Proposed 20% Non-Resident Income Withholding Tax (WHT) on Bank Card Merchant Payments.
The Finance Bill 2026 has proposed an amendment that widens the definition of “management fee ” to include interchange fees and merchant service fees arising from transactions that use plastic or virtual cards under partnerships with global card networks, e.g., Visa, MasterCard, American Express (Amex), China UnionPay (CUP), DCB-Japan and Discover, from 1st July 2026.
This proposed change is under Clause 2 of the Finance Bill, 2026. Section 2 of the Income Tax Act is amended in subsection (1);
(a) in the definition of “immovable property”, by deleting the word “and” appearing immediately after the words “immovable property” at the end of item (a), and substituting therefor the word “or”.
(b) in the definition of “management or professional fee”, by inserting the words “and includes interchange fees and merchant service fees arising from transactions that use a card as a means of payment” immediately after the word “calculated”.
(c) by deleting the definition of “royalty” and substituting therefor the following new definition— “royalty” means a payment made as a consideration for— (a) the use or the right to use — (vii) a proprietary digital platform, payment network, payment-card scheme, payment processing system, switching system, clearing system or settlement system, including access, participation or usage rights in such system through a card, whether the consideration is periodic or transaction -based and whether or not the payment is described as a service fee, transaction fee, network fee, assessment fee, processing fee or similar charge;”
Explainer- What are the Three Components Making up a Card Payments Merchant Discount Rate (MDR)
Merchant service fee (interchange fee, network assessment fee, and processing fee) make up the Merchant Discount Rate. The MDR is the fee merchants (businesses – supermarkets, MSMEs, online) pay to banks and payment processors for using their debit or credit cards or mobile wallets to make payments. The MDR normally ranges from 1% to 3% of the cost of goods and services bought from merchants but could be higher if the merchant is more risky or if you are a high-income individual with a special prestigious card like American Express, Visa (Platinum, Signature, Infinite) or MasterCard (World, World Elite, World Legend).
Interchange fee is the transaction processing fee set by global card networks like Visa or MasterCard, which is paid by the merchant’s bank (businesses – supermarket, MSMEs, online ) to the bank of the cardholder (customer paying for goods or services).
Also Read: Treasury Responds to Viral Finance Bill 2026 Tax Claims
Network assessment fee is the fee paid to payment networks such as Visa and MasterCard, or to local networks like Kenswitch.
Processing fee is the fee retained by the bank or payment gateway providers (e.g., Pesapal, Cellulant, Flutterwave, Paystack (Stripe), iPay Africa, DPO Pay) of the merchant (businesses – supermarket, MSMEs, online)
Finance Bill Proposal of 16% VAT on transaction fees
The Finance Bill 2026 proposed amendment subjects to VAT money transfer, payment processing, settlement, merchant acquiring, gateway services or aggregation supplied over a software or platform for a fee or commission by a payment service provider.
Clause 31 of the Finance Bill, 2026, on VAT treatment of Digital Financial Services. The Bill proposes to amend Paragraph 1 of Part II of the First Schedule to the VAT Act by deleting subparagraph (b) that exempts: (b) the issue, transfer, receipt or any other dealing with money, including money transfer services, and accepting over the counter payments of household bills, but excluding the services of carriage of cash, restocking of cash machines, sorting or counting of money.
The Bill then proposes to replace it with a new subparagraph (b) as follows: (b) the issue, transfer, receipt or any other dealing with money, including money transfer services, and accepting over the counter payments of household bills, but does not include— (i) the services of carriage of cash, restocking of cash machines, sorting or counting of money; and money transfers, payment processing, settlement, merchants acquiring, gateway or aggregation services supplied over a software or platform for a fee or commission by a payment service provider.
Rise in Transaction Cost for Ordinary Kenyans Paying Local and Online Merchants
The memorandum submitted on 25th May 25, 2026 by the Kenya Private Sector Alliance (KEPSA) on Finance Bill, 2026 to the National Assembly Departmental Committee on Finance gives a breakdown of the tax increase that Kenyan businesses and citizens will bear every time they swipe their cards at supermarkets, MSMEs or use their cards to pay for goods and services online.
Table 1 uses the example of a Merchant Discount Rate (MDR) of Kshs 100. The current excise duty of 15% adds a further Kshs 15, bringing the total fee to Kshs 115. The proposed non-resident Withholding Tax (WHT) of 20% of MDR will add Kshs 20, bringing the total fee after WHT to Kshs 135.
Also Read: Safaricom CEO Breaks Silence on Possible M-PESA Split From Telco Business
The proposed VAT of 16% on MDR, plus an excise duty of 15% on the MDR, will add another Kshs 18.4. The gross card payment transaction cost passed on to be borne by Kenyan businesses and individuals will therefore hike up to Kshs 153.4, broken down into MDR of Kshs 100 and total taxes of Kshs 53.4, of which proposed VAT and withholding taxes constitute Kshs 38.4.
The overall effect is a 38.4% increase in card payment transaction costs, which will further reduce the incomes of Kenyans after taxes and thus they have less money left in their pockets to pay for rent, electricity, gas, food, fare, school fees, hospital bills, clothing, save, invest, buy assets or entertainment.
| Table 1- Current and Proposed Taxes on Merchant Discount Rate (MDR) Charged on Plastic or Virtual Cards. | Current | Proposed Amount if Finance Bill 2026 is approved. | Tax Increase |
| Current Merchant Discount Rate (MDR) Charged by Card Acquiring Banks to Merchants (Supermarkets, MSMEs, Online). MDR is shared among card-issuing banks, card-acquiring banks, payment processors, and card networks. | Kshs 100 | Kshs 100 | |
| Current Excise duty @ 15% (borne by each party as per recent jurisprudence = 15% (100) | Kshs 15 | Kshs 15 | |
| Proposed Non Resident WHT @20% of MDR for card companies (borne by the local banks) (if Finance Bill, 2026 proposal is adopted) = 20%(100) | 0 | Kshs 20 | Kshs 20 |
| Proposed VAT @ 16% of MDR plus excise duty of 15% on the MDR (if Finance Bill, 2026 proposal is adopted) =16% (100+15) | 0 | Kshs 18.4 | Kshs 18.4 |
| Total Merchant Transaction Fee, including Merchant Discount Rate (MDR), Excise, VAT, and Withholding Tax, passed on to Kenyans. | Kshs 115 | Kshs 153.4 | Kshs 38.4 |
Other Effects of the Proposal
The higher taxes will reduce card transactions and thus negatively impact digital payments and financial inclusion as Kenyans ditch debit and credit cards. The unpredictability of taxes is scary to local and foreign direct investors in digital payments infrastructure. Payments are the lifeblood and oxygen oiling the wheels of the economy, and the proposed taxes will reduce the speed at which money circulates in the economy.
Taxing debit and credit card payments while exempting fintech or bigtech digital wallets like Lipa na Mpesa is discriminatory and does not live up to the global financial sector regulatory principle of “Same Activity, Same Risk, Same Regulation,” which the Financial Stability Board says is critical to ensuring a level playing field amongst competitors.
The proposal is against the Supreme Court’s ruling in the Commissioner of Domestic Taxes v Absa Bank, which clearly upheld that interchange fees and merchant service fees are not management or professional fees for the purposes of withholding tax.
Follow our WhatsApp Channel and X Account for real-time news updates.
