Concerns that Parliament should consider before passing Finance Bill 2026 into law

By Fredrick Kimotho

The Departmental Committee on Finance and National Planning will begin stakeholder hearings on the Finance Bill 2026 (“the Bill”) on Thursday, May 21, 2026. As the Bill enters this stage, Parliament has a crucial chance to review some of the most debated proposals before they become law.

While the Bill aims to raise government revenue, modernise tax administration, and widen the tax base, several provisions it contains could lead to unintended negative consequences, such as increasing the cost of living, reducing investor confidence, and giving the Kenya Revenue Authority (KRA) draconian enforcement power.

It is important for the debate to move beyond simply asking whether Kenya needs more revenue. Instead, we should focus on how to ensure that collection measures enhance fairness and equity, do not hamper economic growth, and that taxpayer rights are protected.

Here are some proposals in the Bill that deserve careful consideration and possible revision.

Withholding tax on card transactions and VAT on digital payment services

One major proposal contained in the Bill is a provision that seeks to introduce withholding tax on card transactions and VAT on digital payment services. Although these changes seem to be aimed at large financial institutions, the reality is that the extra costs will likely be passed on to ordinary Kenyans.

Kenya has built a global reputation as a leader in financial services space, thanks to affordable digital payments and friendly regulations. Parliament should avoid introducing taxes that will make it harder for people and small businesses to move from cash to digital payments, especially since many small merchants already operate on thin margins.

VAT changes for electric vehicles and related products

Another important area worth reviewing is the proposed VAT changes for electric vehicles and related products. The Bill proposes shifting from zero-rating to VAT exemption for electric motorcycles, buses, bicycles, and batteries. In practice, this change will likely make these items more expensive because suppliers can no longer recover input VAT.

At a time when Kenya wants to lead in green transport and climate innovation, making electric mobility costlier sends the wrong message. Keeping these products zero-rated would support Kenya’s clean energy goals and make electric transport more affordable. This is even more critical considering the current crisis arising from overreliance on imported fossil fuels. One would expect that this is the time to use tax policy to drive greater adoption of alternative energy.

Expanding KRA’s powers

The Bill also proposes to expand KRA’s powers by allowing agency notices to be issued even while a taxpayer’s appeal is pending. This means KRA could freeze or access bank accounts before disputes are fully resolved. Such a move shifts the balance too far in favour of the state and risks undermining the constitutional right to fair administrative action. Parliament should keep the current safeguards that protect taxpayers during ongoing appeals. Based on the experience in countries with similar provisions, if this measure is passed, taxpayers will suffer from inflated assessments and cashflow challenges that will be too costly for business.

Removing VAT exemptions for tourism facilities and conference centres

Investor confidence is another area Parliament must address. The Bill proposes to remove VAT exemptions for tourism facilities and conference centres without transitional protections. Investors who put money into projects based on existing incentives could face sudden cost increases. Parliament should introduce “grandfathering” provisions to protect investments already underway.

Treating at least 60 percent of distributable profits as distributed dividends

In what is seen as a move to give more powers to the Commissioner to raid on “tax avoidance schemes”, the Bill proposes that at least 60 percent of distributable profits be treated as distributed dividends in certain cases. This approach penalises businesses that choose to retain earnings for expansion or future investment, rather than paying them out as dividends. Especially in uncertain economic times, it is important to encourage businesses to preserve working capital and re-invest for growth without facing additional tax burdens. Many experts believe this provision should be removed entirely as the existing anti-avoidance provisions are sufficient.

Idea to think about

Over time, inflation and rising cost of living cost have eroded the real value of incomes, pushing many workers into higher tax brackets and increasing their tax burden. Stemming from this, there is an urgent need for Parliament to carefully review the Pay As You Earn (PAYE) tax bands. Many stakeholders, including the Kenya Bankers Association, have emphasised that a comprehensive review of PAYE bands would help ensure that tax policy remains fair and responsive to economic realities. Adjusting these bands would provide relief to low and middle-income earners, increase disposable incomes, and help stimulate consumer spending, which is not only vital for economic growth but generates more tax revenue for Government through consumption taxes. Let us seize the opportunity and provide this much needed relief to the employees who have carried a (disproportionate) burden over the years.

Bill also contains some positive proposals

Despite these concerns, the Bill also contains a number of positive reforms. Exempting pension death benefits from income tax is a humane and progressive step. The clearer tax framework for trusts and expanded reliefs for Real Estate Investment Trusts (REITs) could deepen capital markets and improve succession planning. Extending the tax amnesty programme and introducing a fairer penalty framework for eTIMS will provide practical relief for taxpayers.

The Bill shows the government’s determination to increase revenue without imposing a single dramatic tax hike. However, the combined effect of the proposals could mean higher consumer costs, heavier compliance burdens, and broader enforcement powers for KRA. Parliament must use the public participation process as a real opportunity to recalibrate the Bill and not just as a formality. The goal should be a Finance Act that raises revenue while protecting economic growth, taxpayer rights, investor confidence, and the everyday financial realities of Kenyan citizens.

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Fredrick Kimotho is an Associate Director and the Tax Policy Lead and Deloitte East Africa. The views presented are his own and do not necessarily represent those of Deloitte.