In June 2020, the union minister for power and new and renewable energy announced that basic customs duty of 20-25% will be imposed on solar modules imported to India. This will come into effect as of 31st July 2020 with a customs duty of 15% imposed for the first year and a progressive increase on the import duty to 40%.
This increase aims to curb solar cell and module imports from China.
India has continually met a large portion of its solar cell and module requirements through imports from China, Malaysia, and other countries. This was done despite the 25% safeguard duty levied. However, the COVID-19 crisis is one of the main reasons for the change, since supply chains were disrupted, which led to a delay in the commissioning of projects.
In a bid to improve domestic solar manufacturing by minimizing delays caused by such situations, the government has also said that this move will drive domestic solar module prices down.
The solar segment in India has achieved grid parity and record low tariffs in a short amount of time. A recent auction of 2 GW solar power capacity saw tariffs hitting a new low of Rs. 2.36 per kWh. This success is largely attributed to the reduction in the cost of cells and modules. Technological advancements in solar cell manufacturing and economies of scale have also contributed to a 60% decline in the cost of solar modules in the last 5 years.
Research also suggests that the safeguard duty levied was responsible for the diversification of sources of import of solar cells and modules. Currently, India’s solar cell manufacturing capacity stands at around 3,100 MW and module manufacturing at around 9,000 MW. Of this, about 2,000 MW and 3,800 MW respectively are located in Special Economic Zones (SEZs).
These SEZs are typically open markets conceptualized to attract foreign investments by allowing tax cuts and other similar practices. Traditionally, the material produced by SEZs is duty-free, there is 100 per cent tax exemption on export income for five years, and there are no levies of minimum alternate tax and the goods and services tax. However, the basic customs duty is all set to turn the tables.
This new customs duty for the first year, starting August 2020, has been set as 15% and will apply to manufacturers in SEZs as well since they are regarded as imports within the country. This custom duty will not apply to manufacturers outside the SEZs.
Future Outlook for Domestic Manufacturing
A large part of the industry, primarily non-SEZ, has welcomed the basic customs duty. COVID-19 has brought to light the importance of having good domestic manufacturing capabilities. The vacuum in supplies created due to the suspension of international cargo has highlighted the need for robust domestic manufacturing capacity and supply chain.
If the 100 GW target is to be met by 2022, the market will need to enhance its manufacturing capacity. To this end, the government has begun rolling out manufacturing-linked solar power generation tenders. A recent tender was won by Adani Green Energy. It involves the setting up of 8 GW of solar power plants along with a 2 GW of solar cell and module manufacturing facility.
The government has also proposed a plan to triple domestic solar cell manufacturing capacity, however, the implementation of these plans will have to be closely monitored.
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Summarized from RenewableWatch