Last week an office memorandum of the Ministry of New & Renewable Energy (MNRE) said that the government has approved a proposal for imposition of Basic Customs Duty on solar photovoltaic cells and modules/panels.

It proposed Customs duty of 40 per cent on solar modules and 25 per cent on solar cells beginning April 2022. This should create a level-playing field for local manufacturers vis-a-vis foreign players and help achieve the goal of Atmanirbhar Bharat.

“India has all the capabilities needed to emerge as the next manufacturing hub,” says Shekhar Dutt. Director General, Solar Power Developers Association.

But it may not be this simple. And, here is why?

Scaling up manufacturing will take time, anywhere between 3-5 years, and in that period sourcing equipment would be through imports, which will become expensive. As modules are a major component, import duty will have a sizeable impact on the solar project cost. Since it is a pass-through in the electricity sector, this would also mean increase in consumer tariff.

Agreed, a broad range of factors affect tariff, but guesstimates show that this move can potentially lead to 50-55 paise increase per unit.

“The domestic capabilities for manufacturing solar cells and modules are at a nascent stage. They need an appropriate gestation period to enhance the manufacturing capacity and meet global quality standards while meeting domestic requirements. Hence, levying Basic Customs Duty at this stage is a bit premature and can potentially result in a significant mismatch in demand and supply,” says Dutt.

The cascading impact on solar module prices, which make up 60-70 per cent of the total EPC cost, can significantly increase solar tariffs too. “Hence, we believe that the two-year timeframe required for upstream and downstream linkages of the entire manufacturing value chain be provided to local manufacturing. Only when they are ready to meet domestic demand in terms of capacity and quality, should Basic Customs Duty be implemented,” Dutt added.

While the government may have addressed one aspect of the industry, it also needs to adopt a holistic approach to ensure that ongoing projects do not get affected by this move. The announcement does not provide for grandfathering, which would have allowed projects already auctioned to import equipment under existing rules without paying the Customs duty.

The MNRE’s March 9 office memorandum clearly states that the proposal to impose Basic Customs Duty (without grandfathering of bid out projects) has been agreed to by the Finance Ministry with effect from April 1, 2022. “The Ministry of Finance has also advised that the customs notification in this regard shall be issued at appropriate time,” it said.

Ongoing solar power projects going slow, due to a delay in signing of power purchase agreements (PPAs) with DISCOMs or other issues, may have to pay customs duty if they import equipment post the deadline. Therefore, there is a need to clarify on the availability of the safeguard duty (SGD) on imported cells and modules, which is currently at 14.5 per cent and valid till July 2021.

According to industry trackers, grandfathering of Basic Customs Duty for the projects for which the bid process has been completed will help achieve multiple objectives — it will ensure that duty implementation is smooth and it will help avoid incremental workload on developers and DISCOMs on processing reimbursement requests under change-in-law and disputes. Further, it will also ensure that additional import duty costs are not passed onto the retail consumer and prevent an imminent increase in tariffs

India has also set a target of 450 GW installed RE capacity by 2030. As per the Central Electricity Authority's Optimum Energy Mix report, the electricity requirement of the country by 2029-30 will be 817 GW, including the 450 GW from renewable energy sources, out of which 280 GW would come from solar energy. To achieve the target of 280 GW, around 25 GW of solar energy capacity is needed to be installed every year, till 2030.

Today, India's solar sector is heavily reliant on imports of solar equipment. Instances of certain countries dumping solar cells and modules to kill the nascent domestic industry were noted, which led to imposition of safeguard duties. The pandemic brought disruptions in international trade including imports of solar modules and solar cells affecting capacity addition in the country.

High import duty

In fact, Solar Power Developers Association feels that the basic import duty of 40 per cent is too high on Solar Modules, it should be around 25 per cent and be imposed with effect from January 2023 instead of April 2022, and for Cells, it can be from July 2023. Till that time, Tariff barriers on Solar cells and Modules, can be in the form of Anti-Dumping Duty / Safeguard Duties in the range of 15-20 per cent from July 2021 onwards, they said adding that the Centre and State Government should collaborate for definitive roadmap for Basic Customs Duty till at least 2030 to provide local manufacturers stability in creating a robust and self-reliant manufacturing eco-system.

And for ongoing projects a transparent mechanism such grandfathering of Basic Customs Duty for bid out projects may be considered. Alternatively MNRE can notify capex linked formula for pass through of Basic Customs Duty under change-in-law provision.

As Vipul Tuli, CEO South Asia, Sembcorp Industries and FICCI Power Committee Chairman, sums it up thus: “Basic Customs Duty will provide clarity to those investing in setting up manufacturing facilities. Increase in tariffs for new projects is an obvious outcome of this, but the overall benefits to the country in terms of investment, employment, economic activity, energy security and technology development are also substantial. In any case, as free inter-State transmission benefits come to an end, the policy regime for renewables will need go through changes to ensure that the energy transition continues.”

For India to take centre-stage in the global solar landscape, the domestic industry should be able to cater to the global requirement. The International Solar Alliance, which has come into being largely due to efforts of India, offers a ready-made market of 1 TerraWatts capacity. However, in order to be competitive and relevant in these markets, it is imperative for local industry to be at par with other global suppliers.

To ensure that this well-intended move doesn’t go waste, there’s a need to address the challenges across the upstream and downstream vertical of the sector. Therefore, while promoting localisation in manufacturing it also needs to ensure that ongoing projects are not at a disadvantage and the tariff hike does not hit the end-consumer.

Related Topics