Why VATs on Solar Energy Hinder Progress on Energy Poverty
Photo credit: SolarAid
What difference can a value added tax make to the lives of those living in energy poverty? A big one.
Currently, many countries in sub-Saharan Africa apply a value added tax (VAT) to clean energy products like solar lanterns and solar home systems. While it is critical for all countries -- particularly developing countries -- to develop a strong and diverse tax base to pay for public services like healthcare and education, VATs are usually regressive, meaning that they hit the impoverished the hardest.
As the anti-poverty organization Christian Aid explains in its Tax Justice Advocacy Toolkit, “unless a comprehensive set of exemptions is applied to the basic goods and services consumed by poor people, they will spend a much higher percentage of their minimal incomes on the goods and services that carry this tax than those with large disposable incomes.”
Tragically, VAT is holding up a key development and climate objective: increasing clean energy access for all, both on and off the grid.
According to Lighting Africa, solar components and products in many geographic areas continue to be hit with duties, VATs, and surcharges which can lead to price increase on solar products of upwards of 30 percent. That means, in practice, the VAT is an unnecessary barrier to sourcing affordable solar products for off-grid and rural populations.
Even worse, thanks to high subsidies for kerosene, VAT exacerbates an already unequal energy playing field. The end result is that those desperately seeking energy access turn to heavily polluting and ultimately more expensive forms of fuel-based lighting - like kerosene.
As such, many governments have begun to update their tax code to include VAT waivers and exemptions that support, not hinder, solar energy deployment. This includes leaders from Burkina Faso, Nigeria, Mali, and most recently Kenya. The result? The off-grid solar industry is thriving in these countries, and solar energy is affordable for low-income people who most need access to energy.
But many more countries must implement these kinds of exemptions to expand solar power for everyone.
Zambia currently exempts off-grid solar products -- like solar lanterns -- from a VAT that is typically applied to imported goods. They do this because 42.3 percent of the population lives in extreme poverty and only 22 percent are connected to electricity. Affordability of solar products is therefore critical for those living beyond the grid. The existing VAT exemption has allowed solar products to remain within the budget of low-income individuals and families.
The Zambian government will soon be setting its budget for 2015, a process which will decide the fate of this exemption. Solar energy access providers like SolarAid are strongly encouraging the government to keep the VAT and tariff exemption in place. Zambian solar lighting customers who buy $10 solar lights save an average of $75 a year, with savings spent on food, school fees, and building small businesses.
But more solar products are needed in Zambia and across sub-Saharan Africa. While no panacea, reducing and eliminating solar VAT supports the ability of entrepreneurs and NGOs -- like SolarAid -- to get these services into the hands of those who need them most. In this specific case, solar VAT does nothing but harm those who need clean, reliable energy access the most.
A VAT exemption on off-grid solar products is the obvious choice, and we support SolarAid’s push to ensure it remains in place.
--Justin Guay, Associate Director, International Climate Program, and Vrinda Manglik, Associate Campaign Representative, International Clean Energy Access