To introduce value added tax (VAT) on electricity or not? This pertinent question continues to boggle the minds of all Emaswati – be it the consumer, government, the energy regulator, the utility provider, or industry.
In an attempt to assist legislators make an informed decision based on evidence, the Eswatini Energy Regulatory Authority (ESERA) commissioned the Eswatini Economic Policy Analysis and Research Centre (ESEPARC) to conduct a study on the potential benefits and effects of introducing VAT on electricity in the country.
ESEPARC has completed the study and last week presented the findings to the ESERA team and representatives from the Ministry of Natural Resources and Energy. The study sought to investigate the potential benefits of introducing VAT on electricity, as well as how such a development would affect the economy as a whole, households, and industry.
Highlighting the economic situation in the country, Senior Research Fellow Dr Thabo Sacolo noted that Eswatini is excessively dependent on revenue from the Southern African Customs Union (SACU), which is volatile and unsustainable, hence government has to deploy strategies to reduce the dependence on SACU receipts to fund the fiscus.
“Current efforts emphasise expanding the tax base to generate more revenue for the State. The Ministry of Finance is in the process of amending the VAT Act of 2011, which includes introducing VAT on electricity. Introducing VAT on electricity is usually greeted with widespread concern for its potential negative effects, so it is important to understand the budgetary, economic, equity, and environmental effects such a development can have,” he said.
Some of the pertinent questions the study addressed include the following:
- Will the benefits outweigh the costs?
- How will introducing VAT on electricity affect industrial activity in Eswatini?
- How will it affect the competitiveness of different sectors, households, and the economy at large?
- What is the best position that the government can take?
Dr Sacolo said lessons had been drawn from countries (both developed and developing) that have effected VAT on electricity. “However, we are cognisant that when we do a benefit transfer, we must take into consideration the situation in the Eswatini economy,” he added.
Chipping in, Research Economist Mangaliso Mohammed explained that the study used the Eswatini Social Accounting Matrix (SAM) 2016 to work out the possible outcomes when VAT on electricity is introduced. He said the SAM was used to investigate the social development impacts on industry, households, and to ascertain the responsiveness of customers to changes in tariffs.
Adding, Executive Director Dr Thula Sizwe Dlamini said the energy sector has become more important now than ever as the global economy transitions into the fourth industrial revolution. He noted that energy will become more critical to drive the technologies that will come with the fourth industrial revolution hence the need for a reliable and efficient power supply in Eswatini. He said these new technologies will increase the demand for electricity, hence the importance of this study.
Meanwhile, Mandla Vilakati from the Ministry of Natural Resources and Energy commended ESERA for commissioning the study, which he said would help them understand the energy sector even better, as well as assist government to make informed policy decisions regarding the energy sector.