ACE TAF conducted this study on responsible VAT and duties for the solar sector. The analysis summarised in this report aims to provide a quick and clear understanding of the impact of VAT and duty regimes on energy access and a range of socioeconomic development outcomes. This report summarises the key findings of the analysis and its application to three focus countries: Malawi, Rwanda, and Sierra Leone.
The benefits to households gaining access to SAS products alone outweighs the foregone tax revenues associated with VAT and duty exemptions. While there remains a significant energy access deficit in many Sub-Saharan Africa (SSA) countries, tax exemptions offer an effective tool to support achieving energy access objectives and valuable economic activities for households. Beyond these economic benefits to users of SAS systems, a faster-growing SAS sector will also support jobs in the value chain, deliver environmental benefits and key sustainable development outcomes including improved health and education.
Standalone solar products play a critical role in helping countries achieve their electrification targets. The importance of these products is now well recognized by governments which deploy a range of fiscal strategies, including tax incentives, to support the growth of the sector. SAS products often represent the most cost-effective way of providing electricity to unserved households in sparsely populated rural areas, where it is expensive and impractical at least in the short-term to extend large grid infrastructure, and where customers often have relatively low ability to bear the financial cost of energy access.
While many African governments have implemented VAT and duty exemptions, not all countries provide tax exemptions, and/or these exemptions are not always fully implemented. This is in part because of a limited evidence base on the benefits of granting exemptions, and the financial cost and capacity development needed to consistently implement such incentives. Therefore many governments have not assessed the impact of taxes foregone on SAS uptake and the full range of socioeconomic benefits to the different stakeholders – government, households, and the environment. Even where exemptions are granted, inconsistent application at the border remains a major challenge. Codes do not always clearly define the components of the standalone system that are exempt; for example, SAS providers in Zambia sometimes incur taxes on solar components especially batteries, that are at other times granted exemption from duties.
In the absence of an evidence base to support tax exemptions, there is a risk of reversing existing policies as countries face a challenging public finance context because of the COVID-19 pandemic. Countries that previously had exemptions are now reviewing these policies, as they need to balance priorities given the economic downturn which is both reducing tax receipts and increasing the need for public spending. These policy changes will potentially have an adverse effect on the ability to achieve energy access targets. For example, in June 2020, the Kenyan National Assembly passed the 2020 Finance Act that introduced 14% VAT on standalone solar products which will likely erode the progress made towards the achievement of universal energy access by 2022.
This report was authored by the Africa Clean Energy Technical Assistance Facility and Open Capital Advisors. Download the full report here.