Taxing solar panels

Pakistan plans to expand its power sector substantially. It has enormous solar photovoltaic (PV) potential and all the necessary conditions for its implementation such as high radiation yield, a regulatory framework, a favourable architectural landscape and strong demand forces that support its development.

The Alternative Renewable Energy Policy, 2019 also aims to produce 30 percent of its energy from non-hydro renewable energy resources by 2030. The revised Nationally Determined Contributions 2021 commits to achieving a 60 percent renewable energy share in the next decade.

These targets could be easily transposed as more than 30,000 villages in the country are still without electricity; in rural areas, a majority of people currently live in darkness. Also, many people lack reliable access to energy supply. Solar installations have already seen an unprecedented growth in off-grid and weak grid regions. There has particularly been an exponential growth in the use of solar tube wells and water pumps for irrigation purposes – to counter the soaring diesel and petrol fuel prices in the domestic market.

Due to rising electricity tariffs, there has also been a growing trend in net metering and distributed generation. This indicates that people are shifting towards affordable and sustainable energy resources. Based on the context, solar power has the potential to play a key role in facilitating the transition to low-carbon energy, mitigating climate change and meeting energy demands. However, to create a coherent push to tap these potential indigenous resources, little attention has so far been given to the role of supportive instruments and their interaction across different policy domains, which could trigger transition from the perspective of technology adopters and investors.

The government recently proposed a 17 percent sales tax – previously, zero percent – on the import of solar panels. Before examining the implications of this tax, it is important to understand that the solar PV market of Pakistan is largely dominated by imported products. The uneven statistics indicate that more than 90 percent of the consumer market for solar PV panels is met via imported products. The local industry for the production of these products today is negligible.

In such a scenario, the imposition of GST will only add further complexities. It will increase the retail price of the complete system for potential adopters and disincentivise the national solar drive in an early market. This will widen the gap between imported fossil fuel-based power generation and solar PV energy base – delaying the onset of the targeted indigenisation of power procurement resources.

Imposing the tax will also have a direct bearing on the profitability of investors and vendors, discouraging potential investment in the sector. Moreover, with an inflation rate of 9.7 percent in Pakistan, solar panels have already led to high operation costs for solar companies, which translates into higher installation costs. The ill-timed renewed attempt to impose a tax on solar products is not only incompatible with the existing policy renewable uptake goals and ambitions but will also undermine the solar PV drive cutting into our national emissions reduction potential and power generation indigenisation drive.

If we look at the import statistics of solar panels, we could see that after the government waived off GST on solar panels in 2014, it registered a steady positive-year wise growth – increasing from $44 million in 2013 to $722 million in 2017. The market, however, was impacted in 2019 due to the Covid-19 crisis, nonetheless, reviving in 2021. At this stage, it is important to extend continued support to the nascent solar market in the country.

Decentralised Renewable Energy (DRE) configurations have many benefits for the Global South, and for a country such as Pakistan, they offer a potent option for an affordable, sustainable and climate-safe energy system. Pakistan holds one of the largest unserved populations globally and has a high potential for bottom-up solar PV technological leapfrogging. Importantly, amongst the different PV customer segments in the Pakistan market, the residential sector remains one of the key sectors driving the solar PV growth in the country and is also one of the most price-sensitive sectors. Any further price hikes will only constrain the drive towards solar PV adoption.

Progressive economies of the world are evolving renewable energy (RE) policies to incentivise the stakeholders and support the solar industry’s growth. For example, through America’s investment tax credit system, residential solar PV system owners can claim 26 percent of the project’s capital cost, although the solar PV system cost in the US is highest than in other countries. While in Australia, the incentives cover almost half to two-thirds of the project cost.

Similarly, rather than imposing taxes, the Pakistani government needs to offer loans, rebates, duty exemption and credit schemes. Developing policies and tax benefits that help RE integration should be the government’s top priority. Pakistan can make significant gains in terms of decarbonisation and low carbon development if it facilitates RE adoption and waives off the recently introduced additional tax.

The government should also extend substantial support to domestic renewable energy manufacturing firms in the short- to medium-term, to constructively reduce reliance on imported manufactured solar products. The need of the hour is a long-term strategy, which retains a steady growth trajectory for solar while increasing protection against imported panels in the long run through incentivising local production.

The writer is a researcher based at Policy Research Institute for Equitable Development and Technical University, Berlin. She tweets @NSaleh91