Home Energy VAT on Solar is a step backwards reducing chances of achieving the 2022 universal energy access goal

VAT on Solar is a step backwards reducing chances of achieving the 2022 universal energy access goal

by Kennedy Omutanyi

One cannot stress enough the importance of electricity in every sphere of modern life.

Not only is it essential to all sectors of the country’s development; health, education, entertainment, manufacturing, security, food & beverage, transport, telecommunication, mining, etc… it is also fundamental to the economic growth and well-being of communities and indeed a development indicator.

The 2019 Census shows that 50.4% of the overall population enjoys mains electricity for lighting while 24.5% uses solar. In the rural areas only 26.3% have mains and 23.7% are still relying on polluting paraffin.

The lack of access to electricity limits a huge number of households from improving their livelihoods and leaves them vulnerable to the negative environmental and health impacts that come from “unclean” energy. 

Studies and realities have proved that Minigrids are key to the electrification of rural areas.  Currently in Kenya, 99% of the existing off-grid electrification is provided by small-scale stand-alone PV systems.

Kenya has always been a leader in the African energy space, but in the recent months- with the removal of VAT exemptions to solar products, the country could lose out on the gains it made towards achieving universal access to energy by 2022.

This compounded the challenges of communities in the off-grid areas who depend on and/or whose hopes were on solar products to access electricity and improve their livelihoods.

While it might be understandable that the government requires revenue, the income expected to be realized by Kenya Revenue Authority (KRA) from VAT on solar products does not warrant the negative impact that this tax has on the underserved communities.

A recent impact study by African Minigrids Developers Association (AMDA) shows that removal of VAT exemption on solar products will:(1) increase mini-grid system costs by 11-13%; (2)increase energy tariffs by at least 4.5%; and (3) significantly reduce the ability to get new investment in the off grid energy.

In the mini-grid sector, any slight increase in cost results to a high impact on the end consumer which is its affordability. 

This will significantly slow the electrification of communities living in the off grid regions of Kenya as well as in the other rural areas which are underserved by the national grid. 

The off grid communities and the county governments of Turkana, Mandera, Marsabit, Kilifi, Kwale, Siaya, Kisii, Narok, Wajir, Isiolo and many other parts of Kenya will lose in terms of (a) Education (increased study time); (b) Generating new sources of income, (c) Skilled job creation (in the solar sector specifically) – Power for All undertook a study in 2019 showing that in Kenya; the decentralized energy sector alone has created over 10,000 direct jobs and 65,000 jobs in the communities they serve.

Taxing this sector will constrict its growth which will mean fewer jobs both within the companies providing energy and the communities reliant on that energy. It will have the opposite of the intended effect (a) Government revenues (from increased productive use and formalized jobs), (b) Health (electrified clinics, vaccine cold chains, reduced pollution from fossil fuel use), (c) Environment (reduced emissions of climate-warming greenhouse gases).

It should be noted that VAT on solar products are already applied in the construction and maintenance  of mini-grids and that the VAT exemption was removed from the imported solar panels, batteries and related equipment which is about 1/3 of the total CAPEX of a mini grid.  

Removing the VAT exemption is an additional taxation on the poor. 

The 2020 introduced VAT targets clean cooking, off-grid solar and all types of mini-grid technologies (hydro, wind, solar) specifically designed to empower the poorest and most marginalized citizens of Kenya. The taxes will be paid by those who can least afford it, those who  are beyond the reach of government financed services and those who least deserve such treatment during an economic and health crisis like Covid-19. 

Reduced the chances of advancing government’s agenda of universal access to energy

These taxes will make Kenya’s national goal of achieving universal access to energy by 2022 unattainable – and make all elements of the Big Four agenda (food security, affordable housing, manufacturing, and affordable healthcare) quite expensive and very difficult to achieve. Research by Duke University shows that introducing this VAT means 17% of more Kenyan households will annually not be able to afford these products. 

Makes the Government of Kenya insincere and noncommittal on climate change. We have all seen the impacts of extensive flooding and the unpredictability of the rains in recent years. These extreme and unforeseeable events are well established to be the result of climate change – and they are getting worse each year. As these climate events cost the economy billions in lost revenue for our farmers and cost the government enormously in terms of emergency relief, is “tax the solution to our problems!” really in the government’s interest? To add salt to injury, due to increased tariffs, more and more people will turn to the use of wood, charcoal, paraffin and diesel compromising both their environment and health.

In summary, taxing access to electricity which is the engine of growth, and the backbone behind so many of our national objectives, is counterproductive and will lead to less tax income longer term: from the jobs that will not be created, from the products that will not be sold and from the services that will not be rendered without access to electricity.  

We therefore call upon the Parliamentary Finance and Energy Committees, legislators, the treasury, the ministries of Finance and Energy and the Council of Governors to ensure that VAT  on solar products, to be used in off-grid areas, is removed so that Kenyans living in these marginalised regions and rural areas can at least start moving towards fair and equitable treatment in terms energy access for their socio-economic development (and we need to keep  in mind that, unlike in grid-connected regions, electricity tariffs in these areas are not subsidised).

We kindly appeal to our esteemed leaders to ensure that this is considered during the current budgeting period for 2021-2022 financial year. 2020 was a dark year for so many reasons. Let’s make 2021 a bright year of light for all Kenyans and reinstate the VAT exemption for solar, particularly in rural areas served by mini-grids. Kenyans in the off-grid and rural areas are waiting to breathe a sigh of relief!

Authored by Kennedy Omutanyi, Kenya National Coordinator – Africa Minigrid Developers Association (AMDA) 

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