Major problem with government’s solar tax incentive

The National Treasury’s approach to the solar energy tax incentive is short-sighted, unintelligible, and fails to grasp the functioning of an efficient solar energy system fully.

This is according to Webber Wentzel partner Carryn Alexander and candidate attorney Sakiwe Canca.

They highlighted several concerns regarding the government’s tax incentives for rooftop solar panels announced earlier this year.

In February, Finance Minister Enoch Godongwana announced a tax rebate of 25% of the installation cost of rooftop solar panels and a tax rebate of 125% for businesses investing in renewable energy sources. 

There are no requirements for the size of the projects, and the incentives are available for two years, starting from 1 March 2023.

According to the 2023 Budget Speech, these incentives were put in place to reduce pressure on the grid, bring more generation capacity online, and help ease load-shedding.

However, Webber Wentzel said the Treasury’s approach to the solar energy tax incentive might be short-sighted and fails to fully grasp the functioning of an efficient solar energy system.

Their first concern is that the incentives only cover rooftop solar panels, which are only one component of a fully functioning solar energy system.

“A fully functioning solar energy system does not only require the installation of rooftop solar panels — each component, which includes inverters and batteries, is crucial.”

This should be an important consideration for the National Treasury, which stated one of the incentive’s aims is bringing more generation capacity online. 

“Any rooftop solar system which feeds into the grid […] requires an inverter to convert the direct current (DC) electricity (generated by the solar panels) to alternating current (AC) electricity, which is what is needed for the energy to be fed back into the national electricity grid.”

For inverters not to be covered by the solar energy tax incentive is, therefore, “unintelligible” and contradictory to the goal of increasing generation capacity.

Webber Wentzel’s second issue with the government’s solar incentive is the requirement that the solar panels must be “new and unused” to qualify for the tax credit. 

This criterion, therefore, prevents taxpayers from claiming deductions for panels acquired before 1 March 2023 but installed afterwards. 

While this requirement may have been put in place to save costs, Webber Wentzel said it might hinder the overall effectiveness of the incentive and contradicts the government’s commitment to addressing the energy supply crisis and climate change.

“When one considers the magnitude of the energy supply crisis that South Africa is facing, as well as the imminent climate catastrophe, the pecuniary gain that Treasury seeks to obtain is injudicious and defeats the so-called purpose of the solar energy tax incentive.” 

“Therefore, while the introduction of the solar energy tax incentive constitutes a clear indication by the government of its commitment to tackling the current energy supply crisis and the imminent climate catastrophe, the fiscal conservatism by Treasury may ultimately be its undoing.”

Treasury is expected to consider the relevant public comments and revise the Taxation Laws Amendment Bill for further review, Webber Wentzel said.

Other critiques

When the solar tax incentives were first announced, they were met with mixed responses.

While many applauded the government’s decision, others said the measures do not go far enough in addressing the country’s energy concerns.

Iraj Abedian, CEO of Pan-African Investment and Research Services, said the incentives are a “good policy, badly implemented”.

For Abedian, the incentives are limited to South Africa’s small tax base and are only temporarily available. They are, therefore, unlikely to have a major impact.

Intellidex, in their budget commentary, also lamented the “pro-rich” nature of the incentives, as there was no mention of subsiding or supporting a rollout of solar panels for the poor.

Dawie Roodt, the chief economist at the Efficient Group, took these concerns further.

Roodt is “not in favour of a subsidy on solar panels” in any form. Subsidies distort underlying economic forces and provide more opportunities for misuse, according to Roodt.

However, in its current guise, these subsidies are unlikely to have a major impact as the government is talking about “small sums of money”, said Roodt.