KRA vs Banks: How Finance Bill 2026 Digital Payment Taxes Target Card Fees

Nairobi, Kenya — In an aggressive regulatory maneuver designed to bypass recent judicial setbacks, the National Treasury has structured the proposed Finance Bill 2026 digital payment taxes to directly target card payment interchange and processing fees. This statutory pushback has drawn immediate warnings from the Kenya Bankers Association, which cautions that squeezing the digital transaction rails will derail the country's decade-long cash-lite progress. By altering the VAT and income tax frameworks, the government is seeking to lock in revenue flows that have previously slipped through its fingers.



The proposed Finance Bill 2026 digital payment taxes target the core clearing infrastructure of card transactions by subjecting bank-to-bank interchange fees to a standard 16% Value Added Tax and 20% excise duty. By redefining these settlement flows under taxable financial services, the Kenya Revenue Authority intends to collect an estimated Ksh 15 billion annually from merchant transaction fees. This legislative rewrite effectively strips local commercial banks of their previous court-won tax exemptions.

The Interchange Battleground: KRA's Legislative End-Run

The legal dispute over digital transaction taxation reached a boiling point after the High Court ruled in favor of commercial banks, stating that clearing, settlement, and interchange services constitute financial intermediation and are therefore exempt from VAT. Unwilling to cede this tax base, the National Treasury used the Finance Bill 2026 to structurally rewrite the Income Tax and VAT Acts.

Rather than appealing the court's definition, the new draft legislation amends the exempt schedule to explicitly exclude card-processing networks and interchange settlements from VAT-exempt status. This means every time an issuing bank processes a card transaction on behalf of an acquiring bank, the fee exchanged between them attracts statutory taxes. The Kenya Revenue Authority (KRA) is facing intense pressure to bridge a widening fiscal deficit, and with the IMF demanding aggressive revenue mobilization, the tax collector has zeroed in on the card payment ecosystem.

Calculating the Friction: Finance Bill 2026 Digital Payment Taxes in Practice

To understand how these fiscal changes translate to the real economy, consider a local retail business processing transactions using a standard card terminal. Under the current regime, a consumer buying goods worth Ksh 10,000 via credit or debit card triggers a standard Merchant Discount Rate (MDR) of approximately 2.5%, costing the merchant Ksh 250.

Within this Ksh 250 fee, the acquiring bank pays an interchange fee of 1.5% (Ksh 150) to the issuing bank to cover settlement risks and processing costs. Under the proposed Finance Bill 2026, the KRA will levy 16% VAT on this Ksh 150 interchange fee, translating to a direct tax of Ksh 24. A proposed 20% excise duty on financial transaction clearing services adds another Ksh 30. Passed down to the merchant, the total transaction processing fee climbs from Ksh 250 to Ksh 304, severely squeezing the margins of high-volume, low-margin retail businesses.

Bankers Sound the Alarm on Cash Reversion

The Kenya Bankers Association (KBA) has launched a vigorous lobbying campaign against these proposed levies, presenting data to the National Assembly’s Finance and Planning Committee. The banking lobby argues that taxing the digital clearing rails will trigger an immediate regression in financial inclusion. If merchants are forced to absorb higher POS maintenance fees, many will simply deactivate their terminals, risking pushing transactions under the radar of eTIMS, the KRA's electronic tax invoice management system.

With M-Pesa transaction tariffs already highly optimized, card networks were beginning to offer competitive alternatives for larger purchases. Introducing double taxation on bank settlements disrupts this competitive equilibrium. It forces small-scale merchants to reconsider physical cash, which remains completely untracked and outside the automated compliance net of the tax authority.

"Taxing interchange rails treats essential transactional infrastructure as a luxury. If these amendments pass, businesses will abandon digital payment channels, undoing a decade of cash-lite progress."
— Dr. Julius Kipng'etich, Group CEO, Jubilee Holdings

Macroeconomic Stakes and IMF Pressure

This tax offensive is not occurring in a vacuum. The Central Bank of Kenya has consistently championed the National Payments Strategy, which aims to phase out physical currency notes to lower transaction costs and curb illicit financial flows. However, the National Treasury's desperation to service Kenya’s external debt obligations has created a policy mismatch. By choosing to squeeze revenue from the digital transaction architecture, the government is prioritizing short-term revenue collection over the long-term structural efficiency of the domestic digital economy.

Transaction Component	Pre-2026 Tax Treatment	Proposed Under Finance Bill 2026
Interchange Fees (Bank-to-Bank)	Exempt (Judicial Precedent)	16% VAT + 20% Excise Duty
Card Clearing & Settlement (Visa/MC)	Non-taxable financial service	Subject to standard withholding and VAT
Lipa na M-Pesa Merchant Fees	Standard corporate tax on revenue	Enhanced eTIMS reconciliation audits

For forward-looking enterprises and financial institutions, the proposed Finance Bill 2026 digital payment taxes represent a serious operational headwind. Investors on the Nairobi Securities Exchange must monitor how these regulatory adjustments will affect bank non-interest income projections for the latter half of 2026. Adapting to this new fiscal terrain requires early system adaptation, as the state appears determined to monetize every digital shilling moving through Kenya's financial systems, regardless of the private sector's warnings.