Heavy Duty

Government changing tax regimes on imported solar cells and modules

In June 2020, the union minster for power and new and renewable energy announced that a basic customs duty to the tune of 20-25 per cent will be imposed on solar module imports. This will come into effect as soon as the current safeguard duty expires on July 31, 2020. As of now, customs duty is being imposed for the first year, during which it will be 15 per cent. The government has planned to progressively increase the import duty to 40 per cent. The imposition of duties is being seen as a move to curb solar imports, primarily from China.

Despite a 25 per cent safeguard duty levied in July 2018 for a period of two years, India continues to meet a large portion of its solar cells and module demand through imports from China, Malaysia and other countries. There was a decrease in the safeguard duty from 25 per cent to 20 per cent between July 2019 and January 2020 and then to 15 per cent during January 2020 to the end of the two-year period in July 2020.

The move is aimed at improving domestic manufacturing and comes at a time when the world is grappling with the Covid-19 pandemic that has disrupted supply chains, leading to delays in the commissioning of projects. With enhanced domestic manufacturing of solar cells and modules, the country plans to reduce the cost of domestic solar products and minimise the delays caused by such unforeseen situations.

Duty analysis

The Indian solar power segment has been able to achieve grid parity and record low tariffs in a relatively short period of time owing to a number of factors. The most recent auction of 2 GW solar power capacity saw tariffs hitting a new low of Rs 2.36 per kWh, breaching the previous record of Rs 2.44 per kWh seen in May 2017. A reduction in the costs of cells and modules has played a significant role in bringing down the tariffs. Technological advancements in solar cell manufacturing and economies of scale achieved due to the high demand have led to over 60 per cent decline in the cost of solar modules in the past five years.

Evidence suggests that safeguard duty on cells and modules has been responsible for the diversification of sources of import of solar cells and modules to a large extent. According to the MNRE (as stated in a written response to a question in Parliament), India imported solar cells and panels worth around $1.2 billion from China during the period April 2019 to December 2019 while the total import of solar equipment during the same period was worth around $1.5 billion. During the first nine months of 2019-20, India imported $127.2 million worth of solar equipment from Vietnam and about $110 million from Thailand. In comparison, the imports in the corresponding period of 2018-19 (when there was no safeguard duty) were found to be 842 per cent and 1,352 per cent higher respectively. Meanwhile, solar equipment imports fell by about 60 per cent between 2017-18 and April-December 2019-20, and imports from China fell by about 65.5 per cent during the same period.

The imposition of basic customs duty on imported solar cells and modules has its origins in the logic that led to the levying of safeguard duty two years ago. However, the distinction between safeguard duty and basic customs duty lies in the details. According to the Directorate General of Trade Remedies, anti-dumping or safeguard duty is essentially a protectionist measure to ensure fair practices. Typically, it is used when a manufacturer from a different country of origin sells goods in the importing country at prices lower than the normal value, a practice known as “dumping”. The government and the solar industry felt that solar modules were being imported from China at prices so low that they were unfair to domestic manufacturers. As a result, safeguard duties were put in place to create a level playing field for domestic manufacturers and enable them to compete with their international, mainly Chinese, counterparts.

Customs duty is a tax imposed on imports and exports of goods. It is purely a means of raising revenue for the country that can then be used for its overall economic development.

At the end of its tenure, in July 2020, the safeguard duty stands at 15 per cent. The new customs duty for the first year, starting August 2020, has been set at 15 per cent as well. This translates to nearly no change in the duty levied on the landed solar modules or cells. Therefore, besides the natural trajectory of the costs of goods imported into the country, solar cells and modules may not see much of a disruption because of the customs duty. However, if the duty is increased, as per government plans, the costs may rise, thereby jeopardising the projects that have not factored in the higher customs duty in their tariff calculations.

SEZ woes

India’s solar cell manufacturing capacity stands at around 3,100 MW and module manufacturing at about 9,000 MW. Of this, about 2,000 MW and 3,800 MW, respectively, is located in special economic zones (SEZs). While a boon for domestic manufacturing, a significant fallout of levying customs duty on solar cells and modules is expected to be on solar manufacturers in SEZs. Manufacturers situated in SEZs enjoy several tax benefits that are not extended to non-SEZ manufacturers. However, the basic customs duty is all set to turn the tables.

SEZs are typically open markets that were conceptualised to attract foreign direct investment by allowing tax cuts and other similar practices. The material procured by SEZs is duty-free, there is 100 per cent tax exemption on export income for five years, and there are no levies of minimum alternate tax and the goods and services tax. Meanwhile, goods procured by industrial units outside of SEZs do not get such privileges. However, the goods sold by SEZs are regarded as imports within the country. Therefore, with the basic customs duty now being levied on solar cells and modules, it will apply to manufacturers in SEZs as well. This has been a point of contention for manufacturers in these areas. The customs duty does not apply to manufacturers outside of SEZs.

Outlook for domestic manufacturing

The basic customs duty is being welcomed by a large part of the industry, primarily non-SEZ, as a measure to improve the laggard domestic manufacturing of solar cells and modules. For all the damage it has caused, the Covid-19 pandemic has also opened up a plethora of opportunities to look within the country for resources, christened as the “Atmanirbhar” mission by Prime Minister NarendraModi. With the traditional supply chains now disrupted, especially from China, the industry has realised the need to diversify its sources and improve its domestic manufacturing capabilities significantly. The vacuum in supplies created due to the suspension of international cargo has highlighted the need for a robust domestic manufacturing capacity and supply chain.

The industry is looking at over 60 GW of solar cells and module capacity to be installed across ground-mounted and rooftop categories to meet the 100 GW target by 2022. Beyond 2022, the demand is most likely to sustain to achieve the 450 GW target by 2030. Therefore, the domestic market would need to enhance its manufacturing capacity manyfold to meet the opportunity that has presented itself in the aftermath of the pandemic. To this end, the government has begun rolling out manufacturing-linked solar power generation tenders. A recent tender was won by Adani Green Energy. It involves the setting up of 8 GW of solar power plants along with a 2 GW of solar cell and module manufacturing facility.

Meanwhile, the government has proposed a mega plan to triple the domestic solar cell manufacturing capacity to the tune of 4,000 MW. The government aims to incentivise the setting up of the facility as part of an accelerated manufacturing plan that will reduce the import of solar cells significantly. Another 3,000 MW of cell capacity is being added through manufacturing-linked tenders.

The basic customs duty combined with an incentivised push for solar cell and module manufacturing is likely to improve the business for domestic manufacturers. However, the implementation of plans and the gestation period for setting up the manufacturing capacity will have to be closely monitored as slippages may again make the solar segment import dependent.

By Ashay Abbhi

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