What to expect from new rules, tax measures

Majority of new rules and tax measures introduced by the Finance Act 2026, will take effect today. While the Act, which came into effect last week Tuesday after Presidential assent, has been billed as largely focused on reforming tax administration rather than introducing new tax measures, there are instances where Kenyans will have to pay higher taxes for certain goods and services. 

Among the clauses effective today include those empowering KRA, which can now summarily collect certain debts as well as increased cost of doing business for local manufacturers relying on imported materials such as sugar and wooden boards to produce goods locally. 

The new law also imposes withholding tax on interchange fees, merchant service fees and payments to card companies. This is alongside a 16 per cent VAT on digital and platform-based financial services. While these changes target the backend fees of electronic transactions and not the user fees, they are likely to result in increased costs for merchants and consumers as fintech companies pass on the new taxes.  

When assenting to the Bill last week, President William Ruto noted that the new law was not aimed at punishing Kenyans but continuing a reform process on the tax administrative system, including sealing loopholes that unscrupulous individuals and businesses use to avoid paying their fair share of taxes. “We are pursuing tax avoidance, not taxpayers; offshore schemes, not ordinary wages; and leakages, not livelihoods,” he said, adding that the Bill during its early phases had sparked an important debate on fairness.  

“This law does not raise taxes on ordinary Kenyans. It improves fairness by strengthening compliance, closing loopholes and ensuring that every person and business pays what is lawfully due. We are pursuing tax avoidance not taxpayers, offshore schemes not ordinary wages and leakages not livelihoods,” he said. 

Other segments of the new law that become effective July 1 are higher taxes for betting and scrap metal industries, which have been slapped with withholding taxes, to expand the tax base. In betting, the tax will only apply to payouts from lotteries and prize competitions which were not previously under the withdrawal regime. 

In dealing with scrap metal, the government explained the taxation of the sector would facilitate protection of the environment while further addressing the illegal dealing in scrap metal and vandalism of public property. A new 30 per cent excise tax on imported wood-based boards is also set to come into effect today, which is expected to hit local furniture makers who use the boards as raw materials.

The sector players have protested the tax on imported materials such as medium-density fibreboard (MDF), particleboard, plywood and blockboard arguing that the proposal was absent from the published Finance Bill that underwent public participation in May.

They said it only appeared later through the Supplementary Order Paper during parliamentary consideration of the Bill on June 18 before being passed on the same day. Also coming into effect this July are KRA’s expanded powers including the authority to summarily collect outstanding fees and levies of under Sh100,000 owed to government entities. 

It has also increased the KRA’s agency fee when collecting the Affordable Housing Levy to two per cent from 0.5 per cent. This is expected to give KRA more muscle to collect the levy from employers, with many firms holding the large unremitted amounts of the levy as well as help in the overall mobilisation of tax revenues.

The Act has allowed KRA to pre-populate a tax return based on information already available from third party sources. At the debate stage, the clause was among the contentious issues, with Kenyans noting KRA using third party data such as withholding certificates and bank statements could violate certain rights.  

Responding to the concerns, MPs amended the clause requiring the taxpayers to amend and approve the pre-populated returns as well as disclose the source of the data used to pre-populate the returns. 

Among the measures that take effect on January 1, 2027 include the shorter window for filing tax returns for individuals, who will now be required to file their returns by April 30.  

Companies will, however, continue filing by June 30, having successfully lobbied against the April 30 deadline that was originally proposed in the Finance Bill, arguing the complexity of filing returns for an organisation. 

The government noted that the new filing deadlines “tied together with changes under the Tax Procedures Act to provide for Pre-populated returns, are expected to make filing of returns simple and aligned with the use of technology, and to avoid clogging the system, where previously all taxpayers file returns at the same time. This is a measure to improve administration of income tax.” 

Some of the contentious issues dropped in the assented law include the proposals to give KRA powers to issue agency notices, freeze bank accounts and seize funds from a taxpayer’s suppliers or banks before the court could rule on the validity of the tax assessment.