New VAT Rules Under Finance Act 2026: What You Need to Know

The next time you check a VAT invoice, make a digital payment, or return to Kenya with goods, the rules behind that transaction may not be what they were before.

One of the changes affects VAT refunds on unpaid invoices, giving taxpayers a longer window to recover tax on qualifying bad debts. The waiting period has moved from two years to three years from the date of supply.

This means a business that has accounted for VAT on a taxable sale but has not received payment from its customer will have to wait an additional year before applying for the refund, provided the debt meets the requirements for a bad-debt claim.

Businesses dealing with unpaid invoices will therefore need to keep proper records, including the relevant invoices and evidence of efforts made to recover the outstanding amounts.

VAT Refunds, Invoices and Digital Payments Affected

The new rules also clarify when VAT should be charged on an invoice. A VAT-registered business should only include VAT where the underlying supply is taxable.

Being registered for VAT does not mean every good or service supplied by a taxpayer automatically attracts the tax. The classification of the particular supply determines whether VAT should be charged.

Digital payment services have also received specific VAT treatment. Fees and commissions charged for services such as payment processing, settlement, merchant acquiring, payment gateways and aggregation are subject to VAT at the standard rate.

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The tax applies to the fee or commission charged by the payment service provider for offering the specified service.

For businesses providing outsourcing services, the Act has clarified how employee-related costs are treated. Salaries, wages, statutory deductions and other related employee expenses incurred by a supplier are excluded when determining the taxable value of qualifying outsourcing services provided to a client.

Hire-purchase arrangements have also been given a specific condition. Finance charges may be excluded from the taxable value of goods supplied under a hire-purchase agreement where the supplier is licensed in accordance with the Hire Purchase Act.

This means an arrangement cannot automatically receive the treatment simply because it is described as hire purchase; the applicable legal requirements must also be met.

Returning Passengers and Selected Supplies Get New Treatment

VAT-free allowance for qualifying goods brought into Kenya by returning passengers has increased from about Ksh 39,000 (USD 300) to about Ksh 260,000 (USD 2,000).

The higher threshold remains subject to the applicable customs rules and eligibility requirements, meaning returning passengers still need to establish that the goods they bring into the country qualify for the allowance.

The tourism industry is also affected by the amendments. The Finance Act 2026 defines a tour operator as a tour or safari operator licensed by the competent authority responsible for regulating the tourism sector.

It also introduces the definition of in-house supplies, helping determine the scope of the VAT exemption available to qualifying tour operator services.

Another adjustment applies where goods or services that were previously taxable become exempt. If a registered person has unsold stock for which input VAT had already been deducted, the taxpayer must account for that input tax in the return for the period when the supplies become exempt.

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Adjustment is calculated using the same method originally used to deduct the input tax. If the calculation results in excess input tax, the resulting amount must be paid to the Commissioner.

The Act has further introduced VAT exemptions covering selected goods and services, including dialyzers, scrap metal, qualifying pharmaceutical inputs, bioethanol vapour stoves and selected infrastructure-related supplies, that are subject to the specific conditions and classifications provided for under the law.

These changes mean that VAT treatment will now depend more closely on the type of transaction, the goods or services involved, and the conditions attached to each provision.

For taxpayers, that makes the details important. A business seeking relief on an unpaid invoice, a payment provider charging a service fee or a returning passenger bringing goods into Kenya may each face different VAT rules under the new framework.

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A photo of KRA offices
PHOTO/KRA