Solar projects can't use concessional duty as govt seeks to curb imports

Step seeks to stop project developers from avoiding basic customs duty, but it could raise cost of production

Solar power project developers will not be able to avail themselves of concessional import duty of 7.5 per cent and avoid the existing basic customs duty (BCD) levied on imports: the impact of a policy update that is likely to lead to increase the cost of production.

The Central Board of Indirect Taxes and Customs issued Project Imports (Amendment) Regulations, 2022 on Thursday. "In the Project Imports Regulations, 1986, against Sr. No. 2, in column 2, and in Sr. No. 3, in column 2, for the words 'All Power Plants and Transmission Projects', the words 'All Power Plants and Transmission Projects, other than solar power plants or solar power projects,' shall be substituted," it said.

The regulations pertain to a concessional import rate of 7.5 per cent for new industrial units. It was 5 per cent earlier. Developers were using this to circumvent the BCD on solar product imports.

The government imposed 25 per cent BCD on imported solar cells and 40 per cent on imported modules from April 2022 in order to support domestic manufacturing. Almost 85 per cent of Indian solar capacity is built on imported cells and modules, majority from China. Recently, the Indian government allowed solar power projects awarded before the BCD regime to pass through the additional cost of procuring costly cells and modules.

Industry players pointed out that many developers avoided BCD by availing of the project import regulations under the garb of setting up new units.

"In the past many solar power producers have been taking the benefit of a concessional rate of customs duty under the Project Import scheme. With the exclusion of solar power projects from the Project Import scheme the cost of modules would likely increase by approximately 33-34 per cent, said Saurabh Agarwal, tax partner at EY.

Agarwal said the move is to push the government's ‘Make in India’ plan under the solar PLI scheme Tranche 2.

"The solar power producers would now have to explore the possibility of claiming ‘change in law’ in terms of their power purchase agreement, calculate the impact of the said change in their cash flows and the impact of return on investment," he said.

The Union Cabinet last month approved a Rs 19,500-crore proposal of the Ministry of New and Renewable Energy (MNRE) for the second tranche of the production-linked incentive (PLI) scheme for solar equipment manufacturing.

The PLI is part of ‘National programme on High Efficiency Solar PV Modules’ for achieving manufacturing capacity of gigawatt (Gw) scale in high efficiency solar photovoltaic (PV) modules.

In the first tranche of tendering, MNRE received close to 50 Gw of bids against a PLI sanction of Rs 4,500 crore and request for proposal of 10 Gw. It received close to 18 bids from a range of companies, including Coal India, L&T, Vikram Solar, and Megha Engineering. The winners were Reliance New Energy Solar Ltd, Adani Infrastructure and Shirdi Sai.

The corpus was increased to Rs 19,500 crore under the Union Budget 2022-23 to accommodate the large number of bids.  

The new round of the PLI will have three different schemes for different product categories, this paper reported recently. Of the allocated corpus, the highest share of Rs 12,000 crore could go to end-to-end manufacturing of ‘polysilicon-wafers-cells-modules’ (raw material to finished product).