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Rooftop solar power: To zero-rate or not…?

Muneer Hassan CA(SA), is Senior Lecturer in Taxation at UJ, lecturer on the Gauteng Board Course, and member of the SAICA National Tax Committee.

He recently published an opinion article that first appeared on the The South African Institute of Chartered Accountants (SAICA) website on 21 February 2023.

In his State of the Nation address on 9 February 2023, President Cyril Ramaphosa announced that the Minister of Finance will outline incentives for rooftop solar power in his Budget Speech on 22 February 2023.

Edward Kieswetter, Commissioner of the South African Revenue Service (SARS), spoke at the PSG Think Big series on 7 February, where he stated that he would also like to see tax incentives or concessions for households investing in their own energy generation, or use the value-added tax (VAT) system to zero-rate products that offer alternative energy solutions. The latter proposal begs the question whether or not to zero-rate and if this is the optimal choice.

The Organisation for Economic Co-operation and Development (OECD) has advocated for a broad-based, single-rate VAT system since the 1980s (Hageman, Jones & Montador, 1987). South Africa is an associate and participant in the OECD, and as a result, South African policymakers gain access to the OECD expertise and good policy practices (OECD 2021).

Recent studies, such as the Mirrlees Review, support this view, arguing that a broad base with a single standard rate would permit substantial revenue growth while reducing tax administration costs for the revenue collection agency and compliance costs for businesses (Mirrlees, Adam, Besley, Blundell, Bond, Chote, Gammie, Johnson, Myles & Poterba, 2011:351). The view that the VAT is not a suitable instrument for altering social behaviour or advancing equitability is strongly supported by research (Ian, Keen & Smith, 2010). This calls into question the effectiveness of zero-rating, which is intended to influence social behaviour and promote equality.

The Davis Tax Committee concluded that zero-rating is an overly blunt instrument for addressing issues of equality; however, they believe that eliminating current zero-ratings would be difficult because no ideal compensation alternative has yet been identified.

In response to a report of the Standing Committee on Finance and the Select Committee on Finance (compiled after public hearings) and the Cabinet statement of 28 February 2018, the Minister of Finance, through the Davis Tax Committee, appointed a panel of independent experts to examine and review the list of zero-rated food items.

In theory, according to the Independent Panel of Experts for the Review of Zero Ratings in South Africa, it would be less expensive to return the cost of the VAT increase to the poorest households than to extend zero-rating. It also demonstrated quite clearly that the VAT system is not an ideal instrument to provide subsidies. In the case of primary foodstuffs for example, only 10% of the consumption of primary foodstuffs (where the VAT relief lies) is by the poorest 30% of people, who are the intended target group. The Panel found that the richest 10% benefited in monetary terms nearly double (i.e. R1,3bn) what the poorest 10% (R800m) did from zero-rated goods.

Furthermore, as VAT is a transactional tax through the value chain, there is no evidence that businesses in the value chain are not mainly absorbing the VAT relief as additional profit rather than proportionally reducing the retail price of the end product with the full relief of the VAT.

VAT zero-rating is still not an ideal instrument. Yes, you would have less of a challenge regarding the target market, i.e. purchasers of solar power, given that there is no further split in the target market as there is for primary foodstuffs (i.e. rich versus poor purchasers). However, there is no mechanism to ensure that if rooftop solar power is zero-rated, suppliers would simply increase their prices by 15%, with no benefit to the end-user or consumer.

Direct subsidy and rebates are preferable because they are targeted and the expenditures have a verifiable audit trail. Consequently, no payments are made without an audit, this level of oversight is necessary to ensure that the benefit reaches the end-user or consumer. Rebates are also preferable to deductions and allowances because rebates ensure that each individual receives the same benefit, whereas deductions and allowances vary based on the individual’s marginal tax rate.

The last and most important hurdle is administration. The Panel on VAT rightly concludes that having these incentives in the VAT system places a compliance burden on SARS and also complicates VAT vendors tax affairs.

A similar challenge would exist for income tax though probably more direct but has other challenges such as the money flow being deferred for months or years. SARS is usually picked for these incentives purely because of its competence in being able to manage matters, though given SARS’ main mandate of collection, it is difficult for SARS officials in practice to properly apply themselves “as the givers of incentives”. That is where things go awry for taxpayers i.e. SARS is seldom a good “distributor of money” as that is not its mandate.

So, who is best placed? Municipalities are probably the least ideal given that there are very few financially stable and functional municipalities. A burden to validate claims and pay rebates probably would be a disaster that would merely add to the current list of items on the Auditor General’s report. That leaves the Department of Trade and Industry, which does dispense some incentives, and ESKOM itself, the latter having a track record of doing so for its solar geyser rebate that seemed to have been quite successful before being stopped in April 2015. Who is best placed, therefore remains to be answered.

*The views expressed in this article are that of the author/s and do not necessarily reflect that of the University of Johannesburg.

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