Finance Bill 2026 proposes sweeping tax changes in Kenya, including ending a key tax exemption for Kenya Airways and expanding taxation across digital payments, software and financial systems. The draft legislation, published on May 4, 2026, signals a broader effort by the government to increase revenue collection from strategic sectors.
At the center of Finance Bill 2026 is an amendment to Section 35 of the Income Tax Act, which would delete Paragraph 1(lii). This provision currently grants a withholding tax exemption to Kenya Airways on payments made to non-resident service providers offering specialized technical, maintenance, compliance, training and digital systems support.
Finance Bill 2026 Ends Kenya Airways Tax Relief
The removal of the exemption under Finance Bill 2026 means Kenya Airways could face additional tax costs when paying foreign service providers. These services include aircraft maintenance systems, compliance frameworks, aviation software and internationally accredited training.
The exemption has historically applied where such services are unavailable locally or where providers are certified by international regulatory or standards bodies. This reflects the global nature of the aviation industry, where safety and operational requirements often necessitate partnerships with foreign firms.
If enacted, the change would increase operating costs for the airline, potentially affecting its financial position and competitiveness in international markets.
Finance Bill 2026 Broadens Digital Payment Taxation
Beyond aviation, Finance Bill 2026 introduces significant changes to how digital transactions are taxed. The bill expands the definition of “management or professional fee” to include interchange fees and merchant service fees associated with card-based payments.
This adjustment would bring a wider range of digital payment charges into the tax net. It is expected to affect banks, payment processors and merchants involved in Kenya’s growing cashless economy.
The move reflects the government’s intention to capture more revenue from digital financial activities as electronic payments become more prevalent.
Finance Bill 2026 Redefines Software and Royalty Taxes
Finance Bill 2026 also revises the definition of “royalty” to include a broader set of software-related payments. This includes fees for proprietary and off-the-shelf software, as well as costs related to licensing, development, training, maintenance and support.
In addition, the new definition extends to digital platforms and payment infrastructure, including card systems, processing systems, switching systems, clearing systems and settlement systems. These changes would apply regardless of whether payments are made periodically or per transaction.
As a result, software firms, fintech companies and digital commerce operators may face increased tax obligations under the proposed framework.
Finance Bill 2026 Introduces VAT Changes on Unsold Stock
Another key provision in Finance Bill 2026 is the introduction of Section 17A in the VAT Act. This would require businesses to repay input tax previously claimed on unsold stock if those goods are no longer taxable.
The measure could create immediate tax liabilities for companies holding inventory, particularly in sectors with fluctuating tax classifications. Businesses may need to adjust their accounting and inventory management practices to comply with the new requirement.
Finance Bill 2026 Signals Broader Tax Reform
Taken together, the proposals in Finance Bill 2026 indicate a comprehensive restructuring of Kenya’s tax system. The changes target multiple sectors, including aviation, financial services, software and commerce.
The government appears to be focusing on areas with growing economic activity, particularly digital transactions and technology-driven services. By expanding the tax base, the bill aims to increase revenue collection in line with evolving economic trends.
Market Implications of Finance Bill 2026
The potential impact of Finance Bill 2026 extends across several industries. For Kenya Airways, the removal of tax relief could increase operational expenses tied to essential international services.
For the financial and technology sectors, the expanded tax definitions may lead to higher costs for digital transactions and software usage. These costs could be passed on to consumers, potentially affecting pricing and adoption of digital services.
Businesses may also face increased compliance requirements as they adapt to the new tax framework.
Outlook for Finance Bill 2026
Finance Bill 2026 is still subject to legislative review and approval. Stakeholders, including businesses and industry groups, are likely to engage with policymakers to assess the implications of the proposed changes.
If enacted, the bill would mark a significant shift in Kenya’s tax policy, aligning it more closely with the realities of a digital and service-driven economy.
The outcome of the legislative process will determine how these changes are implemented and their ultimate impact on key sectors. For now, Finance Bill 2026 represents a pivotal development in Kenya’s fiscal strategy.
