Impact Assessment of VAT and Import Duty Exemptions for Stand-Alone Solar in Nigeria – Policy Brief

Stand-alone solar (SAS) products play a critical role in delivering electricity access for all, especially for hard-to-reach, low-income Nigerian households. Out of a total population of 201 million, 77 million still lack access to electricity, and even those who are connected to the main grid experience frequent – and costly – outages. Households often spend more on generator fuel and kerosene for lighting than on consumption from the grid, resulting in an inefficient, costly, and environmentally damaging energy sector. In this context, the Federal Government of Nigeria (FGN) aims to reach 5% of households with stand-alone solar technologies by 2040, and recently launched an ambitious plan to connect 5 million un-electrified households in the country through solar home systems (SHS) and mini-grids by 2023.

VAT and import duty exemptions are a crucial part of an enabling environment to support achievement of these ambitious energy access targets. While there are VAT and import duty exemptions being put in place by the government, it is imperative to note that the scope of the VAT and import duty exemptions needs to be expanded and effectively applied to achieve the FGN’s set targets for 2023 and 2040 as stated above.

The report presents an assessment of the impact of VAT, import duties and proposed comprehensive waivers for household access to SAS products in Nigeria over the next five years.

Findings

Under a reasonable but ambitious growth scenario, 2.75 million households could be using an SAS product by 2025, if VAT and import duty exemptions are in place and implemented effectively. Without the exemptions, the sector would likely survive but will struggle to grow to its potential, at a cost of around 700,000 fewer households gaining access to SAS technologies in the next five years.

Fully implementing both VAT and import duty exemptions would imply the government foregoing up to ₦ 1.8 billion in annual tax receipts at today’s sales volumes. However, this is a short-term loss, for long term gains. In particular, if the SAS industry grows in line with its potential described above, the potential for VAT and income taxes could rise rapidly, worth up to ₦ 6.8 billion annually by 2025, and this could also contribute around ₦ 4.5 billion and ₦ 2.3 billion annually in corporation tax and employee income taxes respectively. Even in the short-term, VAT and import duty exemptions could make a significant contribution to reducing federal fuel subsidies, with the tax exemptions potentially reducing.

Recommendations 

To make best use of tax policy to support the achievement of the Federal Government of Nigeria’s ambitious energy access targets of reaching five million household through solar connections by 2021, there are three main recommendations that should be implemented:

1. Ensure clear definition of the scope of, and effective and efficient implementation of import duty and VAT exemptions to quality-verified SAS systems and components.
2. Set-up a Technical Working Group led by the Ministry of Finance, Budget and National Planning to develop a plan and support the implementation of the exemptions for identified solar products, facilitate government cross-agency cooperation and government – private sector coordination, and ensure that tax exemptions are effective in making sure quality SAS products reach underserved populations.
3. Improve the importation process for solar products by resolving issues such as HS code classification that cause delays and add associated costs such as demurrage that are passed on to the end user. This also includes the effective implementation of the Ministerial Directive on Import Duty and VAT Modification Order for solar products.