Money transfer charges levied by payment service providers (PSPs) such as M-Pesa and Airtel Money will be spared from the 16 percent value added tax (VAT) as MPs propose additional amendments to the Finance Bill, 2026 to exempt the cash transfer services.
The Departmental Committee on Finance and National Planning has recommended further tweaks to the first Schedule of the Value Added Tax (VAT) Act providing a clear distinction between mobile transfers and support services such as cash handling and payment processing.
The changes follow objections to the application of VAT on money transfers, payment processing, settlement, merchant acquiring, gateway or aggregation services by various stakeholders including Safaricom and Airtel which hold licenses as payment services providers (PSPs) from the Central Bank of Kenya (CBK).
The imposition of VAT on mobile money transfer charges would have increased the cost of payments via the platforms negating a drive to bring down the fees.
‘The committee recommended the amendment of the clause to adopt a broader, technology-neutral framework covering money transfer services and related transactions, while clearly distinguishing taxable transactions such as cash handling and payment processing,’ the Finance Committee said in its report on the consideration of the Finance Bill.
‘The committee further noted the need for a clear definition of ‘payment service provider’ to ensure certainty, consistency, and effective application of the law as contained in the Bill.’
Payment service providers led the objection to the proposal to levy VAT on the platforms highlighting its impact on the affordability of services by consumers.
Some 42 firms including Pesapal, Kenswitch, Airtel Money and M-Pesa would have been liable for value added taxes even as the National Treasury insisted that the tax was targeted at owners of platforms and not users.
Airtel Networks Kenya Limited warned the proposal would have resulted in double taxation as mobile money payments already attract excise duty.
‘Delete the proposal to retain the VAT-exempt status of money transfer services for affordability of mobile-money services and to promote an inclusive and digitally driven financial eco-system among others,’ Airtel said.
‘Furthermore, its deletion would preserve integrity and coherence of the tax framework designed to ensure that financial services are taxed once, either through the VAT or the excised duty regime.”
The Kuria Kimani-led committee recommended that the National Treasury adopt a clearer definition of the term-payment service provider-to ensure certainty, consistency and the effective application of the law as contained in the Bill.
Tax experts had warned that the VAT charge on payment service providers would have been payable by consumers as revenues earned by PSPs were generated from user fees.
For the widely used M-Pesa service with nearly 40 million users, and which was the pioneer mobile money service, the billions of shillings in daily transfers would have been a low-hanging fruit for exchequer revenues.
The application of VAT on the user charges would have made transfers costly rendering the goal of bringing down mobile-money charges sterile.
The Kenya National Financial Inclusion Strategy 2025-2028 by CBK for instance proposes caps to the cost of person-to-person mobile money transfers and seeks to reduce costs for users of mobile money from a baseline of Sh23 –the average cost per mobile money transaction in 2024– to a mean of Sh10 by 2028.
Charges on certain mobile money transactions are already as high as 6.9 percent of the amount being transferred, far outpacing what banks charge their retail customers to move cash.
‘M-Pesa user charges are already expensive, and this would only be a step in the wrong direction, ultimately sidelining some from using formal financial services,’ said David King’ori, a senior tax advisor at corporate law firm Bowmans Law.
M-Pesa charges Sh7 for transfers between Sh101 and Sh500 and a maximum of Sh108 for transfers above Sh50,000, while low-value transactions under Sh100 are free.
The proposal to apply VAT on mobile transfer platforms stemmed from a High Court ruling that saw judges bar the Kenya Revenue Authority (KRA) from collecting taxes from PSPs, including Pesapal and Kenswitch.
In its ruling, the High Court noted that the services of receiving, transferring and processing payments on behalf of third-party merchants were exempt from VAT.
Attempts to apply VAT on PSPs have been deemed discriminatory as traditional financial services have not been subjected to the same taxation attempts.
Automated Teller Machines (ATMs) transactions, telegraphic money transfer services, foreign exchange transactions, cheque handling and loan underwriting are deemed as financial transactions and are exempt from VAT.
The issuance of securities for money, provision of guarantees and the issue, transfer and receipt of dealings with bonds or stocks are also exempt from VAT.