Finance Bill, 2026: Analysis of Key Proposed Tax Reforms

Introduction

The Finance Bill, 2026 (“the Bill”) proposes significant amendments to Kenya’s tax framework through changes to the Income Tax Act, Tax Procedures Act, Value Added Tax Act, Excise Duty Act, Miscellaneous Fees and Levies Act and the Stamp Duty Act.

The proposed amendments form part of the Government’s ongoing fiscal strategy aimed at enhancing domestic revenue mobilisation, broadening the tax base, improving tax compliance, strengthening enforcement mechanisms and aligning Kenya’s tax framework with modern business practices and the digital economy.

This review analyses the key proposals contained in the Bill and their potential implications for taxpayers, businesses and investors.

A. INCOME TAX ACT

1. Expansion of the Definition of Management and Professional Fees

The Bill proposes to expressly include interchange fees and merchant service fees within the definition of management and professional fees.

These are fees charged between financial institutions whenever a customer uses a debit or credit card to complete a transaction, while merchant fees are charges levied by banks and payment processors on merchants for facilitating electronic card payments.

By expressly bringing these fees within the statutory definition, Parliament seeks to eliminate ambiguity and ensure that income generated from modern payment infrastructure is subject to withholding tax.

The amendment will significantly affect banks, payment processors, fintech companies, merchants and digital payment service providers.

2. Introduction of Final Withholding Tax on Rental Income Earned by Non-Residents

The Bill proposes the introduction of a final withholding tax regime on rental income earned by non-resident persons from property situated in Kenya.

Non-resident persons earning rental income from property situated in Kenya are generally subject to income tax under the ordinary income tax framework.

A final withholding tax is intended to simplify tax administration and improve tax collection from non-resident property owners. However, the current drafting does not distinguish between residential and commercial property, creating uncertainty regarding its scope.

3. Increase of Residential Rental Income Tax

The Bill proposes to increase the Residential Rental Income Tax rate from 7.5% to 10% of gross rental income.

As the tax is charged on gross receipts rather than net profits, landlords will face a direct increase in their tax burden regardless of operational costs or financing expenses.

The amendment is likely to affect returns within the residential real estate sector and may influence pricing decisions by landlords.

4. Tax on Imported Second-Hand Clothing

The Bill proposes the introduction of a tax equivalent to 5% of the customs value of imported second-hand clothing and footwear.

The proposal is intended to broaden the tax base and increase revenue collection.

Further, this is also intended to support domestic textile manufacturers by increasing the cost of imported second-hand clothing and reducing the competitive disadvantage faced by local producers.

B. TAX PROCEDURES ACT

1. Enhanced Reporting Obligations for Virtual Asset Service Providers

The Bill proposes the introduction of new reporting obligations requiring Virtual Asset Service Providers, including cryptocurrency exchanges, virtual wallet providers and digital asset trading platforms operating in or from Kenya, to submit annual information returns to the KRA.

The proposal aligns Kenya’s tax framework with emerging international standards such as those of the Organisation for Economic Co-operation and Development (OECD), aimed at improving transparency in virtual asset transactions and strengthening tax compliance within the digital asset sector.

2. Reinstatement of Deregistered Taxpayers

The Bill proposes to allow taxpayers who have previously been deregistered to apply for reinstatement of their existing KRA PINs rather than requiring a completely new registration process.

The proposal seeks to simplify taxpayer administration and improve continuity within the tax system.

3. Exemption from PIN Requirement for Non-Resident Investors

The Bill proposes to exempt non-resident persons from the requirement to obtain a KRA PIN for purposes of opening an account with an investment bank.

Non-resident persons seeking to open investment accounts in Kenya are generally required to obtain a KRA PIN before completing the account opening process.

4. Strengthening of Anti-Avoidance Provisions

The Bill expands the Commissioner’s powers to challenge tax avoidance arrangements and issue assessments where transactions are deemed to lack genuine commercial substance.

The proposed amendment strengthens the KRA’s ability to challenge artificial transactions and arrangements designed principally to reduce tax liabilities.

Businesses engaging in complex group restructurings, financing arrangements, cross-border transactions or tax planning structures may face increased scrutiny.

5. Introduction of Pre-Populated Tax Returns

The Bill proposes to allow the Commissioner to generate pre-populated tax returns using information available through KRA systems.

Taxpayers are currently responsible for preparing and filing their own tax returns using information available to them.

By automating part of the filing process, the Government hopes to improve efficiency while reducing under-reporting of income. However, taxpayers will remain responsible for verifying the accuracy of the information before filing returns.

C. VALUE ADDED TAX ACT

1. Adjustment of Input VAT Where Taxable Supplies Become Exempt

The Bill proposes the introduction of a new provision requiring taxpayers to reverse input VAT previously claimed on unsold inventory where the underlying supplies subsequently become exempt from VAT.

This proposal may create significant cash flow implications for businesses holding substantial inventories at the time the amendments take effect.

2. Extension of the VAT Refund Period for Bad Debts

The Bill proposes to extend the period before which a taxpayer may seek a VAT refund on bad debts from two years to three years from the date of supply.

Businesses operating in sectors characterised by lengthy payment cycles, including construction, infrastructure, real estate and government contracting, are likely to be most affected.

3. Increase in the Duty-Free Threshold for Travellers

The Bill proposes to increase the duty-free threshold from USD 300 to USD 2,000.

The existing threshold has remained relatively low despite inflation, changes in consumer spending patterns and increased international travel.

The proposed increase seeks to modernise the exemption and reduce the tax burden on personal imports.

4. Reclassification of Supplies Under the VAT Regime

One of the most significant policy shifts proposed by the Bill concerns the movement of several supplies from the zero-rated category to the exempt category.

• The affected supplies include:
• Scrap metal
• Inputs used in the manufacture of animal feeds
• Inputs used in the manufacture of pharmaceutical products
• Telephones for cellular and wireless networks
• Electric motorcycles
• Goods and services supplied exclusively for approved Public Private Partnership (PPP) infrastructure projects

While both zero-rated and exempt supplies attract no VAT to the consumer, suppliers of exempt goods lose the right to recover input VAT.

As a result, businesses operating within renewable energy, healthcare, manufacturing, agriculture and telecommunications sectors may experience increased operational costs and reduced VAT recoverability.

5. VAT Exemptions for Public-Private Partnership (PPP) Projects

The Bill proposes to exempt goods and services supplied exclusively for the implementation of approved Public-Private Partnership projects upon approval by the relevant Cabinet Secretary.

PPPs are increasingly being used to finance major infrastructure projects including roads, ports, energy facilities, water projects and transport systems.

By exempting qualifying supplies from VAT, the Government seeks to lower project costs, improve project viability and encourage private sector investment in public infrastructure.

D. MISCELLANEOUS FEES AND LEVIES ACT

1. Amendment to the Definition of East African Community Partner States

The Bill proposes replacing the existing definition with a treaty-based definition that refers generally to countries admitted as members of the East African Community under the EAC Treaty.

The amendment appears intended to align domestic legislation with the EAC Treaty framework and avoid the need for future legislative amendments whenever new countries are admitted into the regional bloc.

E. STAMP DUTY ACT

1. Stamp Duty Exemption for Transfers into Real Estate Investment Trusts (REITs)

The Bill proposes to exempt transfers of beneficial interests in property to Real Estate Investment Trusts (REITs) from stamp duty.

This proposal is expected to reduce transaction costs associated with transferring assets into REIT structures and may encourage greater participation in collective real estate investment vehicles.

The exemption is likely to be particularly attractive to developers, institutional investors, pension funds and property owners seeking to restructure real estate holdings.

CONCLUSION

The Finance Bill, 2026 proposes a far-reaching restructuring of Kenya’s tax framework with significant implications for businesses, investors, financial institutions, landlords, digital service providers and individual taxpayers.

Although the Bill introduces targeted incentives in sectors such as infrastructure, real estate and healthcare, its primary objective remains the enhancement of revenue collection through the expansion of the tax base, strengthening of compliance mechanisms and increased enforcement powers for the Kenya Revenue Authority.

Should the Bill be enacted substantially in its current form, taxpayers will need to reassess their compliance frameworks, business models, transaction structures and tax planning strategies to ensure readiness for the proposed changes.