Kenya Introduces 16% VAT on Digital Payment Processing Fees

Banks and fintech companies in Kenya have begun applying a 16% Value Added Tax (VAT) to fees charged for processing and settling digital payments, adding another cost for businesses that rely on card machines, online payment gateways and merchant payment platforms.

The change follows amendments under Kenya’s Finance Act 2026, which narrowed the VAT exemption previously available to certain financial services. The amendment took effect on 1 July 2026, although one commercial bank notified customers that it would begin charging the VAT on digital payment transaction fees from 1 November.

Payment service fees move into the VAT net

The tax applies to fees charged by payment service providers for services including payment processing, settlement, merchant acquiring, payment gateways and aggregation.

These services connect businesses with banks, card networks and other payment systems, allowing merchants to accept electronic payments and receive the proceeds.

Payment gateways such as Pesapal fall within the scope of the amendment. However, the VAT applies to the service fee rather than the full value of the customer's purchase.

For example, if a payment provider charges a merchant KSh350 to process a transaction, the 16% VAT adds KSh56 to that service charge. It does not add 16% to the entire amount paid by the customer.

The Kenya Revenue Authority says the Finance Act clarifies that fees charged by payment service providers for these digital services are no longer covered by the exemption for financial services.

M-Pesa transfers remain exempt

The amendment does not bring all digital money transfers under VAT.

Ordinary person-to-person transfers through mobile money services such as M-Pesa and Airtel Money remain exempt. The distinction is between transferring money and paying a provider to process, aggregate or settle payments for merchants.

This means someone sending money to a friend will not face the new VAT on that transfer service. A business accepting card payments or using a payment gateway, however, may pay VAT on the processing fees charged by its provider.

A change following court disputes

The new tax treatment follows disputes between payment companies and the Kenya Revenue Authority over whether digital payment processing qualified as an exempt financial service.

In August 2025, the High Court ruled in favour of Pesapal in a VAT dispute involving an assessment of approximately KSh110.8 million, including tax, interest and penalties.

The court found that the nature of the services mattered when determining their VAT treatment, rather than simply the technology used to deliver them. The Finance Act 2026 subsequently amended the VAT framework to specifically bring payment processing, settlement, merchant acquiring and gateway services supplied for a fee or commission into the taxable category.

Merchants face higher payment costs

The additional VAT could increase operating costs for retailers, online businesses, restaurants and other merchants that depend on electronic payment infrastructure.

Businesses may absorb the additional charge or pass some of it on through their prices. The impact will depend on the fees charged by individual providers and whether merchants can recover the VAT as input tax under Kenya's VAT rules.

The change also comes as the Central Bank of Kenya pursues a separate financial inclusion target to reduce the average cost of person-to-person transfers from KSh23 in 2024 to KSh10 by 2028.

That target concerns the cost of sending money between individuals, while the new VAT applies to specified services used by businesses to accept and process payments.