Parliament's tax verdict: What to expect from the proposed law

MPs handed ordinary consumers a surprise reprieve by rejecting several of the most politically toxic consumption tax proposals in the Finance Bill 2026, though a raft of new levies buried deep within the controversial law still threatens to quietly drain already hard-pressed Kenyan households' wallets.

The Departmental Committee on Finance and National Planning, chaired by Kuria Kimani, released its comprehensive report following weeks of intense and heated public hearings across 13 counties. 

The Bill was passed by Parliament on Thursday.

The amendments appear to be a delicate balancing act between immense political pressure from a heavily taxed public and the government's pressing fiscal necessities. 

The National Treasury estimates that the state requires at least Sh98.9 billion in additional revenue from the new measures to bridge a yawning budget deficit for the 2026/2027 financial year.

"The committee was guided by the need to balance revenue mobilisation through administrative reforms with the imperative to support economic recovery, safeguard taxpayers' rights and promote sustainable growth," Kimani noted in the report's foreword.

While lawmakers successfully shielded ordinary Kenyans from aggressive cash grabs on mobile connectivity, digital payments, and green energy, businesses and consumers face a sneaky secondary layer of taxation. 

These less-conspicuous adjustments could trigger a significant ripple effect across the economy, analysts warn. 

In a major win for digital inclusion and the local tech ecosystem, the committee completely rejected a Treasury proposal to lift the excise duty on mobile phones to 25 per cent.

The MPs also killed an aggressive plan to shift the tax point to the exact moment a smartphone is activated on a local mobile network.

Telecommunications stakeholders argued during public participation that an activation-based tax framework would create "significant compliance challenges" and create uncertainty for consumers.

Backing the sector's concerns, the committee noted: "The proposal could undermine digital inclusion, discourage local assembly and investment in the ICT sector, and adversely affect access to communication and digital services".

A collective sigh of relief swept across Kenya's financial sector as MPs shot down plans to bring digital and platform-based financial services into the standard 16 per cent value-added tax (VAT) bracket. The original proposal would have dramatically increased the cost of everyday mobile money transfers like M-Pesa.

Instead, the committee recommended adopting a broader, technology-neutral framework covering money transfer services while clearly exempting core transfer fees, choosing instead to target specific ancillary corporate cash handling services.

Lawmakers also defended Kenya's nascent green transition by rejecting a Treasury plan to strip solar batteries, lithium-ion batteries, electric motorcycles, electric bicycles, and electric buses of their zero-rated VAT status. 

Moving these items to "exempt" status would have prevented local manufacturers from claiming input VAT, driving up retail prices.

The committee warned that reversing these green incentives, which were initially granted to lower the cost of essential goods, would "increase production costs, discourage investment, and undermine predictability in the tax system".

Input taxes for local animal feed manufacture were similarly protected under the zero-rated banner to keep meat and milk prices stable.

Despite the high-profile victories for mobile money, consumers who prefer plastic or digital banking will still face higher costs through indirect channels.

Millions of salaried workers face a prolonged squeeze on their disposable income after the parliamentary committee directed the National Treasury to fast-track, rather than immediately implement, proposals to widen narrow Pay As You Earn (PAYE) tax bands. 

The departmental committee acknowledged widespread public grievances that the rigid tax brackets disproportionately push low- and middle-income earners into higher tax rates, rendering the personal income tax system regressive. 

While stakeholders lobbied to raise the lowest taxable income threshold to Sh30,000, boost monthly personal relief to Sh3,000, and cap the top tax rate at 28 per cent down from 35 per cent formal workers will see no immediate net pay relief as the state seeks to balance tax progressivity with safeguarding national revenues.

Until the Treasury finalises these progressive adjustments and aligns them with the national budget targets, the Kenya Revenue Authority (KRA) will continue to collect PAYE under the existing system, leaving workers waiting for a formal timeline on when their take-home pay will actually increase.

The committee also approved a provision expanding the definition of "management or professional fees" to explicitly capture interchange and merchant service fees arising from card-based transactions.

Under the approved framework, banks and payment processors will now be hit with a withholding tax on these fees, 5 per cent for residents and 20 per cent for non-residents.

"The amendment clarifies the tax treatment of card transaction-related fees by closing a gap where interchange and similar fees were not clearly captured," the committee observed. Analysts warn that while the tax is levied on the banks, these costs are highly likely to be passed down to shoppers in the form of higher merchant fees and transaction costs.

The committee moved to aggressively formalize cash-heavy sectors of the economy. It upheld a strict 20 per cent withholding tax on net winnings from lotteries, prize competitions, and betting. 

Furthermore, horse racing lost its long-held tax exemption and was swept into the standard betting excise duty framework at 12.5 per cent of the amount wagered.

A new 1.5 per cent withholding tax was also approved for the sale of scrap metal, a sector the government claims has suffered from rampant tax evasion. According to the committee, a previous repeal of this tax had created massive "compliance gaps in a largely informal, cash-based sector characterised by limited record-keeping".

In a bid to capture untaxed income leaving the country, a final non-resident rental income tax regime was approved.

Non-resident landlords will now be required to register with the Kenya Revenue Authority (KRA) and file monthly returns.

Corporate entities also faced a dramatic regulatory shakeup. The Treasury initially sought a hard mandate forcing companies to distribute at least 60 per cent of their undistributed profits as dividends or face heavy tax penalties.

Following furious pushback from capital-intensive sectors like manufacturing, the committee agreed to moderate the threshold.

"The proposed introduction of a 60 per cent deemed dividend distribution threshold would impose an unnecessary burden on businesses and limit their ability to retain earnings for reinvestment," the committee conceded.

While ordinary citizens parsed through the fine print of everyday price increases, the absolute biggest victory in the Finance Bill 2026 belonged to corporate taxpayers.

The committee officially adopted a proposal to reintroduce a massive one-year tax amnesty programme starting July 1, 2026.

The amnesty covers all principal tax liabilities accrued up to December 31, 2025, offering an automatic 100 per cent waiver on all accumulated penalties, interest, and fines, provided the principal tax is settled by June 30, 2027.

Lawmakers pointed directly to the success of a previous 2023 amnesty programme, which saw 1.06 million taxpayers apply, unlocking Sh43.9 billion in frozen revenue for the state coffers.

However, the committee issued a stern warning against making the relief a regular fixture. 

"Repeated use of tax amnesty programmes may create moral hazard by weakening the culture of voluntary compliance... Amnesty must remain a targeted intervention rather than an expected recurring benefit".