Pakistan has been blessed with one of the highest solar irradiation figures in the world; thus, making solar energy a feasible and logical part of the country’s fuel mix.
Most sane and mindful Pakistanis can clearly recall the promises, along with ambitious timelines provided to solve the country’s energy crises at the time of the elections. One almost brought himself believe, then, that the party in the centre – PML-N, had done its homework.
We were all in for a massive surprise when the federal government decided to unilaterally impose hefty taxes on the import of solar equipment and machinery in the recently enacted Finance Act 2014.
We are not talking about making 5 per cent or 10 per cent taxes on solar imports. The sector that otherwise rightly enjoyed tax shelter since 2006, will now be taxed at 32.5 per cent on imports. This is where the decision to tax solar panels is beyond comprehension and a work of sheer stupidity.
Sources further suggest that 60–70 consignments of solar panels and equipment have been stranded at the Karachi Port, pending the payment of taxes by importers.
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The summers in Pakistan are the peak demand season, in terms of electricity consumption and sales of solar panels. It is a cause of grave concern to the importers, as the delay in the clearance of shipments is not only causing huge business losses, but also incurring huge losses in demurrage due to delays at the port.
How difficult is it for policy makers to understand that the exemptions of duties, along with other fiscal incentives, play a significant role in increasing the investment in the sector?
Current scenario of solar power in Pakistan
So what has been going on in the country's solar arena lately? Here's a summary:
Successful mobilisation of funds: Federal government agencies, such as the Alternative Energy Development Board (AEDB), National Electric Power Regulatory Authority (NEPRA), have been doing a fine job in mobilising foreign and local developers to invest and develop solar-based projects in the country. To shorten the process, a feed in tariff for solar-based projects has been announced as well.
The federal government, could almost boast about spearheading the development process in solar projects in terms of land provision, water supply and regulatory approvals.
The occasional and expensive services of the national grid: Secondly, we are all aware of just how reliable and affordable the electricity from the national grid has been. Consumers in the agriculture, residential and commercial sectors have therefore, on their own, installed solar panels to meet their energy needs.
A large number of farmers today are therefore employing solar-based solutions to pump underground water for irrigation purposes. Similarly, residential and commercial consumers of energy have been increasingly employing solar installations as compared to the expensive diesel or gas-based generators.
Lowest per capita consumption: Thirdly, Pakistan has one of the lowest energy consumption per capita in the region. Now, solar energy systems play a very dynamic role by providing access to energy in the far-flung areas of the country.
Taxing is a lose-lose
How will the decision impose taxes in this case create a lose-lose situation?
Simple enough: because solar equipment reduces the burden on the energy supply from the national grid. Simple economics suggests that this would result in significant foreign exchange savings, as the energy from solar panels would need to be otherwise produced from inefficient plants in the country.
Since more than half of Pakistan’s generation is from thermal sources, the country will have to further increase imports of furnace oil for electricity generation.
Consumption and production at the same place reduces both technical and commercial losses in distribution otherwise incurred in supply from the grid.
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Given Pakistan’s limited potential to raise finances for large infrastructure generation projects, solar energy systems are ideal in mobilising capital from private and small to medium-level consumers and investors.
So, why does it really concern us?
The whole world understands the importance of energy independence and the reliability of energy produced through solar installations, and has therefore provided several fiscal incentives for consumers to install solar panels.
At a time when the entire country is facing a huge energy crisis, one would expect the government to provide fiscal incentives for clean, alternative energy supply solutions.
Several regional and international countries are providing incentives, such as tax breaks and subsidies, to companies and home owners installing solar panels; the federal government has shown its myopic vision by imposing duties instead. India, for example, has been providing tax incentives to consumers installing solar energy systems to have long-lasting renewable energy installation as part of its fuel mix.
Nothing cheap under the Pakistani sun
What will actually happen as a result of the taxes?
All the flashy projects initiated as independent solar power plants in the country will have to increase their tariff by at least 35 per cent due to the imposition of duties. Why? Simply because under our policies, any taxes or duties imposed on solar-based projects are pass-through and, therefore, will be directly borne by the consumers.
Similarly, in the residential and commercial off-grid solar solutions, the incidence and brunt of duties will be borne by consumers and buyers as well.
Since Pakistan’s agriculture sector has increased its reliance on solar panels, any imposition of duties and subsequent increase in prices will reduce the pace of installations, leading to lost output and an increased cost of production.