Finance Act 2026: The Definitive Briefing for Kenyan Businesses

1. How we got here: the legislative timeline

For readers who track process as well as outcome, the Act’s journey matters because several of the Bill’s proposals were changed or left out along the way.

1. The Finance Bill 2026 was published in early May 2026, accompanying the KES 4.8 trillion budget for FY 2026/27.
2. Public participation and committee hearings followed through May and June.
3. The National Assembly passed the Bill with amendments in mid June 2026.
4. The President assented on 23 June 2026.
5. Commencement is staggered: most provisions from 1 July 2026, the export declaration requirement from 1 September 2026, and the filing timeline and extractive sector changes from 1 January 2027.

2. Income tax changes

2.1 Residential rental income: the rate stays at 7.5 percent

The Act does not change the residential rental income tax rate, which stays at 7.5 percent of gross rent. Its amendments to the rates in the Third Schedule touch other items. Landlords who want to understand the annual net-income alternative, which they can choose by written notice to the Commissioner, can ask our accountancy team to set out both positions from their actual figures.

2.2 Non-resident landlords get their own rental income tax

The Act creates a non-resident rental income tax, a final tax on rent that a non-resident earns from property in Kenya. The Third Schedule rates for non-resident rent are 30 percent of the gross amount for immovable property and 15 percent for other property; the Act did not change those rates. A non-resident owner must register through a simplified framework, then file and pay by the 20th of the month after the month the rent is paid. That does not apply where a resident person receives the rent on the owner’s behalf and the tax is deducted at source. Diaspora property owners who are non-resident for tax purposes should check which route applies to them.

2.3 Investment deductions: two targeted changes

The Act changes the investment allowance table in two specific places:

• Petroleum or gas storage facilities keep the 50 percent first-year allowance, but where the investment is above KES 10 billion the allowance is 100 percent in the first year of use.
• The 10 percent allowance on industrial buildings is now stated to be per year, in equal instalments.

The Act does not amend the other items in the table. Machinery used for manufacture, for example, stays at 50 percent in the first year of use.

2.4 Employment income: gratuity exemption recalibrated

A new exemption covers contributions to a gratuity where the contract of service runs for a continuous period of at least three years, or is renewed or extended beyond three years, and the amount paid does not exceed 31 percent of the emoluments earned over the contract period. Employers running gratuity schemes should have payroll re-model the exemption before the next contract renewal cycle. PAYE bands and personal relief were left unchanged by the Act.

2.5 Extractives and capital gains

Two further changes matter to a narrower audience:

• The income tax rate for non-resident company contractors in petroleum operations falls from 37.5 percent to 30 percent, paired with a new 15 percent rate on repatriated income for mining licensees and petroleum contractors. All of this takes effect on 1 January 2027.
• For capital gains, a new limb of the Eighth Schedule charges gains on shares sold by a non-resident where the shares derive their value from Kenya, or where the sale changes the group membership of a Kenyan resident company or the ownership of property in Kenya. The new limb states no minimum percentage; the existing limbs and their 20 percent tests remain. This widens the net for deals involving Kenyan assets held through offshore structures.

3. Withholding tax changes

The withholding tax amendments are quietly among the most commercially significant provisions in the Act, because they reach the payments industry that nearly every Kenyan business now runs on.

1. Royalty redefined. The new definition of royalty expressly covers payments for the use of a proprietary digital payment card network or platform, whatever the fee is called, and software fees, whether for licence, development, training, maintenance or support. Banks and fintechs paying international card schemes need to check their withholding position.
2. Professional fees expanded. The definition of management or professional fee now includes interchange fees and merchant service fees on card transactions, pulling routine payment-acquiring economics into withholding.
3. Scrap metal. A 1.5 percent withholding tax applies on payments for scrap metal, formalising a notoriously informal supply chain.
4. EAC dividends. The 5 percent rate on dividends paid to citizens of East African Community partner states is removed, so the standard 15 percent non-resident rate applies. Anyone receiving such dividends should update their withholding records.

The practical consequence for ordinary SMEs is indirect: payment processing costs may be repriced, and merchants may see acquiring fees reflect the new withholding and VAT treatment described below.

4. VAT changes

4.1 Payment processing loses its exemption

The VAT exemption no longer covers payment processing, settlement, merchant acquiring, gateway and aggregation services supplied over a software or platform for a fee or commission by a payment service provider, which brings them to the standard 16 percent. Money transfer services stay exempt. Combined with the withholding changes above, the cost of card and platform payments may rise, so check your bank and processor fee schedules.

4.2 The bad debt refund wait extends to three years; the input VAT limit does not change

A supplier who has paid VAT on a supply but has not been paid by the customer can now apply for a refund of that VAT after three years from the date of supply, up from two. This is a longer wait, and it does not touch input VAT. The time limit for claiming input VAT stays at six months after the end of the tax period of the purchase. Businesses that discover unclaimed input tax during a books cleanup, a common finding when we take over a client’s bookkeeping, should check it against that limit.

4.3 Exemptions granted and removed

The exemption schedule was reshuffled, and many of the new entries carry conditions. Among the notable movements:

• Newly exempted: dialyzers, scrap metal, goods for infrastructure projects funded by the National Infrastructure Fund, plant, machinery, equipment and spare parts for approved projects with total investment of at least KES 3 billion, goods and services for LPG storage tanks where the investment is at least KES 5 billion, and the granting of credit, including the realisation of collateral.
• Moved to exempt: inputs for manufacturing pharmaceutical products are now exempt on the recommendation of the Cabinet Secretary for health, having previously been zero rated. Suppliers of exempt goods generally cannot recover the related input VAT, so local manufacturers may see costs rise.
• Narrowed: the zero rating of electric bicycles and of solar and lithium ion batteries is now tied to specific tariff headings.
• Removed: several exemptions were deleted or narrowed, including the carriage of cash and the restocking of cash machines, and several Bill-stage proposals to exempt additional items did not survive to the Act.

4.4 Labour outsourcing clarified

A new provision deems employee-related costs (salaries, wages, statutory deductions and related costs) in labour, outsourcing and employee placement services to be disbursements made by the supplier on behalf of the client, subject to the existing disbursement rule in the VAT Act. For the BPO, staffing, and payroll outsourcing sector this addresses the question of whether VAT applies to the full invoice or only the service margin, and contracts should be reviewed to match.

5. Excise duty changes

Excise changes are aimed at specific products this year. Among them:

1. Fruit and vegetable juices now have two rates: KES 14.14 per litre without added sugar or sweetener, and KES 20 per litre with it.
2. A 50 percent excise duty on antique, vintage and classic motor vehicles, meaning those first registered at least 30 years before purchase and valued at KES 10 million or more.
3. New or changed rates on other goods, including tobacco products, imported sugar at KES 40 per kilogram, and imported timber and board products at 30 percent.
4. Float glass originating from East African Community partner states is no longer excluded from the excise duty on imported float glass.

6. The administration overhaul: where SMEs should focus

If you read only one section of this report, read this one. The Finance Act 2026 rewires how KRA interacts with taxpayers, and much of it assumes your data is already in their hands.

6.1 Prepopulated returns: KRA drafts first

KRA may now use its electronic tax system to generate a prepopulated tax return, which it must issue by the end of January of each year of income. The Act does not list the data sources; KRA says only that it will use available taxpayer information. A taxpayer issued with a prepopulated return has two months from the date of issue to confirm or amend it.

Understand what this changes. Until now, you told KRA your numbers and KRA checked. Where KRA issues a prepopulated return, it starts from its own numbers and you must confirm or correct them within a deadline, with records behind you. A business whose books are three months behind cannot meaningfully exercise its right to amend. This provision alone justifies the monthly close discipline we describe in our accounting systems report.

6.2 A general anti-avoidance rule enters the Tax Procedures Act

New section 18A on tax avoidance schemes, widely described as a general anti-avoidance rule (GAAR), lets the Commissioner work out your tax as if a scheme had not been entered into, where a person carried out a tax avoidance scheme for the purpose of obtaining a tax benefit. The assessment must come within five years of the end of the tax period, with written reasons within 30 days of the determination, and a taxpayer may apply for a private ruling on complex transactions. The Act also repeals the older anti-avoidance provision in section 23 of the Income Tax Act. Early enforcement will define the reach of the new rule. Aggressive structures, including informal ones common in SME groups (management fees between related entities, asset shuffling before disposals), carry statutory challenge risk. Structures should be documented with commercial purpose in mind; our tax advisory team runs exactly these reviews.

6.3 Data-driven assessments get statutory footing

New section 29A lets KRA issue an assessment on a person’s income using listed information, including tax withheld and PAYE accounted for, the electronic tax invoice system, third-party returns, inspections and audits. KRA may ask you in writing for relevant information at least 30 days before issuing the assessment, and you may object in the usual way. Together with prepopulated returns, this is the legal scaffolding for the enforcement model eTIMS was always building toward: the mismatch letter that cites your own invoice data back to you. Our KRA audit survival guide explains how to respond when one arrives.

6.4 Electronic compliance penalties: softened from the Bill, still serious

The Bill proposed a penalty of two times the tax due for electronic compliance failures, which drew objections. The Act settles on the higher of 5 percent of the tax due, KES 100,000 for a company, and KES 10,000 for an individual, with an important safeguard: the Commissioner must first issue a notice asking for reasons and consider whether the failure was beyond the taxpayer’s reasonable control, was not wilful, and was put right as soon as practicable. The penalty covers failing to issue an electronic tax invoice, file a return electronically, or pay tax electronically.

Read the minimums carefully. For a small company, a KES 100,000 minimum transforms eTIMS sloppiness from a bad habit into a material financial risk. If your invoicing discipline is imperfect, fix it this quarter; our eTIMS report covers the practical setup.

6.5 The amnesty window extends, then closes

The tax amnesty framework is extended: interest, penalties and fines accrued up to 31 December 2025 can fall away where you apply and pay all outstanding principal tax by 31 December 2026, do not incur a further tax debt, and give a written undertaking to settle any outstanding taxes. The amnesty is granted only once. For any business carrying legacy arrears, this is a time-limited way to clear the position. Quantify, apply, propose a payment plan if you need one, and settle all principal before the deadline. Anything still unpaid after 31 December 2026 attracts interest and penalties with no amnesty.

6.6 Other administrative changes worth knowing

• Recovery of fees and levies: where KRA collects a fee, levy or charge under another law, it can recover unpaid amounts as if they were unpaid tax, with summary recovery for amounts up to KES 100,000.
• Export declarations (from 1 September 2026): importers must obtain and retain, for five years, an export declaration or equivalent customs document from the country of export. If they cannot produce it, the Commissioner may reject related claims, determine customs value or tax liability on the information available, and impose prescribed penalties. Traders should be collecting these documents from suppliers now.
• Virtual asset service providers: annual information returns become mandatory, with a penalty of KES 1 million for each failure to file and KES 100,000 for each omission, extending the visibility regime to crypto platforms.
• Travellers’ allowance: the VAT-free allowance for goods brought in by returning passengers rises from USD 300 to USD 2,000.
• REITs: transfers of property into real estate investment trusts gain relief from capital gains tax and stamp duty.

7. What did not survive the Bill

Several of the Bill’s most contested proposals were dropped or changed before enactment:

• The proposal to treat a portion of undistributed profits as deemed dividends was not adopted, after strong pushback from the private sector.
• The two-times-tax penalty for electronic compliance failures was replaced with the 5 percent regime described above.
• The proposal to charge excise duty on mobile phones at 25 percent on activation was not adopted, and the Act makes no change to excise duty on mobile phones.
• Several proposed VAT changes were left out, including VAT on money transfer services and exemptions for mobile phones and worn clothing.

The lesson of recent years holds: Bill-stage panic is premature, but Act-stage complacency is expensive. What matters is what commenced on 1 July.

8. Action list: what Kenyan SMEs should do before December

1. Close your books monthly, starting now. Prepopulated returns and data-driven assessments make current books the price of participation. If you cannot close monthly in-house, outsource it.
2. Audit your eTIMS discipline. Every sale invoiced, every purchase supported. The new penalty minimums make a gap a five- or six-figure risk.
3. Quantify legacy arrears and use the amnesty. Apply and pay all outstanding principal by 31 December 2026 to qualify for amnesty on interest, penalties and fines accrued to 31 December 2025, subject to the other conditions. The amnesty is granted only once.
4. Review payment costs against your margins. VAT on payment processing plus withholding on card network fees may surface in your bank charges. Update pricing models before it erodes margin silently.
5. Landlords: keep applying the 7.5 percent residential rate, which the Act did not change, and make sure non-resident owners are either registered and filing monthly or have the rent handled through a resident agent.
6. Review related-party arrangements against the GAAR. Document commercial purpose now, not when the query letter arrives.
7. Importers: collect export declarations from suppliers. The requirement has applied since 1 September 2026, so build the five-year retention into your filing system.
8. Check your input VAT and bad debt dates. Input VAT must be claimed within six months after the end of the tax period of the purchase, and a bad debt VAT refund can now be claimed only after three years from the date of supply.

9. Compliance calendar impact at a glance

Date	What changes
1 July 2026	Main provisions commence: non-resident rental income tax, VAT changes, WHT expansion, GAAR, penalty regime, prepopulated returns framework
1 September 2026	Export declaration requirement begins for importers
31 December 2026	Amnesty deadline: apply and pay all outstanding principal to qualify for amnesty on interest, penalties and fines accrued to 31 December 2025
1 January 2027	Filing timeline changes (individuals file by the last day of the fourth month after the year of income) and the extractive sector changes

This report summarises legislation for general information and is not professional advice. Provisions, commencement dates, and administrative practice will be refined through regulations and KRA notices over the coming months. Contact Sparkline before acting on any specific provision.