Imposition of VAT on solar products defeats the intended purpose

The Finance Act, 2014 amended Item 45 of the Part I of the First Schedule to the VAT Act, 2013 to exempt “specialised solar equipment and accessories, including solar water heaters and deep cycle-sealed batteries which exclusively use or store solar power”. 

It is estimated that to date over 4.3 million solar units have been sold in Kenya. Solar Home Systems constitute 18% of these sales, while pico-solar products take up 82%. Up to 99% of Kenya’s existing off-grid electrification is through stand-alone solar. Through the KOSAP program the government of Kenya aims to provide electricity services to remote, low density, and traditionally underserved areas of the country, by providing 250,000 new electricity connections by stand-alone systems through the result-based financing and debt financing facilities combined.

The supply of solar equipment in Kenya has historically been subject to VAT at zero rate under the Repealed VAT Act (Cap 476). The VAT Act 2013 which came into effect in September 2013 omitted various provisions relating to VAT exemption or zero-rating of solar equipment and accessories effectively making them subject to VAT at 16%. In 2014 the industry lobbied for VAT exemption with the aim of making solar products more affordable to low-income earners.

The Finance Act, 2014 amended Item 45 of the Part I of the First Schedule to the VAT Act, 2013 to exempt “specialised solar equipment and accessories, including solar water heaters and deep cycle-sealed batteries which exclusively use or store solar power”.  Additionally, the Finance Act, 2014 also introduced Item 48 in the same schedule to exempt “inputs or raw materials supplied to solar equipment manufacturers for manufacture of solar equipment or deep cycle-sealed batteries which exclusively use or store solar power.

The industry has enjoyed favourable policies for the last five years which have made solar products affordable especially with the introduction of the PAYGo systems which have enabled customers to pay an initial deposit, and a KShs.50 daily payment for a period of 1 year. In the beginning of 2020, when the world was hit by the global pandemic, off grid businesses were equally affected resulting in the industry obtaining essential service status to enable businesses to operate beyond the curfew hours and bypass the travel restrictions imposed by the government. As the industry came to terms with the impacts of the pandemic, the government reintroduced VAT in the Finance Bill 2020, and at the EAC level, an import duty on solar products was reintroduced. These two actions severely affected product pricing with more than 60% of solar companies passing the increase in pricing directly to customers with estimated price increase in solar systems by about 21- 40% as seen in the research conducted by Kenya Renewable Energy Association (KEREA).

As the government works towards achieving universal access to electricity and the last Mile Connectivity, energy access still lags behind particularly in the rural areas which accounts for 26% grid connection and 30% solar connection. There are many Kenyans primarily in the rural areas who cannot afford the cost of a small solar home system. In the KOSAP counties, only 23% of the population has access to grid or solar. According to sales reports, total demand (sales) for both cash and PAYGo grew by 40% in 2018 and 55% in 2019. However, sales slowed down by 11% in the first half of 2020, the first time in four years. It is projected that households will continue to rely on non-clean forms of energy such as paraffin and wood which are detrimental to the environment and to the health of the women and children.

Despite COVID-19 pandemic being a disruption to the industry which resulted to decreased household incomes, job losses and decreased business revenues; taxation on stand-alone solar products has hit far worse on the majority of solar companies (KEREA survey). The KOSAP project which targets to address the energy access gap for 1.3 households by 2022 will be hugely affected with 66% of the solar companies participating in the program reporting to difficulties in reaching the KOSAP targets due to the changes in pricing.

The National Assembly Finance Committee during the review of proposed Tax laws Amendments in December 2020, implied that the government is heavily reliant on the industry to support the achievement of the budgetary targets. However, the industry is slowing down as evidenced in the decline in investments and consumer demand. Decline in the industry only means that the industry will be unable to contribute towards the corporate taxes, income taxes, PAYE and the input taxes that will contribute to the overall rise in the revenue collections. It would seem therefore that as government raises revenue from the sale of solar products, it would lose revenue from other taxes by companies which in the long run may outweigh the income from VAT.

The industry remains hopeful that the government will reconsider reversing the taxation on solar products to facilitate the overall growth of the economy. The removal of VAT on solar products will go a long way to keep these products affordable and support Kenya reach its universal access to electricity goal by 2022. All Kenyan’s deserve to turn the lights on when they get home at night, and this tax impedes the achievement of that goal for Kenya.

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