The Indian government has introduced several protectionist policies in the recent past to boost domestic manufacturing in the solar sector. Some of these measures include the anti-dumping duty, safeguard duty, and a proposal for basic customs duty (BCD). These measures are aimed at safeguarding the interest of domestic solar manufacturers who say that the import of cheap products from China is hurting domestic manufacturers.

In the Union Budget this year, the government proposed a BCD of 20% on solar cells and modules. The main reason behind this step was to decrease the dependence on imports from China and increase the prices of solar imports, bringing it closer to domestic prices. However, the effect of imposing BCD on solar manufacturers in the Special Economic Zones (SEZs) of the country has not been thought through and could have severe negative consequences.

To understand the implications of this proposal, we need to understand how SEZs function. Traditionally, SEZs are created as open markets within an economy. SEZs came into being mainly to attract foreign direct investment (FDI) into the country. The main objectives behind the establishment of  SEZs are to promote the export of goods and services, encourage investments from domestic and foreign entities, creation of employment opportunities, and developing infrastructure facilities.

These zones enjoy special privileges in the form of tax exemptions and incentives. They enjoy duty-free import and domestic procurement of goods for development, 100% income tax exemption on export income for the first five years, 50% for the next five years, and 50% of the plowed back export profit for the next five years. Also, SEZs in India are exempt from Minimum Alternate Tax (MAT) and Goods and Services Tax (GST).

The latest proposal on BCD, according to manufacturers, is going to create an imbalance between the manufacturers located in the domestic tariff areas (DTAs) and those located in SEZs. DTA simply means an area in the country that’s outside the SEZs and does not enjoy these privileges. As far as trade and commerce are concerned, SEZs are regarded as international territory. Local raw materials bought by producers within SEZs are regarded as exports, whereas those goods that are produced in SEZs and sold in the DTA are regarded as imports.

If the manufacturing units in SEZs want to sell their products in India, they will have to pay this duty, whereas units in the DTAs will be exempted. This proposal defeats the whole intention behind the imposition of basic customs duty, which is to protect Indian manufacturers.

In case the proposed duty is implemented, manufacturing units located in SEZs will have to pay the value addition on top of the BCD on imported goods. Value addition here simply means the enhancement a company in an SEZ provides to these imported products before offering it to customers. Value addition for solar manufacturers refers to the process of bringing together glass, aluminum frame, EVA, backsheets, and other components together during the manufacturing process, which makes the final product.

In contrast, manufacturing facilities located in DTA will have to pay BCD only on the imported goods, and they will not be liable to pay BCD on the value addition done in the DTA.

India currently has a solar module manufacturing capacity of nearly 10 GW, which includes players like Adani Solar, Tata Solar, Waaree Energies, RenewSys, and Vikram Solar. According to Ministry of New and Renewable Energy’s (MNRE) official data as of 2018, more than 60% of the country’s cell manufacturing capacity and approximately 40% of module manufacturing facilities are located in SEZs. This proposed move, which is designed to help domestic manufacturers, might harm the industry.

This proposal will make these manufacturing units highly uncompetitive as compared to their counterparts in the DTA. Many manufacturers who were planning to expand their facilities in the SEZs are now not sure now whether to go ahead or wait for the government to intervene. If BCD is implemented without considering all the above issues, it will be difficult for solar manufactures to survive in SEZs.

Speaking to Mercom India, Saibaba Vutukuri, CEO of Vikram Solar, said, “The Government of India is planning to levy BCD on the import of solar cells, and those assembled in modules or made up into panels. However, there are plausible implications of BCD on manufacturing units operating in SEZs. In case the duty is levied, manufacturing units located in SEZs will get adversely affected as compared to their counterparts in DTA as a manufacturing unit located in SEZ would be liable to pay BCD on value addition. A manufacturing facility located in DTA won’t be liable to pay BCD on value addition done in DTA.”

“It is essential to put SEZ units manufacturing solar cells and modules at par with DTA units for the levy of BCD; otherwise, these units will die an unnatural death, and thousands of people will lose their jobs. If this doesn’t happen, India will lose its existing manufacturing capacity located in SEZ, which will defeat our purpose of becoming self-reliant,” he added.

Recently, leading solar manufacturers, Webel Solar, Vikram Solar, and RenewSys in a letter sought the intervention of Prime Minister Narendra Modi to provide a level-playing field for all manufacturers to realize the true potential of the renewable energy sector.

Speaking on the adverse impact of the proposed move on SEZs, Avinash Hiranandani, Global CEO of RenewSys, said, “Manufacturers like RenewSys that have invested in scaling up their facilities based in SEZs are requesting the Ministry of New and Renewable Energy to continue to treat SEZ and DTA-based manufacturing facilities at par when it comes to sale from SEZs to DTAs. This measure will ensure continued growth for the solar industry as a whole. The MNRE, along with the other ministries, are fully aware of this situation and have assured us that they will take care of the solar manufacturers based in SEZs, and we are also confident that they will do that. However, if BCD is implemented without exempting the sale from SEZ to DTA, then the existing SEZ facilities will face an immediate unnatural disadvantage. This will hinder our operations and be detrimental to the industry as well.”

“BCD is good for all manufacturers. So, I am certain that both SEZ and DTA manufacturers will support and benefit from its levy. The only alteration that we request be considered is to bring SEZ and DTA based manufacturing plants at par. RenewSys is a member of the Indian Solar Manufacturers Association, and we are aware that several manufacturers with plants in DTA are also in support of treating sale from both facilities at par,” Avinash added.

The manufacturers in the SEZs expect the government to provide specific exemption under the Customs Act from BCD on solar cells and modules supplied from SEZ to DTA area.

However, tweaking the proposal to make a special exemption for solar units in SEZs is not easy and would require an amendment in the SEZ Act. The final decision has to taken by the Ministry of Commerce and Finance.

Ministry officials are of the opinion that the BCD would follow a similar method of imposition as is the case with safeguard duty. Now, safeguard duty is applicable only on the value of imported items and not on the value added inside the SEZ, and the same could be applied to the imposition of BCD. For example, solar cells manufactured in SEZs and then sold in the DTA are exempt from safeguard duty as the wafers (raw material for cell manufacturing) are not subject to safeguard duty. Similarly, in the case of modules, the duty will be levied only on the solar cells and any other raw material imported and not the final product (module). Simply put, BCD would be imposed on the raw materials imported and not on the value addition that goes in the SEZ before they are up for sale in the DTA.

Speaking to Mercom, a top executive at a manufacturing unit in DTA said, “The main aim behind establishing SEZs was to promote the export of Indian goods. But instead of concentrating on that, the Indian cell and module manufacturers are trying to sell their goods in the Indian market, which defeats the intention behind the development of SEZs. If they want to sell it to the DTA, then they should relocate. They cannot be exempted from the imposition of BCD as that will require an act of Parliament. In SEZs, we have manufacturing facilities for several goods, and solar is not the only one, which makes the case of exemption from BCD not viable. They need to seek support from the MNRE if they are planning to move out. All the manufacturing units in SEZs are enjoying so many benefits, and they also don’t have to pay the anti-dumping duty, which makes their case of exemption from BCD weak”.

Manufacturers also believe that the government needs to come up with other incentives to boost the domestic manufacturing sector. One such move is to provide central financial assistance (CFA) of 25% to any entity establishing a solar cell manufacturing facility in the country. Another step could be to provide interest subvention at the rate of 3-5% on the term loan and working capital to manufacturing units engaged in renewable energy manufacturing for the last ten years.  

To reduce the dependence on imported solar products and boost the domestic manufacturing sector, the government has already levied safeguard duty on solar imports from China and Malaysia. This safeguard duty is slated to end in July 2020, and the government is now mulling over its continued imposition.

“Here is another example of an important policy proposal which has not been thought through. Various government officials are giving contradicting dates to impose a basic customs duty and creating more uncertainty, which is the last thing we need right now as the industry struggles to come back after the COVID-19 lockdown. Hopefully, there are no unpleasant surprises and implementation occurs after all factors are considered and the industry has been consulted,” said Raj Prabhu, CEO of Mercom Capital Group.