Excise Duty Meets Crypto: The Legislative Gaps Kenya Must Close

As Kenya's digital economy is rapidly evolving, the government is continuously updating its tax policies in a bid to expand the tax net while ensuring there is no tax leakage resulting from rapidly changing business models. A notable change introduced through the Finance Act 2025 is the imposition of a 10% excise duty on fees charged by virtual asset service providers (VASPs) on virtual asset transactions. This measure aims to expand the tax base and integrate digital assets into the formal tax system.

The introduction of excise duty on fees charged by VASPs comes two years after the Finance Act 2023 introduced Digital Asset Tax at a rate of 3% on the transaction value of digital asset exchanges. The Digital Asset Tax imposed significant costs on digital asset traders, such as those dealing in cryptocurrencies, as it was seen as a tax on capital rather than a tax on the income of VASPs. This was onerous and negatively affected the operations of VASPs. The Digital Asset Tax was subsequently repealed by the Finance Act 2025 in favor of excise duty applied to the fees charged by VASPs on virtual asset transactions.

The shift to excise duty is seen as a step towards fostering innovation within the digital economy while still broadening the government's revenue base. Notably, this amendment is expected to reduce the cost of doing business for VASPs compared to the previous regime. Despite the intended positive impact of the changes to the taxation of virtual assets, the implementation of the new excise tax may present several legal and operational challenges.

Challenges that may hinder full implementation of the recently introduced excise duty on fees charged by VASPs

One of the potential challenges is the lack of clear legal definitions within the Excise Duty Act. The Act does not define the term "virtual assets." Nor does it define what qualifies as a virtual asset. The term "virtual assets" may cover a broad spectrum of digital instruments, such as cryptocurrencies, tokens, non-fungible tokens (NFTs), and digital vouchers. The lack of clarity creates uncertainty as to which assets fall within the scope of excise duty, thereby increasing the risk of inconsistent application, interpretational disputes, and potential double taxation.

Conversely, when the Digital Asset Tax was introduced, the Income Tax Act was amended to include a definition of "digital asset," which provided a degree of certainty in the law's implementation. The current lack of definition under the Excise Duty Act presents an undesirable uncertainty for both taxpayers and administrators.

Additionally, the term "Virtual Asset Service Provider" is also not defined within the Excise Duty Act. The absence of a clear definition creates ambiguity regarding which entities and individuals fall within the scope of excise duty. To ensure effective implementation and enforcement of the law, it is essential that the legislation explicitly defines "Virtual Asset Service Provider." This definition should clearly outline the types of businesses, platforms, or individuals that fall within its ambit, such as cryptocurrency exchanges, wallet providers, and other intermediaries involved in the transfer safekeeping, or administration of virtual assets.

By providing a precise definition, the KRA will be better equipped to identify the intended taxpayers, minimize the risk of non-compliance and efficiently collect the relevant taxes from those operating within the virtual asset ecosystem. The lack of clear definitions may result in tax disputes, and while Kenyan courts have previously held that the absence of a statutory definition does not always result in ambiguity, the technical and evolving nature of virtual assets makes clarity and precision in tax legislation essential to avoid tax disputes and ensure enforceability.

International best practice highlights the importance of establishing a comprehensive legal framework prior to imposing tax obligations on virtual assets. Jurisdictions such as the European Union, Singapore, and the United States have all enacted detailed legislation to define and regulate virtual assets before introducing relevant tax measures. This approach provides legal certainty, facilitates compliance, and supports effective enforcement.

Proposed way forward and conclusion

For Kenya to effectively implement excise duty on virtual asset transactions, the Excise Duty Act should be amended to include clear and comprehensive definitions of "virtual assets" and "VASPs." The KRA, in collaboration with other regulatory bodies, should also issue detailed guidance to clarify the application of excise duty to virtual asset transactions, supported by practical examples and compliance protocols. Ongoing engagement with industry stakeholders will be vital to ensure that the tax regime is workable, enforceable, and does not impede innovation.

While the shift from the Digital Asset Tax to an excise duty on fees charged by VASPs is aimed at a more balanced approach for business and the government, the lack of clear legal definitions for virtual assets and VASPs in the Excise Duty Act may create major challenges. Until these issues are resolved, applying excise duty to virtual asset transactions will remain uncertain. A clear and coordinated approach is needed to give certainty to businesses, regulators, and the economy.

Marlene Blessing is a senior tax consultant at Deloitte East Africa. The views presented are her own and not necessarily those of Deloitte. She can be reached at mablessing@deloitte.co.ke.

This article was originially published on Business Daily here.