High power bills loom as State scraps tax breaks

Commercial lawyers have warned of a rise in electricity bills as the National Treasury moves to scrap key value-added tax (VAT) exemptions for projects in the energy sector.

Partners at Bowman’s (Coulson Harney LLP), a law firm, said removing the incentives as proposed in the Tax (Amendment) Bill 2020 would force investors to pass the increased cost to consumers.

The fiscal measures will also blunt attractiveness of Kenya’s energy infrastructure development in the eyes of investors, the lawyers have warned.

In their submissions to the National Assembly’s departmental committee on energy, the lawyers said that removing the VAT exemption on imported suppliers meant for constructing power plants would raise costs of such projects.

The submissions were developed by Bowmans’ partner for projects and infrastructure Aleem Tharani as well as tax partner Alex Mathini.

Investors enjoy VAT exemptions on imports of specialised equipment for developing solar and wind energy.

“Such projects are procured on the basis of a fixed feed-in-tariff and as such any increase in capital expenditure would have to be factored into such tariffs,” reads the submissions by the firm in part.

“This would make it harder for consumers’ tariffs to go down and would instead increase the cost of electricity.” Bowmans warns that such a move will make some potential projects economically unviable.

Those already under construction will apply for claims from the government using their power purchase agreements and letters of support from the government, warns Bowmans.

“Such relief will either require the relevant tariff to be increased or will require the government to make payments to project developers to indemnify them from the change of tax,” the firm said.

The Bill is also proposing scrapping of VAT exemptions on imported or purchased supplies for direct use in geothermal, oil or mineral exploration.

The move will lead to increased costs of prospecting and exploration of oil and other minerals, thereby making such activities less attractive to potential investors.

Tied to this is the proposal to cut capital allowance investment incentive for energy and infrastructure projects to between 50 percent and 100 percent from the current 100 percent to 150 percent.

“If measures such as those proposed by the Bill are implemented, Kenya’s desire for 100 percent renewable energy production and development of key infrastructure required to spur economic growth will be under serious threat,” said the firm.