Kenya’s draft law proposes tax on second-hand clothes

Kenya’s new draft Finance Bill 2026 is proposing a raft of tax proposals that could yet prove controversial. The proposed law published on April 30, 2026, says President William Ruto’s government targets $3.63 trillion in revenue for 2026/27 and a wider budget deficit of 5.3 percent of gross domestic product in the 2026/27 fiscal year (July to June), up from 4.7 percent in 2025/26. The bill, effective July 1, 2026, if unchanged, will tax second-hand clothes locally known as mitumba, smartphones, digital platforms and increased import duties on local products. And salaried workers will continue to be taxed as the Bill has omitted relief on Pay as You Earn (PAYE). “On PAYE, Kenyans were led to expect relief and a restructuring of the tax bands to ease the burden on salaried workers. That proposal does not appear in this Bill. That is not a minor omission. An explanation is owed to every employed Kenyan who was waiting for it,” said Faith Odhiambo, former President of the Law Society of Kenya (LSK). The Bill proposes a 25 percent excise duty on phones for cellular and wireless networks. “A phone is not a luxury. It is how Kenyans bank, communicate, conduct business and access government services. Parliament must interrogate this carefully,” Ms Odhiambo said. Read: Kenya second-hand clothes imports from China rise 86pc On digital financial services, the Bill removes existing VAT exemptions on money transfers and payment processing. “These are the tools of financial inclusion that millions of Kenyans, including the very people this government says it wants to reach, rely on daily. Making them more expensive will not serve the objective of a broader tax base,” she said. The Bill also makes changes to when Kenyans should file their returns. On tax filing timelines, the Bill moves the income tax return deadline to April 30, which is two months earlier than the current June 30, and compresses nil return filing to January 31. On mitumba, the Bill inserts a new Section 12H into the Income Tax Act which deems profit at 5 percent of customs value payable upfront before goods are released by KRA as a final tax. That means that a trader importing a bale worth $1 million pays $50,000 regardless of whether they make a profit or a loss. Critics say this is not equitable taxation. “This reduces the time available for audit completion, cash flow planning and compliance. For small businesses and individual traders, this is not administrative reform. It is an additional compliance cost they can ill afford,” said Odhiambo. “Be that as it may, we cannot afford a repeat of June 2024. Parliament must discharge its oversight role with the seriousness this moment demands.” She added, “They should not merely rubber stamp what the Treasury has placed before it. Every clause must be scrutinised. Every punitive or ambiguous provision must be rejected or amended.” The Bill increases residential rental income tax from 7.5 percent to 10 percent. Absent a serious enforcement framework, this would drive non-compliance rather than revenue. Read: Why Kenya is second-hand clothes dumping ground By including interchange and merchant service fees within the definition of management or professional fees for withholding tax purposes, the Bill introduces a compliance burden into automated banking processes. That burden will be passed on to businesses and ultimately to consumers. However, the Bill proposes the reduction of corporate tax for non- resident companies from 37.5 percent to 30 percent to improve the investment climate. The extension of the tax amnesty to cover liabilities up to December 31, 2025, provides a genuine and welcome pathway to compliance. The Bill also proposes VAT exemptions on electric buses, bicycles, dialysers, animal feed raw materials and PPP infrastructure, which are seen as sensible measures. The clarity introduced on trust taxation ensures beneficiaries are not taxed on income already taxed at the trust level, and the recognition of gratuity contributions as exempt income are also steps in the right direction.