With the imposition of Basic Customs Duty (BCD) on solar cells and modules around the corner, the domestic manufacturing sector is uncertain about its impact.

In March 2021, the Ministry of New and Renewable Energy announced BCD on imported solar cells and modules starting April 1, 2022. The BCD on solar modules with HSN Code 85414012 will be 40%, and solar cells (85414011) are 25%. While the manufacturers unanimously supported BCD on modules, the duty on cells was a surprise.

Manufacturers in the domestic traffic area (DTA) are convinced that the imposition of BCD on modules will be helpful in competing with the relatively cheap Chinese counterparts.

But others are looking at the downside of the duty imposition.

Developers continue to be apprehensive and believe that the duty would delay projects and increase project costs.

Most domestic module manufacturers continue to depend on imported cells. With the duty on cells eventually driving the price higher, they are worried about the profit margins. Domestic cell manufacturing capacity currently as low as 3 GW may not be able to support the demand. So, the industry expected the government to defer the duty on cells.

A similar concern is shared by the domestic manufacturers in the special economic zones (SEZs), who have so far enjoyed the benefits of various tax exemptions.

SEZs are created as open markets within the economy and are regarded as an international territory for trade and commerce. Local raw materials bought by producers within SEZs are regarded as exports, whereas the goods produced in SEZs and sold in the DTA are regarded as imports. So, solar modules manufactured in SEZs and sold in the DTA will qualify for the BCD.

Imposition of BCD – a potential problem for SEZs 

The domestic manufacturers with production units in the SEZs are not pleased about the imposition of 40% BCD on solar modules and 25% on solar cells. There is growing concern among the manufacturers in the SEZs, who believe they either have to shut shop or move elsewhere.

The introduction of BCD from April 2022, which seems imminent now, may result in a number of domestic manufacturers moving out of SEZs.

The primary intention behind creating these SEZs was to attract foreign direct investment (FDI) into the country and promote exports. While the manufacturing units in SEZs enjoy several advantages in the form of tax benefits and exemptions, things are bound to get much more challenging for the manufacturing units with the BCD regime looming large.

Speaking to Mercom, Dhruv Sharma, CEO of Jupiter Solar and President of Indian Solar Manufacturers Association (ISMA), said, “Until the law is changed, the SEZ units will have to pay the duty equivalent to the import duty, which will put them at parity with the Chinese imports and act as a deterrent to their ability to sell in the domestic market.”

“The SEZ units will find it extremely difficult to cater to the Indian market in a sustained way because the customers will have a choice to buy it from them or import it from China as the price parity would be the same. To that extent, until the law gets changed, the SEZ units will not operate very freely in the Indian market and will be affected to a great extent by the implementation of BCD,” he added.

Currently, there are overall 425 formally approved SEZs in the country across all sectors.  Out of the total, 376 SEZs are notified, and 268 SEZs are operational.

As per Section 30 of the SEZ Act, 2005, any goods removed from an SEZ to the DTA will be chargeable to customs duties, including anti-dumping, countervailing, and safeguard duties under the Customs Tariff Act 1975, where applicable, as leviable on such goods when imported.

“The developers understand that BCD will not be postponed and are asking for grandfathering of projects that are getting delayed. The domestic manufacturers are capable of meeting the demands of future projects. The duty is coming, and the domestic manufacturers and customer developers need to work together to benefit everyone,” Sharma added.

The need for bringing SEZs at par with DTAs

Recently, In a letter to Union Power Minister R.K. Singh, the National Solar Energy Federation of India (NSEFI) conveyed their worry about the impact of BCD on projects awarded before March 1, 2021. NSEFI argued that the incremental cost under the ‘Change in Law’ compensation would burden the end consumer with at least ₹0.30 (~$0.0040) /kWh and up to ₹0.50 (~$0.0066)/kWh with the use of imported cells and modules for these projects.

Speaking on the predicament of manufacturers in SEZs, Chetan Shah, Chairman and MD at Solex Energy Limited, said, “The SEZs will have to pay 40% duty on modules and thus will have difficulty selling their products in India from April when the BCD comes into force. More than the modules, it is the cells. Even if the modules are procured from local manufacturers, the manufacturers will have to pay 25% duty on the import of cells, which will increase the cost of the modules by ₹2.50 (~$0.033)/W to ₹3 (~$0.039)/W, which is a considerable amount. The customers or developers will not be able to support the increase. So basically, the business will drop unless the government comes out with some solution.”

Nearly 40% of the module manufacturing and almost 60% of the cell manufacturing capacity are located in the SEZs. So, the imposition of BCD would adversely affect the units in the SEZs and defeat the whole purpose of the protectionist tax regime.

The stakeholders believe that the government should come out with some solution to make the SEZs at par with the DTAs, and ensure a level playing field for everyone. Or else, it will lead to the gradual death of solar manufacturing units in SEZs and have a detrimental effect on the country’s domestic manufacturing segment and the overall solar installations.

“Imposing BCD on solar cells will badly affect the business. That’s why companies with SEZ units are setting their units outside of SEZs, as the benefits are no longer economically viable. For SEZ units, there is no way out; they will have to denotify their SEZ status or focus only on exports. There is no other way as they are not in a position to cater to the domestic market,” Shah noted.

With no solution in sight, the companies considering the movement into the DTA are still treading lightly given the cost involved for movement and operating in both SEZ and DTA at the same time.

The other option at the disposal of the manufacturers is to concentrate purely on exports. Whether or not the government considers these issues and takes steps to solve them has left the SEZ manufacturers in limbo.

BCD on solar cells and the International Market  

Echoing similar sentiments, one of the top executives from a leading module manufacturer said, “The recent budget will accelerate the growth of the solar sector in the country. We are yet to calculate the landed cost of modules with the impact of BCD. Other additional taxes and cess would bring BCD to 50% on modules. It is now confirmed that BCD on solar cells will not be postponed, which the industry expected. The BCD on cells will adversely affect the module manufacturers. The manufacturers in the SEZs will struggle because of the implementation of BCD. If there is a BCD on the balance of system (BoS) items like backsheet, EVA, and aluminum, it will further complicate the matter.”

China has the largest market share at nearly 90% when it comes to solar cells and modules imported into the country, followed by Hong Kong and Malaysia. As the economies slowly reopen and recover from the pandemic, the supply chain is returning to pre-covid normalcy.

The industry stakeholders have expressed concerns that if domestic manufacturing fails to meet the ever-rising demand, the sector will have no choice but to fall back on imports.

The industry expects policy tweaks to protect the manufacturing units in SEZs from the BCD impact. But the impact of BCD on cells is to be borne by the module manufacturers.

While the recent budget announcements have raised hopes for the domestic manufacturing sector, whether or not it allows enough time for the sector to build reliance and trust in the locally manufactured components has been an ongoing debate.