In the Budget 2021, the Finance Minister proposed to raise the customs duty on solar inverters from 5% to 20% and on solar lanterns from 5% to 15% to encourage domestic production. The government believes that by hiking the duties and increasing the cost of imports, manufacturers will be incentivized to “Make in India.”

Several international companies already have their solar inverter manufacturing units in India. Inverters account for only 5% of the total project cost, but will the higher duty incentivize manufacturing locally?

The duty is effective from February 2, 2021, with 20% basic customs duty, 0.5% cess, and 1% clearance charges (depending on freight forwarder). An overall 21.5% duty on inverter imports is on the cards.

Mercom spoke with several solar inverter manufacturers and suppliers to understand the implications.

According to a leading string inverter manufacturer, solar inverters earlier had a 10% customs duty.

The large-scale project developers could get a 5% exemption with a certification from the Ministry of New and Renewable Energy (MNRE). “But now the MNRE exemption is null and void, and the effective delta is 15% when it comes to a large-scale project. Meanwhile, in small-scale projects, the delta could be around 10% as they never had an MNRE exemption. We have to see how exactly the duty impacts the market as tenders generally have a “change in law” clause.

Inverted duty structure

Inverter manufacturers in India until now were paying about 10%-14% duty on components imported for manufacturing inverters. But when a fully built inverter is imported into India, the duty was 5%, which makes it a big disadvantage to manufacture in India.

India needs a robust supply chain of critical components used in inverter making like a PCB (printed circuit board), LCD (liquid crystal display) panel, insulated gate bipolar transistors (IGBT), or a connector. These components are currently imported, and the duty levied on these components is counter-productive for the Make in India initiative, which the government is fervently pursuing.

An executive at a leading string manufacturer told Mercom, “Since we don’t have a local supply chain in India, we were trying to reach out to the MNRE to remove the duty on the components, else the government’s latest duty hike on imported inverter won’t have the desired impact. For example, we import IGBT from Europe with 12% duty, and this doesn’t incentivize manufacturing in India.”

In conclusion, he stated that ‘Make in India’ will be conducive only if the duty on inverter components is reduced, rather than just increasing the BCD for the inverter.

“Take the example of the cell phone industry, which has a phased manufacturing plan (PMP) since 2018 under which there is no duty to start with on the components needed to manufacture a cell phone like the charger, LCD, or touchpad. The duty on these components was later raised to 2.5% in 2019, and in the current budget, they have increased the duty to 5%. The government must introduce the same for the solar industry, not only for inverters but also for ancillary industries where several components are similar to the ones used in cell phones. In an ideal scenario, duties can be removed right now, and they can be increased in a phased manner once we have quality suppliers and local manufacturers.”

Industry feedback

Pranav R Mehta, Chairman of National Solar Energy Federation of India, said, “The time has come for Indian manufacturers to become globally competitive and satisfy not only the demand from the Indian market but also the global market. The budget announcement will take us one step closer to this objective.”

According to Sachin Borisa, Hitachi Inverters, the customs duty hike will not impact Indian manufacturers because they are using bought-out . “We do expect an overall impact on taxes for original equipment manufacturer (OEM)-based products. This will subsequently push the rates up for both string inverters and OEM products.”

A ‘bought-out’ part is a part used in a machine or equipment that is not made in-house by the machine or equipment producer. Such parts are standard off-the-shelf parts from other manufacturers.

He added, “The new duty regime won’t affect domestic players as much as it affects OEM products.”

K.N.Sreevatsa, Country Head at FIMER India, told Mercom that the Budget 2021 had given a big push to the ‘Aatmanirbhar Bharat’ vision of the government. Italy-based Fimer acquired Switzerland-headquartered ABB’s solar inverter business in July last year. They have a manufacturing facility in Bangalore.

“The increase in customs duty is a boon for domestic manufacturers. Until now, the duty structure has benefited manufacturers from across the world. With this change in duty now, local manufacturers stand to gain significantly,” he said.

According to Sreevatsa, inverters constitute less than 5% of the total project cost at the project level, and since most local manufacturers are paying a 10% duty, even with an increase in duty, the variations in final numbers will be as insignificant as 1-2%.

He added that “There are several domestic manufacturers in India supplying to the utility-scale projects, so there would be no significant cost increase for this segment. When it comes to the C&I or residential rooftop solar segment, domestic manufacturing does not cover the entire product range required. With an increase in duty to 20%, there will be a slight impact on the overall cost of smaller rooftop solar installations.”

“But for the utility-scale solar segment, the duty offers a level playing field to compete with the imports,” Sreevatsa said.

Sunil Badesra, Country Head, Sungrow, said that the duty hike was a positive move. “Earlier, Indian manufacturers were unable to be competitive because of the inverted duty structure and MNRE exemption on duties.”

Sungrow, a China-based inverter and energy storage system solutions supplier for renewables, started manufacturing in India with a 3 GW facility based in Bangalore.

According to Badesra, the impact of the additional duty will depend on the ‘grandfathering’ clause by MNRE or change in law provisions in the already awarded tenders. “However, we firmly believe this will encourage local manufacturing.”

According to Mercom’s India Solar Market Leaderboard for 1H of 2020, Sungrow, FIMER India (formerly ABB), and Sineng Electric were top solar inverter suppliers to the Indian solar market in the first half of the calendar year 2020.

Classic case of misplaced objectives

The government’s main aim of introducing or increasing duties was to ensure it incentivized manufacturing in India. In the case of duty on inverters, this objective could at best be half successful. The duties have made it costly to import a solar inverter by 15% compared to 5% earlier. According to many manufacturers, global suppliers can easily adjust the price of the inverters to offset the impact of duty. Just like the foreign suppliers were able to bring down the price of modules to neutralize the impact of a 15% safeguard duty.

To effectively incentivize manufacturing in India, the government should reduce the duty on the imported components so manufacturers can bring down the cost of production and in turn, the inverter’s price to make it globally competitive. As the industry has suggested, the government can later implement a phased manufacturing plan to ensure all the critical components are made in India by the time the duty to import these components is increased.

The government has made it costly to import solar inverters but not cheaper to make in India.