Energy Sector Replace Particular Version (Quantity 2) – Renewables


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Value Added Tax (VAT) and its influence on uptake of Renewable
Energy Products in Nigeria

It is not any information that the nationwide grid has failed to supply a
sustainable and dependable supply of electrical energy provide for home
and industrial customers so as to maintain a quickly rising
Nigerian inhabitants and economic system. The World Bank studies that
although, about 55.4% of Nigeria’s inhabitants is linked to the
power grid as at 2020, they’re sometimes with out energy for about
85% of the time and virtually nonexistent in sure
areas1. Over the previous years, a number of off-grid energy
firms have emerged to attempt to bridge this hole. Plenty of
these entities have sometimes used renewable power sources which
serves the twin function of not solely supplementing the grid
shortfall but additionally aiding the nation in assembly its local weather
change obligations beneath the varied worldwide agreements. It
is subsequently vital that Government develop insurance policies which
help the continued development of those renewable power firms
(RECs).

Today, the majority of the marketplace for the RECs are in rural areas
the place a number of of them have arrange mini-grids or centered the sale of
their Solar Home Solutions (SHS). Pricing and affordability,
subsequently, stays a key challenge. One of the important thing sources of air
air pollution in city areas is small fossil mills in use by Small
and Medium Scale Enterprises (SMEs). It is vital {that a} pricing
mannequin be developed that encourages the transition of those SMEs
from the fossil gasoline mills to the varied options offered
by the RECs.

It is in view of the above, that the Government moved to exempt
the sale of renewable power tools from the applying of VAT
within the VAT (Modification) Order 2021 (“the Order’).
However, the jury is out as to the influence of the exemption on the
pricing and affordability of the out there options.

We have subsequently determined to overview the idea of VAT, the
provisions of the Order, and its potential influence on the varied
renewable power options on supply by RECs.

The Concept of VAT

VAT is charged and payable at a flat fee of seven.5% on all
provides of products and companies in Nigeria aside from these listed
as exempt or zero-rated within the First Schedule to the VAT Act. The
VAT Act defines items as all types of tangible properties, moveable
or immovable, however doesn’t embrace land and constructing, cash or
securities, and companies as something aside from items, or companies
offered beneath a contract of employment and consists of any intangible
or incorporeal (product, asset or property) over which an individual has
possession or rights, or from which he derives profit, and which
may be transferred from one individual to a different, excluding pursuits
in land and constructing, cash or safety.

A provide is deemed to happen, beneath the VAT beneath the
following situations:

  1. At the time an bill or receipt is issued by the provider, or
    cost for consideration is because of, or obtained by the provider in
    respect of that offer, whichever comes first;

  2. Where items are provided beneath any rental settlement or regulation
    which gives for periodic funds, they shall be deemed to be
    successively provided for successive components of the durations of the
    settlement or as decided by such regulation, and every of the successive
    provides shall be deemed to happen when cost turns into due or is
    obtained, whichever is earlier;

  3. Where, and to the extent that, provide of taxable items and
    companies are progressively or periodically made beneath any settlement
    or regulation which gives for the consideration for that offer to be
    paid in instalments or periodically and in relation to the
    progressive or periodic provide, these provides shall be deemed to
    be successively made, and every such successive provide shall be
    deemed to happen each time any cost turns into due or is
    obtained or an bill regarding solely that cost is issued,
    whichever happens first;

  4. Where items are provided beneath an instalment credit score settlement,
    that offer shall be deemed to happen on the time the products are
    delivered or the time any cost of consideration is obtained by
    the provider in respect of the availability, whichever happens first.

The Order, which has a graduation date of 30 July 2021,
replaces the erstwhile VAT (Modification) Order 2020. It modifies
the First Schedule to the VAT Act by increasing the listing of exempt
items and companies and up to date the definition of some phrases to
guarantee consistency with the amendments launched to the VAT Act by
Finance Act, 2020. One of the additions to the listing of exempt items
beneath the Order is renewable power tools (REE). Consequently,
the availability of REE is an exempt transaction for VAT functions in
Nigeria.

Review of the varied power options by RECs and the
potential influence of the Order on pricing

We have mentioned beneath, the varied options/fashions in use by
RECs and the potential influence of the Order on their pricing:

  1. Outright or Cash Sales: This is the only implementation
    mannequin. Here, the RECs promote tools to finish customers. The prospects
    pay in money for his or her system, and possession and threat are
    transferred instantly. The operation and upkeep of the
    system additionally turn out to be the duty of the shopper though the
    REC might present any requested upkeep service for a charge. In
    this mannequin, the gross sales worth of the SHS shall be exempt from VAT in
    line with the Order which can have the potential of decreasing the
    price by 7.5%. However, the charge charged for upkeep and different
    companies shall be topic to VAT.

    Only a number of prospects although, can afford the outright buy of
    the tools. There is a robust argument that the life cycle price
    of those tools compares favorably to that of any fossil gasoline
    generator, although it’s tough to make this argument the place
    prospects can solely relate to their speedy money outflow somewhat
    than a life cycle price. It subsequently, is debatable if the elimination
    of VAT on the sale of the tools will result in improved uptake of
    the product by means of this implies.


  2. Lease to Own Model: Here, the tools is offered to the
    prospects beneath a lease settlement. There is usually, an
    intention to switch possession on the finish of the lease interval.
    However, financing issues sometimes influence the
    classification of the lease into finance or operational leases. A
    lot of the RECs acquire funding from lenders who wish to retain a
    lien over the tools. Consequently, in quite a lot of these instances,
    the tools stays within the books of the REC till the shopper
    completes its cost on the finish of the lease interval.

    This subsequently causes confusion as as to whether this can be a rent
    buy transaction or purely a rental transaction. The key
    query has all the time been whether or not it’s potential to promote a chunk of
    tools beneath a rent buy association while retaining the
    similar asset in your books as a set asset on which capital
    allowance is claimed on an annual foundation? Yes, the intention is to
    switch possession, however this doesn’t occur till the final
    instalment of the agreed month-to-month lease rental is obtained. So, are
    the tools stock or mounted belongings?

    The sale of those tools, whether or not they’re labeled as
    stock or mounted belongings, can be exempt from VAT beneath the
    Order, however would the month-to-month leases the place they’re labeled as
    mounted belongings be handled as gross sales proceeds, somewhat than service charges
    which don’t seem to benefit from the exemption offered beneath the
    Order? Given that there’s a important variety of RECs which
    function this mannequin, it can be crucial that this challenge is given
    enough consideration in any other case, the target of decreasing price
    and subsequently rising uptake will not be achieved.


  3. Energy-as-a-service (EaaS): Here, the REC owns the system, and
    gives power as a service to the shopper, who pays a connection
    and periodic charges (e.g., month-to-month) to the REC or a charge per kWh. The
    buyer isn’t answerable for the upkeep of the system and
    by no means turns into the proprietor. In the EaaS mannequin, the periodic charges
    needs to be liable to VAT because it doesn’t qualify as a sale of REE
    beneath the Order. This can be just like what we’ve got with grid
    energy the place energy bought by the Distribution Companies (Discos) to
    closing customers are liable to VAT.

    However, this raises the query once more of pricing and
    affordability. Given that quite a lot of mini grids are in underserved
    or unserved areas that are largely populated with low revenue
    earners, would it not make sense to increase the VAT exemption to cowl
    these set of customers? This is very as a result of the supply of
    the ability in lots of these mini-grids are renewable and
    sustainable so we’re in a position to obtain a twin aim of extending
    power entry while assembly our climate change obligations.

Conclusion

The goal of enhancing power entry and assembly our local weather
change obligations require that we persistently evolve revolutionary
options. We must do issues otherwise to attain these
goals. Addressing the VAT problem within the sector is one in every of
the problems we have to resolve to unlock extra of the potential in
the renewable power sector. Dealing with the challenges
highlighted above is an effective approach to begin. We might not have the ability to
resolve the problem of excessive price of kit so long as we proceed
to import a good portion of those tools, however we are able to make
little modifications which helps in addressing the general price and
enhance uptake of those renewable power options as technique of
enhancing power entry by means of sustainable means.

Footnote

1. https://information.worldbank.org/indicator/EG.ELC.ACCS.ZS?places=NG

The content material of this text is meant to supply a common
information to the subject material. Specialist recommendation needs to be sought
about your particular circumstances.

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