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Economic Impact Assessment on Removal of Tax Exemptions on Stand-Alone Solar Products in Kenya: Technical Report

 

This report presents an assessment of the impact of VAT and import duties on household access to SAS products in Kenya, over the next five years.

The recent introduction of Value Added Tax (VAT) at the standard rate of 16% in the Finance Act 2020 and import duties of up to 25% through the East African Community Customs Management Act, pose a significant risk to the benefits of access to SAS products. These additional costs will be entirely (or almost entirely) passed on to consumers, which will make high-quality SAS products unaffordable for many households. In total, reintroducing VAT exemptions for SAS products could result in Treasury incurring a net cost of around USD 13 million per year by 2025, while import duties could represent up to USD 16 million further. This is a small (albeit not unimportant) contribution compared to total national revenue of USD 16 billion.

Considering the impact on prices and affordability, the 16% VAT charge could result in as many as 470,000 fewer households accessing SAS products by 2025 (with import duties the number rises to 650,000). This limited reach would also come at a cost of 2,500 jobs in the SAS supply chain, a reduction of up to USD 2 million in income taxes and corporation tax contributions, and a slowdown in economic activity worth at least USD 40 million per year for households. Furthermore, VAT and import duties will significantly limit the ability to reach national universal energy targets and put SAS products further out of reach to the most vulnerable communities. It will also reduce available lighting for study hours, increase the use of environmentally damaging energy alternatives such as wood-fuels and kerosene, and limit the development of businesses and service providers utilizing solar technologies for productive purposes such as healthcare provision, medical cold-storage, and micro, small and medium enterprises.

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