Basic customs duty on solar cells and modules: a poor decision

15 March 2021 |

We finally have it. After almost a year of uncertainty, MNRE has announced that PV cells and modules shall be subject to basic customs duty (BCD) of 25% and 40% respectively from April 2022 onwards. MNRE has also clarified that only bids submitted until 9 March 2021 shall be offered BCD related ‘change in law’ compensation. Final Finance Ministry notification for effecting the duty is yet to be released.

The one-year implementation interregnum is expected to serve dual purpose – give interested entities lead time to set up manufacturing facilities as well as respite to projects under construction from additional costs. The period is, however, too short on both counts and should have ideally been at least two years.

Imposition of BCD is in breach of the Information Technology Agreements signed by India under WTO framework.The government seems aware that the decision may be challenged by China, US and other countries but is banking on dispute resolution process to take many years. Nonetheless, MNRE decision provides much needed clarity to the sector. We give below our summary assessment of various related issues.

BCD is expected to stay in place for minimum 4-5 years
Lack of clarity about period of duty imposition is not a surprise as end date for BCD is typically not announced upfront. But it is acknowledged that safeguard duty (SGD) failed to have any beneficial impact on domestic manufacturing because of its limited time span. The government has already informally indicated that BCD would stay in place for at least 4-5 years.

SGD extension almost certain
Last year, SGD was extended until July 2021. We expect another extension at the prevailing 14.50% rate until March 2022 notwithstanding the fact that the Commerce Ministry’s trade investigation is still not complete.

Steep duty would dim solar’s shine
40% duty level is excessive as the cost disadvantage for domestic manufacturers is believed to be no more than 20-25% and the government has already outlined production-linked incentives and demand enhancement for domestically manufactured modules.

The cost impact would be compounded by 10% Social Welfare Surcharge raising effective level of duty to 44% and increasing solar tariffs by about INR 0.52/ kWh. The extra cost would not be welcome by DISCOMs particularly when they are already reluctant to purchase vanilla solar power. The duty improves relative cost attractiveness of wind power and solar-wind hybrid power. 

Higher cost would also dampen long-term growth prospects in rooftop solar and open access solar although there would be a temporary demand boost around H1/ 2022 to avoid BCD burden.

Terrible news for pipeline projects
While ‘change in law’ provisions are enshrined in most PPAs now, proposed compensation increase of INR 0.005/ kWh tariff for every INR 100,000/ MW increase in project cost is not adequate. The formula does not consider ‘carry’ cost of BCD for 25 years and leaves project developers out of pocket by about INR 0.05/ kWh.

On the flip side, the DISCOMs would be even more reluctant to sign PPAs for nearly 18,000 MW of project capacity tendered in the past year – at tariffs ranging between INR 2.36-2.92/ kWh – because of extra ‘change in law’ cost.

Surge in capacity addition expected in H1 2022
Most developers would be keen to import modules for under development projects before BCD comes into effect subject to module price outlook and availability from tier 1 suppliers. H1 2022 could be a really busy time with utility scale solar capacity addition of as much as 10,000 MW.

Little improvement in competitiveness of domestic manufacturing
We maintain that BCD does little to improve cost competitiveness of Indian manufacturing. Small scale, lack of domestic supply chain and dependence on imported technology (plus upstream components) means that India’s self-sufficiency hopes would remain elusive for the foreseeable future.

We expect 10-12 GW of module manufacturing capacity to be developed over the next three years. Interest in cell and other upstream manufacturing is expected to be much lower because of higher capital cost and technology risk (and lower duty).

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