Finance Act 2026: KRA Explains Key VAT Changes for Businesses

The Kenya Revenue Authority (KRA) has outlined key changes to Value Added Tax (VAT) introduced under the Finance Act 2026, with businesses required to take note of new rules affecting VAT refunds, taxable supplies, digital payment services and exemptions.

The changes affect how businesses account for VAT in various transactions, including when they can claim refunds, when VAT should be charged and how certain goods and services should be treated.

One of the key changes concerns VAT refunds arising from bad debts. 

Businesses that have accounted for VAT on a taxable supply but have not received payment may apply for a refund where the unpaid amount qualifies as a bad debt.

However, the period before a qualifying business can apply for the refund has been increased from two years to three years.

KRA said businesses dealing with unpaid invoices should therefore retain invoices, evidence of efforts made to recover the debts and other relevant records to support any future refund claim.

The Finance Act 2026 has also clarified that VAT should only be charged on taxable supplies. KRA said a VAT-registered business should not automatically add VAT to an invoice simply because it is registered for the tax.

Businesses must first establish whether the goods or services being supplied are taxable or exempt before issuing an invoice.

The new rules also provide for adjustments where supplies that were previously taxable become exempt.

Where a registered person has unsold stock for which input tax had already been deducted, the business is required to account for the input tax in the tax return for the period in which the supplies became exempt.

The adjustment is to be calculated using the same method that was originally used to deduct the input tax. Where the adjustment results in excess input tax, the resulting tax is payable to the Commissioner.

KRA has also highlighted changes affecting digital payment service providers. Fees and commissions charged for specified services are subject to VAT at the standard rate.

These services include payment processing, settlement, merchant acquiring, payment gateway and aggregation services supplied through software or a digital platform.

The VAT applies to the fee or commission charged by the digital payment service provider for providing the service, rather than the underlying payment being processed.

The Finance Act 2026 has further increased the VAT-free allowance for qualifying goods brought into Kenya by returning passengers from USD 300 to USD 2,000.

KRA noted that the allowance remains subject to applicable customs rules and eligibility requirements, meaning returning passengers must ensure that the goods they bring into the country qualify for the exemption.

Changes have also been introduced on the VAT treatment of outsourcing arrangements.

Employee-related costs incurred by a supplier in providing outsourcing services to a client are excluded when determining the taxable value of the outsourcing service. The costs include salaries, wages, statutory deductions and other related employee expenses.

The Act has also clarified the treatment of finance charges under hire-purchase arrangements.

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.

At the same time, KRA said informal or unregulated financing arrangements that resemble hire purchase do not automatically qualify for the exclusion and that the agreement must fall within the applicable legal framework.

The tourism sector is also affected by the changes, with the Finance Act 2026 providing greater clarity on the VAT treatment of tour operator services.

The Act defines a tour operator as a tour or safari operator licensed by the competent authority responsible for regulating the tourism sector. 

It also defines “in-house supplies” to clarify the scope of the VAT exemption available to qualifying tour operator services.

Businesses operating in the tourism sector have therefore been advised to confirm that they meet the applicable requirements when determining whether the exemption applies.

The Finance Act 2026 has additionally introduced VAT exemptions for selected goods and services, including dialyzers, scrap metal, qualifying pharmaceutical inputs, bioethanol vapour stoves and selected infrastructure-related supplies.

KRA said businesses should confirm the applicable conditions, classification and documentation before applying any VAT exemption.

The tax authority has urged businesses to review the changes based on the transactions they undertake.

Businesses have been advised to review their invoices and contracts, confirm how their goods and services are classified and maintain records supporting their VAT claims.