BCD Increase on Solar Inverters to be Considered as Change in Law Rajasthan Commission

The Rajasthan Electricity Regulatory Commission (RERC) has ruled that the increase in rates of basic customs duty (BCD) on import of solar inverters along with integrated Goods and Services Tax (GST) and Social Welfare Surcharge is a ‘Change in Law’ event as per Article 12 of Power Purchase Agreements (PPAs).

The Commission said carrying cost on amounts paid towards BCD is refundable to solar project developers at the rate they have secured long-term capital loans.

The state regulator directed Solar Energy Corporation of India (SECI) and distribution companies (DISCOMs) to start monthly annuity payments from the 60th day of its order. The tenure of annuity payment should be for 15 years. The discount rate of annuity payments should be 9% towards the solar power developer’s incurred expenditure due to the ‘Change in Law’ event.

However, the Commission rejected the solar developers’ request to consider the imposition of safeguard duty (SGD) and integrated GST as a ‘Change in Law’ event as the SGD was reduced from the rate applicable on the last day of the bid.


Background

 Fortum Solar Plus, ReNew Solar Energy (Jharkhand Five), and Sitara Solar Energy filed petitions with the Commission requesting that the imposition of SGD and increase in BCD on inverters be considered a ‘Change in Law’ event.

The solar power developers said the notification imposing SGD duty on July 30, 2018, was valid for two years. Therefore, the developers planned to procure solar modules post-July 30, 2020, to avoid safeguard duty on imported modules and keep the tariff low and competitive. However, In July 2020, the government issued a fresh notification imposing an SGD of 14.9% on the import of solar cells and modules for the first six months and 14.5% for the next six months.

According to the PPAs, any statutory change in tax structure or introduction of any tax applicable for setting up solar power projects after the last date of bid submissions should qualify as a ‘Change in Law’ event. The developers are entitled to be placed in the same financial position as before the ‘Change in Law’ event.

Therefore, Fortum Solar Plus requested the Commission direct SECI to pay ₹741.74 million (~$9.98 million) with the carrying cost at 11.66% to compensate the company for paying safeguard duty. Similarly, Sitara Solar Energy requested compensation of ₹472.97 million (~$6.36 million) for safeguard duty and integrated GST, with a monthly carrying cost of 1.25%.

Sitara Solar Energy also asked the Commission to direct SECI to pay ₹28.82 million (~$388,353) to the company towards the BCD increase on inverters and 5% integrated GST and social welfare surcharge, with a monthly carrying cost at 1.25%.

In Budget 2021, the Finance Minister raised the customs duty on solar inverters from 5% to 20%. The duty is effective from February 2, 2021.

SECI’s response

SECI accepted the imposition of the BCD on inverters as a ‘Change in Law’ event. However, it contended that the social welfare surcharge was a social responsibility. Therefore, the solar project developers could not be compensated for the same.

If the Commission considered the imposition of safeguard duty as the ‘Change in Law’ event, SECI requested to make payments in a lump sum instead of annuity payments to avoid additional carrying costs to DISCOMs.

SECI requested the Commission direct the Rajasthan Urja Vikas Nigam Limited (RUVNL) to make payments towards the evaluated claims of safeguard duty and customs duty payable by SECI to the solar project developers on a back-to-back basis under the power sales agreement (PSA) in a time-bound manner.

RUVNL’s response

RUVNL said SECI tendered 750 MW of grid-connected solar photovoltaic projects to be developed on a standalone basis across Rajasthan in August 2018. The developers submitted bids on February 19, 2019, and on that date, the rate of safeguard duty on imported solar cells was 25%. Therefore, the developers were supposed to quote prices inclusive of all taxes.

In July 2020, the government reduced SGD from 25% to 14.9% on the import of solar cells and modules for the first six months and 14.5% for the subsequent six months.

Therefore, no new tax was imposed, but the existing tax structure was reviewed, and it could not fall under the ‘Change in Law’ event as claimed by the petitioners.

Commission’s analysis

 The Commission observed that SECI, in its tender document, set the maximum tariff payable to the project developer at ₹2.68 (~$0.036)/kWh for 25 years. SECI had specified that the tariff should include all statutory taxes, duties, levies, and cess applicable on the last date of bid submission.

The Commission noted that SGD was reduced from the rate applicable on the last day of the bid and had no adverse financial impact on the project costs. Therefore, the Commission ruled that safeguard duty could not be considered a ‘Change in Law’ event per the PPAs.

The state regulator noted that said BCD on the import of solar inverters increased from 5% to 20% from February 1, 2021. The notification was also issued after the last date of submission of the bids. Therefore, ‘Change in Law’ should be considered per the PPAs. The imposition of integrated GST and social welfare surcharge must also be considered a ‘Change in Law’ event.

In June 2021, the Central Electricity Regulatory Commission ruled that Clean Solar Power (Bhadla), a subsidiary of Hero Solar Energy, was entitled to compensation for the additional expense incurred due to the imposition of safeguard duty.

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