales (1.5% of gross amount) and gambling winnings (20% of net winnings, excluding the stake). Both categories are added to sections 10 and 35 of the Income Tax Act, with rates set in the amended Third Schedule.
The 20% winnings rate is among the highest globally for individual players. Combined with the gambling deposit excise under the Excise Duty Act and licensing levies under the Gambling Control Act 2025, the cumulative burden risks driving activity to unlicensed platforms and undermining the consumer protection framework. COFEK recommends reducing the winnings rate to 10% with a minimum threshold of KES 10,000 per win event. We urther recommend scrapping of the 1.5% WHT on scrap metal.
C. Compressed Return Filing Deadlines (Clauses 18–19)
The return filing period under sections 52 and 52B is compressed from six months to four months after the end of the year of income. Nil returns must now be filed within one month of year-end, down from three months. This disproportionately harms SMEs and informal sector taxpayers without professional tax support, generating penalties and interest that are extractive rather than revenue-raising. COFEK recommends retaining the six-month period for individuals and entities with annual gross turnover below KES 10 million, and extending the nil return deadline to three months. In any case, there is no harm to the National Treasury and or KRA if the duration is retained.
D. Non-Resident Rental Income Tax (Clause 4)
A new section 6B creates a dedicated tax regime for non-resident persons earning rental income from Kenyan property. Tax is due by the 20th day of the following month. The measure closes an important tax gap — many Nairobi commercial properties are beneficially owned by non-residents routing income offshore. COFEK supports the measure but recommends extending the payment deadline to the last day of the following month to reduce compliance friction for non-residents without Kenyan agents.
E. Trust Income, Charitable Exemptions, and REIT Incentives (Clauses 8, 16, 20–21)
Section 11 is modernised to eliminate double taxation on trust distributions. Approved charitable organisations must now disburse at least 60% of charitable income to retain tax exemption — a significant new threshold that may disadvantage smaller charities building administrative capacity. Capital gains on transfers of property to registered REITs are exempted, supporting Kenya’s nascent REIT market.
F. Indirect Share Transfer Capital Gains (Clause 23)
New subparagraph 2(d) of the Eighth Schedule brings capital gains from indirect transfers of Kenyan assets within the income tax net — closing a gap previously exploited through foreign holding company structures. COFEK supports the policy objective but recommends inserting a 50% value-derivation threshold (consistent with OECD Model Tax Convention Article 13(4)) and a safe harbour for genuine commercial reorganisations.
G. EAC Preferential Rate Deletions — Income Tax (Clause 22)
The EAC preferential rate exclusion clause is deleted from the withholding tax Third Schedule. This forms part of the broader EAC de-preferencing programme analysed in detail under Part III below. COFEK flags EAC Customs Union Protocol compliance concerns that apply equally to these income tax changes.
PART II: VALUE ADDED TAX ACT AMENDMENTS (CLAUSES 25–32)
Part III of the Finance Bill (clauses 25–32) amends the VAT Act with housekeeping deletions, a hire purchase clarification, a new input tax adjustment obligation, and — most significantly — sweeping changes to the First and Second Schedules of exempt and zero-rated supplies.
A. Mass Zero-Rating Deletions — Second Schedule (Clause 32)
Nine paragraphs (11, 21, 29, 30, 31, 32, 33, 34, and 35) are deleted from Part A of the Second Schedule of the VAT Act. This wholesale removal converts previously zero-rated supplies to standard-rated (16% VAT), with immediate consumer price impacts. Without a regulatory impact assessment, it is impossible to determine which specific goods are affected; COFEK has demanded full particulars of all deleted paragraphs.
This is constitutionally the most concerning provision in the entire Bill. Article 43 requires the State not to take retrogressive measures on economic and social rights without compelling justification. The sudden VAT imposition on zero-rated goods — particularly if they include basic foodstuffs, health products, or educational materials — directly violates this non-retrogression principle. COFEK calls for a 12-month transitional period and full restoration of zero-rating for any deleted paragraphs covering such goods.
B. First Schedule Exemption Changes (Clause 31)
Multiple exemption paragraphs are deleted (49, 58, 62, 109, 153) and new ones inserted (paragraphs 158–170). Positive new exemptions include: dialyzers, scrap metal, animal feed manufacturing inputs, pharmaceutical inputs, sugarcane transportation, mobile phones for cellular networks (strongly supported by COFEK for digital inclusion), electric bicycles, electric buses, solar and lithium-ion batteries, and bioethanol stoves.
The redefined money transfer exemption in Part II, paragraph 1(b) is narrowed to exclude payment processing, gateway, and aggregation services supplied over software platforms — a potentially sweeping carve-out that may inadvertently capture mobile money services essential to financial inclusion. COFEK recommends a clear carve-out for USSD-based financial inclusion services.
C. Input Tax Adjustment Obligation (Clause 27)
New section 17A requires registered persons whose taxable supplies become exempt to account for input tax on unsold stock at the point of exemption. This prevents windfall enrichment from prior input tax claims on stock that will now be sold exempt. COFEK supports the principle but recommends clear transitional guidance from the Tax Commissioner to avoid inadvertent non-compliance during the accounting adjustment period.
D. Hire Purchase and Record Retention (Clauses 26, 28)
The VAT base for hire purchase transactions is clarified to exclude the finance charge component — removing a tax-on-tax distortion. VAT record retention is extended from two to three years, aligning closer to the general five-year assessment limitation.
PART III: EXCISE DUTY ACT AMENDMENTS (CLAUSES 33–36)
Part IV of the Finance Bill (clauses 33–36) and the continuation of clause 36 through pages 973–979 together constitute the most structurally complex portion of the Bill. They cover mobile phone excise, new product categories, and — most significantly — the systematic removal of EAC rules-of-origin exclusions from over 33 tariff descriptions.
A. EAC Rules-of-Origin Exclusion Deletions — 33+ Tariff Descriptions
The Finance Bill removes the phrase ‘but excluding those originating from East African Community Partner States that meet the East African Community Rules of Origin’ from more than 33 excise duty tariff descriptions. The affected categories span: glass products (float glass, safety glass, worked glass, insulating glass units), plastic films and sheets (tariff headings 3919, 3920, 3921), paper and paperboard (kraft paper across four weight categories, self-adhesive paper, gummed paper), ceramics, furniture, printed packaging materials, and printing ink.
This is the single most significant treaty compliance issue in the entire Finance Bill. The EAC Customs Union Protocol under Article 2 of the EAC Treaty creates binding obligations on Partner States not to apply discriminatory internal taxes to goods from other Partner States that meet EAC Rules of Origin. Article 15 of the Protocol prohibits internal taxes in excess of those applied to like domestic goods. The Bill’s provision purports to abrogate these obligations through a domestic Finance Act — which is ultra vires and exposes Kenya to proceedings before the East African Court of Justice.
COFEK’s formal position: all EAC rules-of-origin exclusion deletions should be suspended pending formal consultation with the EAC Secretariat and Council of Ministers, and no provision violating Kenya’s EAC Treaty obligations should be enacted without prior EAC-level clearance. A suspensive clause should be inserted requiring the Cabinet Secretary for EAC Affairs to certify treaty compliance before the deletions take effect.
B. New Excise Categories (Clause 36, Item xxxv)
Coal (5% excisable value): Kenya’s first excise on coal. Defensible as a carbon pricing instrument consistent with Kenya’s NDC commitments, but the revenue is not earmarked for clean energy transition programmes. COFEK recommends earmarking for a consumer energy access fund.
Antique/Classic Vehicles (50% excisable value): A progressive measure targeting luxury vehicles at least 30 years old with a value of at least KES 10 million. COFEK supports the measure but recommends clarifying that the triggering registration is the original global first registration, not a Kenyan re-registration, to prevent avoidance.
Fruit Juices: A two-tier specific rate is introduced: KES 14.14 per litre for juice without added sugar and KES 20 per litre with added sugar — a health-aligned incentive. However, both rates are high by regional standards, harming Kenya’s predominantly smallholder-led mango, passion fruit, and citrus value chains. COFEK recommends a domestic producer exemption or reduced rate of KES 5 per litre for juices manufactured from locally grown fruit.
Plastic Articles at 10%: Previously deleted, now reintroduced at 10% without any EAC exclusion — an effective new tax on EAC-origin plastic articles where previously none applied. This should be explicitly stated in the Explanatory Memorandum and the EAC exclusion restored pending Council clearance.
C. Mobile Phone Excise Restructuring (Clauses 33–34)
The Bill makes two structural changes to mobile phone excise. First, the description is changed from ‘Imported cellular phones’ to ‘Telephones for cellular networks and other wireless networks of tariff heading 8517’ at 25%, extending the excise to locally manufactured handsets. Second — more fundamentally — excise duty liability is shifted from importation to activation: liability now arises when the phone is activated on a network, making mobile network operators de facto excise collectors.
The activation-point change creates significant enforcement complexity and system implementation challenges. Given the simultaneous VAT exemption for mobile phones in First Schedule paragraph 163 (which COFEK strongly supports), the 25% excise rate is excessive — the VAT exemption benefit will be largely offset. COFEK recommends reducing the excise rate to 10–15% and requires the Cabinet Secretary to publish implementation regulations at least 90 days before the 1 July 2026 commencement date.
D. Gambling Excise Amendments — First Schedule Parts II and III
The gambling excise framework is significantly broadened. The definition of ‘amount deposited’ is comprehensively rewritten to capture all money or money’s worth made available for betting or gambling purposes — regardless of mechanism — including cash equivalents, chips, tokens, tickets, and credits provided by both players and operators. Virtual asset gambling deposits are expressly brought within the framework by cross-reference to the Virtual Asset Service Providers Act, 2025.
The proviso to paragraph 4A — which had previously qualified the excise liability for betting deposits — is deleted without any explanatory note or reproduction of its text in the amending Bill. COFEK regards this as constitutionally impermissible: Parliament and the public cannot evaluate what consumer protection is being removed if the deleted text is not disclosed. COFEK demands that the full text of the proviso be published and the deletion not proceed until Parliament has considered its implications.
The cumulative tax burden on a Kenyan gambler is among the highest in the region: gambling deposit excise + 20% winnings withholding tax + licensing levies under the Gambling Control Act 2025. An independent cumulative burden assessment should be commissioned and published before the Bill’s Third Reading.
PART IV: TAX PROCEDURES ACT AMENDMENTS (CLAUSES 37–52)
Part V of the Finance Bill (clauses 37–52) amends the Tax Procedures Act across six thematic clusters: virtual asset reporting, PIN reinstatement and exemption, a general anti-avoidance rule, best-of-judgment assessments, tax debt waiver, and electronic tax system enhancements.
A. Virtual Asset Reporting Framework (Clauses 37–38)
New sections 6C and 6D create a comprehensive surveillance and reporting architecture for Kenya’s virtual asset sector. Every virtual asset service provider (VASP) must file annual information returns with the KRA Commissioner covering all users it maintains a relationship with. Kenya may enter bilateral agreements for automatic cross-border exchange of this information under section 6D.
The penalty regime is severe: KES 100,000 per false statement or omission, and KES 1,000,000 per failure to file. These flat-rate penalties apply uniformly regardless of the VASP’s size — a small cooperative using blockchain faces the same sanction as a multinational exchange, contrary to Article 201(b)’s equitable burden principle.
The framework lacks fundamental data governance safeguards. There is no data minimisation requirement — all users must be reported regardless of transaction value. There is no purpose limitation clause, no retention period, and no independent oversight mechanism. Mass financial surveillance of this breadth without these safeguards is inconsistent with Article 31 of the Constitution and the Data Protection Act, 2019. The Office of the Data Protection Commissioner should opine on sections 6C and 6D before enactment.
COFEK’s recommendations: insert a de minimis threshold (proposed: KES 500,000 aggregate annual transactions); scale penalties to VASP transaction volume; insert a data protection cross-reference clause; define ‘reportable user’ within the Tax Procedures Act; and subject any bilateral information exchange agreement under section 6D to tabling before the National Assembly under the Treaty Making and Ratification Act.
B. General Anti-Avoidance Rule — GAAR (Clause 41)
New section 18A introduces a GAAR authorising the Tax Commissioner to redetermine tax liability where a person has entered a ‘scheme’ to obtain a ‘tax benefit.’ Both terms are defined with exceptional breadth: ‘scheme’ covers any course of action, agreement, promise, or undertaking — whether or not legally enforceable — and ‘tax benefit’ extends to every conceivable form of tax reduction, acceleration, or avoidance including standard tax planning.
COFEK’s primary concerns are structural. First, the Commissioner’s determination is unilateral — there is no prior notice requirement, no show-cause process, and no hearing before the redetermination is issued. This violates Article 47’s guarantee of procedurally fair administrative action. Second, the definition of ‘tax benefit’ overlaps with lawful incentives granted by Parliament, creating a risk that the GAAR could be used to negate statutory exemptions. Third, the provision applies where obtaining a tax benefit is ‘a purpose’ — not the ‘dominant purpose’ — which is broader than OECD BEPS Action 6 standards and most international comparators.
Recommended amendments: insert a 30-day show-cause notice requirement; adopt a dominant purpose test; carve out benefits arising from statutory exemptions granted by Parliament; and require written reasons with every determination per Article 47(2).
C. Best-of-Judgment Assessments (Clause 42)
New section 29A empowers the Tax Commissioner to issue income assessments based on a broad array of information sources — returns, withholding records, KRA Act data, audit records, electronic system data, and any other information under written law. While best-of-judgment assessments are standard internationally, the absence of a statutory prior notice requirement is a material due process gap. A minimum 21-day notice-and-response period should be inserted before any assessment is crystallised, except where there is documented risk of imminent revenue loss.
D. Non-Resident PIN Exemption and Prepopulated Returns (Clauses 40, 48)
New section 12(5B) exempts non-resident persons from the PIN requirement when opening accounts with investment banks — a positive step for foreign portfolio investment, though ‘investment bank’ is not defined and should be cross-referenced to the Banking Act or Capital Markets Act. The prepopulated return system under section 75(3) and (4) is a modernisation gain, but taxpayers must be given a minimum 30-day correction window and fully indemnified for penalties arising from errors in the Commissioner’s own data.
E. Tax Debt Waiver Extension and Compliance Penalties (Clauses 43, 50–51)
The tax debt waiver programme is extended to cover debts due before 31 December 2025, with a payment deadline of 31 December 2026. COFEK supports this relief for taxpayers and businesses carrying legacy debts. The new section 86 graduated compliance framework — requiring the Commissioner to seek reasons before levying penalties — is a meaningful improvement, though the KES 10,000 individual penalty floor remains excessive for micro-traders and should be reduced to KES 2,000 for persons with annual gross turnover below KES 5 million.
PART V: CONSTITUTIONAL CONCERNS
Article 43 — Non-Retrogression of Economic and Social Rights
The mass deletion of zero-rated VAT categories (clause 32) and the removal of multiple exemption paragraphs without compensatory consumer relief mechanisms constitute retrogressive measures under Article 43. The State may not reduce the progressive realisation of the right to an adequate standard of living without compelling justification demonstrated through an evidence-based regulatory impact assessment. None has been published.
Article 201(b) — Equitable Tax Burden
Multiple provisions in the Bill shift significant tax incidence onto digital financial services, gambling winnings, mobile devices, and packaged fruit juices — goods and services disproportionately consumed by lower-income Kenyans. The flat-rate penalty structure for VASPs (KES 1,000,000 per failure regardless of size), the 20% gambling winnings withholding rate, the 25% mobile phone excise, and the fruit juice specific rates collectively concentrate the tax burden on less affluent Kenyans, contrary to the equitable burden principle.
Article 46 — Consumer Rights
Article 46(1)(b) guarantees consumers the right to information necessary to gain full benefit from goods and services. The pass-through of withholding tax costs on digital platform fees and interchange fees will not be transparently disclosed to consumers. Article 46(1)(c) guarantees protection of consumers’ economic interests. The cumulative impact of the royalty expansion, interchange fee withholding, gambling tax, and VAT zero-rating removals amounts to a multi-front assault on consumer economic welfare.
Article 47 — Fair Administrative Action
Both the GAAR (section 18A) and best-of-judgment assessments (section 29A) allow consequential determinations affecting property rights without prior notice or an opportunity to be heard. Article 47 mandates lawful, reasonable, and procedurally fair administrative action with written reasons where rights are materially affected.
Article 31 — Right to Privacy
The VASP mandatory reporting framework and the integration of virtual assets into the gambling excise regime create mass financial surveillance without the safeguards required by a proportionality analysis under Article 24 — no data minimisation, no purpose limitation, no retention period, no independent oversight.
Article 10 — Public Participation and Transparency
The deletion of the proviso to excise paragraph 4A without disclosing the deleted text, the introduction of a GAAR without sector-specific consultations, and the mass amendment of VAT schedules without regulatory impact assessments each fail the public participation standards required by Articles 10 and 118 of the Constitution. COFEK cites the Finance Act 2023 litigation as precedent for successful constitutional challenge on these grounds. We are also concerned that the Finance and Planning Committee is wasting public resources at the private Glee Hotel – even after Parliament spent Sh9.6 billion on Bunge Tower which has ample and exclusive facilities. As a result, COFEK declined to appear before the Committee on May 26, 2026
EAC Treaty — Customs Union Protocol
The removal of EAC rules-of-origin exclusions from more than 33 excise tariff descriptions through a domestic Finance Act constitutes a unilateral abrogation of Kenya’s obligations under Article 15 of the EAC Customs Union Protocol. This cannot be effected without EAC Council-level clearance or a formal derogation under Article 18 of the Protocol. Exposure to EACJ proceedings is material.
PART VI: CONSOLIDATED PRAYER
COFEK respectfully prays that the Finance and National Planning Committee of the National Assembly take the following actions before the Finance Bill 2026 proceeds to Third Reading:
On Tax and Revenue Measures
1.Commission and publish regulatory and consumer impact assessments for clauses 2 (royalty/interchange), 31 (VAT exemptions), 32 (zero-rating deletions), and 36 (excise restructuring) before Third Reading.
2.Restore zero-rating under the Second Schedule for all deleted paragraphs covering basic foodstuffs, health products, agricultural inputs, and educational materials, consistent with Article 43’s non-retrogression principle.
3.Insert a 12-month transitional period before any zero-rated supply converts to standard-rated under the VAT Act.
4.Retain the six-month return filing period under sections 52 and 52B for individuals and entities with annual gross turnover below KES 10 million, and extend the nil return deadline to three months.
5.Reduce the gambling winnings withholding rate from 20% to 10% and insert a minimum threshold of KES 10,000 per win event.
6.Drop the 1.5% WHT on scrap metals as it punishes the poorest of the poor on tax compliance costs
7.Reduce the mobile phone excise rate to 10–15% in light of the simultaneous VAT exemption, and require implementation regulations to be gazetted at least 90 days before commencement.
8.Insert a domestic fruit juice producer exemption or reduced rate of KES 5 per litre for juices manufactured from locally grown certified produce.
9.Earmark coal excise revenue for a clean energy transition fund and consumer energy access programmes.
10.Insert a bright-line 50% value-derivation threshold in Eighth Schedule subparagraph 2(d) for indirect share transfer capital gains, and a safe harbour for genuine commercial reorganisations.
11.Narrow the digital platform royalty definition to payments with genuine intellectual property content, and insert a consumer disclosure obligation for financial institutions passing through withholding tax costs on digital transactions.
On EAC Treaty Compliance
12.Suspend all EAC rules-of-origin exclusion deletions from the Excise Duty Act First Schedule pending formal EAC Secretariat and Council consultation and publication of an Attorney General EAC Treaty compliance opinion.
13.Insert a suspensive clause providing that no EAC exclusion deletion takes effect until the Cabinet Secretary for EAC Affairs certifies in writing that the amendments are consistent with Kenya’s treaty obligations.
On the Tax Procedures Act
14.Refer clauses 38 (VASP reporting), 41 (GAAR), and 42 (best-of-judgment assessments) for revision incorporating the procedural safeguards detailed in Part IV of this submission.
15.Subject the virtual asset reporting framework and the GAAR to a formal, dedicated public participation process including submissions from VASPs, financial institutions, tax practitioners, and consumer organisations.
16.Direct the Office of the Data Protection Commissioner to opine on sections 6C and 6D before enactment.
17.Insert a prior 30-day show-cause notice requirement before any GAAR determination under section 18A; adopt a dominant purpose test; and carve out statutory exemptions granted by Parliament from the definition of ‘tax benefit.’
18.Insert a minimum 21-day notice-and-response period before best-of-judgment assessments under section 29A.
19.Insert a de minimis threshold of KES 500,000 annual transactions for VASP reporting and scale penalties to VASP transaction volume.
20.Subject any bilateral virtual asset information exchange agreement under section 6D to tabling before the National Assembly under the Treaty Making and Ratification Act.
On Gambling Excise Transparency
21.Publish the full text of the deleted proviso to paragraph 4A of Part II of the Excise Duty First Schedule before the deletion is approved.
22.Insert a minimum deposit threshold of KES 500 for the gambling deposit excise and require operators to disclose the excise component to players.
23.Commission and publish an independent cumulative tax burden assessment for gambling activities covering excise, income tax withholding, and licensing levies before Third Reading.
24.Publish valuation, timing, and data protection regulations for virtual asset gambling excise at least 60 days before the provision takes effect.
Consumers Federation of Kenya (COFEK)
www.cofek.africa | May 26, 2026
