Kenya’s proposed Finance Bill 2026 has triggered heated public debate, with critics warning that some measures could increase the cost of living, squeeze businesses, and burden consumers.
The government, however, says the proposals are aimed at widening the tax base, sealing loopholes, and creating a fairer and more predictable tax system.
Below is a breakdown of some of the proposals and the government’s response to concerns raised by former Law Society of Kenya President Faith Odhiambo.
1. New 5% Presumptive Tax on Mitumba Imports
The proposal affecting second-hand clothes traders, commonly known as mitumba traders, has raised fears of higher clothing prices and job losses. Critics argue the tax could hurt low-income Kenyans who rely on affordable imported clothes.
According to the government’s explanation, mitumba imports already attract 16% VAT at the point of entry. The new framework assumes traders make a 5% profit margin, which would then attract a one-off 30% income tax under a presumptive system.
Officials argue the move will simplify taxation by eliminating multiple tax points and making compliance easier for traders. The government also says the proposal followed consultations with mitumba traders and is intended to curb under-declaration by large importers.
2. 25% Excise Duty on Mobile Phones
The proposed excise duty on mobile phones has sparked concern among digital rights advocates and businesses, who warn that smartphones could become unaffordable for many Kenyans, especially young people.
The government says the tax is part of a broader strategy to expand taxation within the fast-growing digital economy. Officials argue the system will focus on actual device usage and participation in the digital economy rather than relying solely on import declarations.
Authorities insist the policy seeks to balance revenue collection with digital inclusion.
3. Shorter Tax Filing Deadlines
The Finance Bill also proposes changes to tax filing timelines from end of June to end of April, a move critics say could increase pressure on small businesses and individuals with limited administrative capacity.
The government argues earlier deadlines will improve efficiency at the Kenya Revenue Authority by allowing returns to be verified within the same financial cycle. Officials say this will improve revenue forecasting and reduce discrepancies in tax records.
4. Increase in Residential Rental Income Tax
Residential rental income tax is set to rise from 7.5% to 10%, raising concerns that landlords may pass the cost to tenants or evade compliance altogether.
The government says the increase will be backed by stricter enforcement measures, including simplified systems for non-resident landlords and withholding mechanisms through agents. Officials say the aim is to improve compliance and close gaps that previously allowed some landlords to avoid taxation.
5. VAT on Digital Financial Services
Digital financial platforms and fintech firms are also set to face tighter VAT rules under the Bill. Critics warn the changes could increase transaction costs and make digital payments more expensive for ordinary Kenyans.
However, the government says the proposal mainly seeks to clarify VAT treatment for digital intermediaries, arguing that many fintech platforms have been operating in legal grey areas. Officials insist the changes are intended to create tax neutrality between traditional banks and digital platforms.
6. Withholding Tax on Merchant and Interchange Fees
Another proposal targets merchant and interchange fees within the banking and payment ecosystem. Businesses fear the measure could increase operational costs and complicate automated banking systems.
The government says the withholding tax is designed to capture revenue from high-volume financial transactions that have historically been difficult to track. Officials argue that collecting the tax at the source will reduce reliance on self-reporting and strengthen tax compliance.
7. Deemed Dividend Tax on Retained Profits
One of the most contentious proposals is the deemed dividend tax targeting companies that retain profits instead of distributing them as dividends.
Critics say the proposal could discourage reinvestment and create a hostile environment for investors. But the government argues the measure is meant to stop companies from indefinitely retaining profits simply to avoid taxation.
Under the proposal, firms retaining more than 60% of undistributed income could face taxation unless they can justify the retained earnings commercially. Officials say the threshold introduces predictability and reduces discretionary enforcement.
Bigger Picture: Shift Away From PAYE Dependence
The government says the broader direction of the Finance Bill 2026 is to spread the tax burden beyond salaried workers by targeting under-taxed sectors such as digital services, informal trade, and certain corporate structures.
Officials also insist public participation on the Bill is still ongoing and that the proposals may evolve before Parliament passes the final law.
>>> Finance Bill 2026: What Kenyans Should Expect From New Finance Law
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