Rising duty structure of up to 40% proposed on solar gear imports

The government has proposed to end customs duty exemption for solar cells and module imports as it looks to boost domestic manufacturing and check large scale procurement of solar generation equipment from China.

Power and renewable energy minister R.K. Singh said on Thursday that the ministry has proposed 20-25 per cent basic customs duty on solar module imports for the current year that will go up to 40 per cent in the next year.

Also, the duty on solar cells has been proposed at a lower 15 per cent level for the first year and a higher 30-40 per cent level in the next year.

The duty has been suggested to be made applicable after the existing 15 per cent safeguard duty in solar cells and modules expires end of July.

Power ministry sources said that the finance ministry is likely to take a decision on the duty structure on solar gear soon.

The proposal on duty is part of a larger measure being looked at by the government through imposition of tariff and non-tariff barriers on imports of non-essential items from China.

While the government had earlier put some restrictions on investment from neighbouring countries including China, the added dimension of confrontation between the armies of the two countries has fast tracked the proposals.

Checks on solar equipment are being considered as Chinese firms supply about 80 per cent of solar cells and modules to India. India imported solar equipment worth $2,817.34 million, $3,418.96 million, and $1,694.04 million, in FY17, FY18 and FY19 respectively from China. In the first nine months of FY20, imports from China stood at $1,179.89 million. Imports have fallen drastically since April due to the COVID-19 outbreak and shutdown of operations in China.

As per the plan, the government would now look at putting basic customs duty (BCD) of 20-25 per cent on solar equipment imports from August when the continuing safeguard duty of 15 per cent ends.

According to clean energy communications and consultancy firm Mercom, BCD will have a bigger impact on developers using imports to construct solar power plants as this would result in higher costs for developers as they would have to pay a BCD of 20 per cent on the cost of the imported product, 10 per cent of SWS (social welfare surcharge) on BCD with IGST on the total. This would result in a total tax incidence of 28.1 per cent.

The safeguard duty on imports of solar cells and modules from China and Malaysia was announced in July 2018 to protect domestic cell and module manufacturers. The duty was set at 25 per cent for the first year, followed by a phased down approach for the second year, with the rate reduced by 5 per cent every six months until the duty is set to end after July 2020.

The proposal on BCD is being considered to prevent unrestricted imports of solar gear from China once the safeguard duty goes. With higher actual duty of over 28 per cent, developers would be incentivised to procure gear from the local market where manufacturing of renewable equipment is kicking up.

According to Mercom, if the proposal for BCD is implemented it could result in return to the earlier scenario when solar tariff under bids started going higher on higher safeguard duty. And when the government put a tariff cap, bids started shrinking leading to cancellations of a few auctions.

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The government has included disruptions in supply lines including imports from China and other countries due to COVID-19 as a "force majeure" condition that could allow postponing the commission date of projects without attracting a penalty. Developers have asked whether BCD imposition will fall under the provisions of the clause as it would raise costs for all of them.