UPDATED Clarification : Till July 29, 2020 Existing BCD & SGD on Cells/Modules Will Continue and Post That SGD will Lapse and 20% BCD Will Kick In

by Vinay Kumar P

All of us in the RE sector were expecting changes in the import duty structure on solar cells and modules, especially given the fact that Safeguard duty (SGD) (currently at 15%) was expected to lapse on 29th July 2020 (SGD sunset date). The budgetary changes made today, can have a significant impact on solar tariffs going forward. This is a low-down on the budgetary changes announced for import of solar cells and modules , today.

Common tariff heading has now been split:
The common Customs Tariff heading (CTH) for solar cells and solar modules , 8541.40.11 has now been split into two. Solar cells (unassembled) will be classified under 8541.40.11 and solar cells assembled into modules or panels, will be under 8541.40.12. This comes into effect immediately as it comes under the Provisional collection of taxes Act. The earlier tariff rate of 12.5% now gets increased to 20% for both headings. Ostensibly this seems to indicate MoF’s intent to articulate a different tariff regime for cells and modules which has so far been common. Having two separate tariff headings would make this easier.

Divining the reasons for tariff increase :
The tariff rate for basic customs duty (BCD) .. (not to be confused with the effective rate) for solar cells and modules for the erstwhile CTH 8541.40.11 was 12.5% . The “tariff rate” normally defines only the cap rate and the tariff rate has to be read with the relevant exemption notification for the heading to get the “effective rate” that is to be paid. The effective rate here, when read with sl no 2 of customs notification 24/2005 Cus dated 1 march 2005 was Nil and it has remained that way since 2005. The tariff rate for these two headings, after today’s split, now stand revised to 20%. (See the third schedule to the Finance Bill 2020 read with clause 115(b) of same document). So since Customs notification 24/2005 persists even today, the effective basic customs duty would still be NIL not-withstanding the increase in tariff rate. The logic of increasing the tariff rate seems to indicate that MoF may not want to continue the BCD exemption in its current form, after the SGD sunset. It needs to be noted that tariff rates can be amended only by the Finance Bill/Act and cannot be amended by executive authority by way of notification. It is legislatively more convenient to raise the tariff rate in the Finance Bill, than wait till July 2020 and rush through with an ordinance. So post july 2020, in all probability , MoF would roll back the current exemption under notification 24/2005 and this could have the potential impact of raising the duty on cells and modules anywhere upto a maximum of 20% (and a minimum of 12.5). A full rollback of the exemption would raise the BCD to 20% and a partial rollback would leave the rates anywhere between 12.5% and 20% . We will have to wait and watch till July to know the BCD.

Implication of the amendment to the SGD notification:
The earlier SGD notification 1/2018 (customs) dated 30–7–2018 has been amended to cover both the split headings for solar cells and modules. As the CTH split becomes effective immediately from 2–2–2020, the apparent incongruity in the SGD notification referring to a single CTH even after the heading split, would have caused interpretation problems. Hence this amendment. It effectively does not change anything — and continues to keep the SGD at 15% till 29th July 2020.

Social Welfare surcharge exemption has been removed
In Budget of 2018, a 10% social welfare surcharge was imposed on all items of import. However under sl no 1 of notification 11/2018 — cus dated 2nd Feb 2018 all items under CTH 8541 were exempted. Now this exemption has been removed (under notification 9/2020 — Cus dated 2 feb 2020) with CTH 8541 removed from the list of exempted tariff headings. So from 2nd Feb onwards SWS of 10% will be applicable on all duties of customs (excluding safeguard, countervailing and antidumping duties) . This is an additional levy to be factored.

Shorn of all the intricate web of presumptions above what this means is the following:

1) Till 29-july-2020 the existing duty structure of NIL BCD and 15% SGD (and 5% IGST) would continue.

2) Post 29 July 2020 , SGD notification would lapse and the tariff rates under the new split headings for solar cells and modules would kick in , and the tariff rate (Basic customs duty) would be 20% for both solar cells and modules . Effective rates would depend on how the MoF amends the current BCD exemption notification.

3) Post july 2020 , if the existing exemption is FULLY removed (unlikely) , then the effective rate on imports of solar cells and modules which is currently 20.75% (15% SGD+ 5% IGST) would stand revised to 26% (20% BCD + 5% IGST) post 29th July 2020. Partially rollback of exemption is also likely in which case the incidence would be less than 26%.

4) Social welfare surcharge exemption has been removed and this will mean an additional 10% levy on all duties of customs, excluding SGD.

The Government is signalling a clear intent that the tariff rate would be 20% on solar cells and modules post july 2020 after SGD lapses. The uncertainty on the duty structure post SGD would still continue until we have clarity on BCD exemption under notification 24/2005 — cus post sunset date.

I have tried to capture the various scenarios after the SGD sunset date in the table below. Hope it gives you a clearer view.