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Impact of VAT and Import Duty on the Stand-Alone Solar Sector in Kenya. A policy position paper presented by: The Kenya Renewable Energy Association (KEREA) and GOGLA

 

In 2020, the VAT exemptions for Stand-Alone Solar (SAS) products were removed through amendments to the Value Added Tax Act, No. 35 of 2013 that were enacted through the Finance Act, 2020. In addition, the Legal Notice No. EACC/89/2020 removed import duty exemptions for SAS products through amendments to the East African Community Customs Management Act, 2004. The removal of tax exemptions on SAS products to comply with the national fiscal policy to raise revenue and gradually eliminate tax exemptions, will have a negative impact on access to SAS products and retard the achievement of universal access to electricity, especially among low-income households. The economic impact assessment on the removal of the tax conducted by GOGLA and the Kenya Renewable Energy Association (KEREA) revealed that:

  • Kenya will not meet the universal access to electricity by 2022, with the SAS contribution (1.9 million households) falling short due to decreased sales owed to both taxes and COVID 19.
  • The government stands to lose a total of 19.6 million per year from VAT and import duty, a mere 0.1% of the total national revenue if the exemptions are reinstated.
  • Prices of SAS products have increased by between 10-24%, and sales have slowed down by 20%.
  • On the contrary, the government would gain US$ 46 million in taxes per year from 250,000 households starting new businesses and an additional US$ 2.7 million from 2,500 new jobs per year.
  • In total, VAT exemptions for SAS products would result in a net cost to Treasury of around USD 13 million per year and would generate over USD 40 million in annual benefits from corporate taxes and other economic activity.
  • Women’s productivity is another indirect benefit that is derived from the increased uptake of SAS and growth of the sector. Out of the jobs created, 27% would be taken up by women. According to the National Policy on Gender and Development, there are gender inequalities in the job market with women accounting for only 30% of formally employed Kenyans. The boost from this sector would help bridge this gap, albeit, slightly.
  • With removal of VAT and import duty, households can switch to SAS products from paraffin, wax or candles. Although they would not eliminate spending on all energy sources, but they should reduce spending on other sources by at least 70%. These savings would amount to US$ 38 million more per year by the end of 2025.
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