Duty Dilemma

Impact of proposed import duties on solar power development

The Directorate General of Safeguards (DGS), part of the Ministry of Finance, has recently proposed a 70 per cent safeguard duty on imported solar cells and modules for a period of 200 days, in order to protect local manufacturers. These duties are imposed during import surges. Once approved, the safeguard duty will be levied on products imported from all countries except developing countries (other than China and Malaysia). In effect, it covers around 90 per cent of cells and modules used in India. In a related move, the government is expected to introduce anti-dumping duties on solar equipment imported from China, Taiwan and Malaysia. Anti-dumping duties are imposed when foreign players indulge in predatory pricing. An investigation on this is currently under way.

While these proposed mandates may seem to be positive for domestic solar module manufacturers, a closer examination points out some of their drawbacks. Since safeguard duty will be imposed on all imports other than those from select developing countries, of which China and Malaysia have expressly been excluded by the DGS, imports into India will start dwindling. The void created by the absence of imports cannot be filled by domestic manufacturers as they have neither the capacity nor the capability to meet international standards for solar cells and modules.

What makes DGS’ proposal even more doubtful is the treatment being accorded to applicant companies situated in special economic zones (SEZs). The DGS has recommended that these units be exempted from the payment of the duty both at the time of import as well as at the time of sale in the domestic tariff area (DTA). This makes the recommendation discriminatory towards other domestic manufacturers, which are not situated in the SEZ. Moreover, if the safeguard duty is imposed, the solar industry will get divided into three parts – one comprising domestic manufacturers situated in SEZs, which will be allowed to import and export to the domestic market without any payment of safeguard duty; the second category will be of domestic manufacturers situated in the DTA, which will be required to pay 70 per cent safeguard duty on imports; and the third category will include those solar power developers who will find it difficult to perform their obligations under existing power purchase agreements (PPAs) with their costs being scaled by the imposition of 70 per cent safeguard duty on solar components.

Further, coming after the levy of 7.5 per cent import duty on modules and 5-18 per cent GST on various input costs, the recommendation shows a lack of policy consistency and clarity across various government departments.

Coming to anti-dumping duties, it is important to note that the US government has recently imposed a 30 per cent tariff on imported solar cells and modules in the first year, with the duties declining to 15 per cent in the fourth year. The US decision may cause the Indian trade investigation and decision process to swing more in favour of imposing these duties.

Now, the key question arises whether India should follow suit or take advantage of the development. In this context, it is interesting to note that for China’s solar module manufacturing capacity, estimated to be around 70 GW per year, the major markets are China itself, followed by the US and India. With green energy activity expected to slow down in the US, China’s solar equipment makers may adopt a more competitive stance on pricing to drive demand in India. This will help meet India’s 100 GW of solar capacity target by 2022.

However, if the duties are imposed, industry experts believe that the solar power tariff will go beyond Rs 4 per kWh from roughly Rs 2.50 per kW at present. Such high tariff levels will discourage state discoms from buying solar power. Further, this will slow down the ongoing project development activity as the discoms may want to renegotiate PPA terms and conditions, as has happened in some recent tenders, which saw higher than usual bid levels.

The private market, both rooftop and open access solar, is likely to be the worst affected by these duties. Consumers in this segment are in no hurry to build projects and would prefer to wait until there is complete clarity and the final costs are acceptable. According to BRIDGE TO INDIA’s analysis, this segment could see volumes declining by as much as 50 per cent if duty exceeding 20 per cent is imposed. The government should therefore weigh the pros and cons of imposing both safeguard and anti-dumping duties.

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