The Indian government proposes to end custom duty exemption on solar cells and module imports as it looks to boost domestic manufacturing and put a check on large scale procurement of solar generation equipment from China.
Sources in the government said that a 20 per cent basic customs duty may be imposed on solar equipment imports soon after the existing 15 per cent safeguard duty in solar cells and modules expired end of July.
The proposal is part of a larger measure being looked at by the government through imposition of tariff and non-tarrif barriers on imports of non-essential items coming from China.
While the government has earlier put some restrictions on investments from neighbouring countries, including China, the added dimension of confrontation between the armies of the two countries have led to the proposals being fast tracked.
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. The imports had fallen drastically since April due to Covid-19 outbreak and shutdown of operations in China but the country remains sought after by developers as price of gear is almost 30-40 per cent cheaper.
As per the plan, the government would now look at putting basic customs duty (BCD) of 20 per cent solar equipment imports from August when the continuing safeguard duty of 15 per cent ceases.
The budget 2020-21 proposed the 20 per cent duty but has not implemented it so far. Ministry of New and Renewable Energy is now likely to recommend this duty to replace safeguard duty ending in July. Sources said that the duty could be raised in future to upto 40 per cent depending on whether a 30 per cent duty is meeting its objective.
According to clean energy communications and consultancy firm Mercom, BCD will have a bigger impact on developers using imports to construct solar power plants. 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 is being considered to prevent unrestricted imports of solar gear from China once 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 proposed 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 government put a tariff cap, bids started shrinking leading to cancellations of a few auctions.
Sources said that rather than imposing 20 per cent duty across the board, the government may also look at a two-tier duty where solar cells attract duty, say at 12.5 per cent level (same as before 2005 when BCD existed) and solar modules 20 per cent duty.
Government has included disruptions in supply lines including imports from China and other countries due to Covid-19 as “force majuere” condition that could allow postponing commissioning date of projects without attracting penalty. Developers have asked whether BCD imposition will fall under the provisions of the clause as it would raise cost for all of them.