Policy Alert: Kenya Introduces VAT on Off-Grid Solar Products

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Policy Alert: Kenya Introduces VAT on Off-Grid Solar Products

On Tuesday 23 June, the Kenyan National Assembly passed the 2020 Finance Bill that will result in the introduction of a 14% VAT on off-grid solar products.

The adopted Bill removed the current VAT exemption for “specialized equipment for the development and generation of solar and wind energy, including deep cycle batteries which use or store solar power upon the recommendation of the Cabinet Secretary responsible for matters relating to energy.” This in effect meant that, likely effective 1 July  2020, the status of solar equipment and accessories which were exempt would now be subject to VAT at the rate of 14%.

GOGLA’s position on the introduction of VAT is as follows:

  • It will result in the increase in price of solar equipment. Most companies will have no choice but to transfer this increase to the consumer. This will have a significant impact on the ability of low-income households in Kenya to purchase solar powered equipment including the basic solar powered lights.
  • It will erode the progress made towards the achievement of universal energy access by 2022 and Kenya’s development agenda to achieve Sustainable Development Goal (SDG) 7 which aims at ensuring access to affordable, reliable, sustainable and modern energy for all.
  • Due to the unique PAYGo business model, together with an effective door-to-door distribution model, our sector has created many jobs in the rural communities. These jobs are now at risk.
  • According to World Food Program projections, the number of people facing acute food insecurity is set to double by the end of 2020 due to the economic impact of COVID-19. Reducing access to solar products, including solar pumps, reduces the options to mitigate this crisis.

GOGLA and the local industry have been heavily involved in the discussions and negotiations related to this legislative development over the last few months. A previous similar proposal to reintroduce VAT was already proposed by the National Treasury in April, an effort ultimately rejected by the National Assembly through efforts of GOGLA and other stakeholders on grounds that it would conflict with the national priorities for universal energy access. This week’s development, which was clarified by the National Treasury to protect the local manufacturing industry, is disappointing and worrying.

The country was well poised to continue to make significant progress in bringing energy access to vast areas of the country through off-grid solutions that the government already realizes and acknowledges cannot be served otherwise. The introduction of new taxes on off-grid solutions will hamper this progress by affecting job creation and important improvements in quality of life and solutions that are bringing new opportunities for economic activity to these hard to reach communities.

We remain confident that the government is still committed to realize universal energy access by 2022, as His Excellency President Uhuru Kenyatta reiterated at the 2020 Off-Grid Solar Forum in Nairobi. Over the next few weeks and months, GOGLA will continue to engage with the government and all relevant stakeholders to pursue a suitable policy solution that will enable the off-grid industry to effectively help reach this goal.

Operational Note

Under the Finance Bill, any proposals should take effect on the date of assent. Given that under the provisions of the Public Finance Management Act, 2012, the Bill has to be enacted by 30 June 2020.

Therefore, on receiving presidential assent, the supply or importation of specialised equipment for the development and generation of solar and wind energy, including deep cycle batteries which use or store solar power will be subject to VAT from 1 July 2020.

It should be expected that any imports or sales of these products on or after 1 July 2020 will be subject to 14% VAT.  In the event that an importer already had an exemption from the Cabinet Secretary, it is likely that any such exemption for goods cleared on or after 1 July 2020 will now be overtaken by the new VAT provisions, principally because the CS cannot overrule the VAT Act (as now amended).

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