Safeguard Duty on Solar Panels imposed- Where is the Protection to domestic manufacturing industry
Global warming, climate change, increasing carbon footprints, greater dependence on import of fossils leading to adverse balance of payment positions, currency fluctuation and political risks are the few reasons that compelled many countries all over the world to hunt for a sustainable alternate energy option.
Solar and Wind once considered costly power have now achieved the grid parity and became affordable energy sources, this added fuel to fire for growth of renewables and led green energy transition indeed inevitable in India.
The Government of India has also set an ambitious target to achieve 100GW of solar power by 2022. The promotion of renewable energy by India also helped India to create new jobs, attract foreign investments and gave birth to a new era of energy infrastructure development making India second most attractive renewable energy market in the world.
India is emerging as an undisputed leader in terms of solar deployment however its domestic manufacturing industry is bleeding and is unable to grow with the pace to support deployments, currently India is highly dependent on imports of solar modules to achieve its solar targets. The obvious reason behind imports is the availability of cheaper solar PV cells and modules as compared to indigenously manufactured. India’s vision to become a world leader in solar energy cannot be complete without building its manufacturing strength in solar sector and thus there is an immediate need to promote domestic manufacturing in solar sector.
With the intent to protect domestic manufacturing industry from the injury caused by the sudden surge in import of solar cell and panels, Government of India on the recommendations of Director General of Trade Remedies (“DGTR”) vide its notification dated 30th July, 2018 imposed 25% safeguard duty for a period of 2 years on Import of Solar PV Cells and Modules to be levied in a manner specified in the said notification. Although, the duty was imposed with the intent to provide relief to the manufacturing industry but the imposition of duty with pass through of this duty for already bid out projects under change in law provisions of the power purchase agreements has not only negated its impact but defeated the sole purpose for which it was levied as it failed to generate demand for the domestic solar modules and accord protection as intended.
The imposition of duty on one end did not help generate demand for domestic solar modules, on other hand it put additional burden in the form of increased project cost and significant additional cash outflow to developers. The biggest concern raised by the solar industry on levy of safeguard duty was its impact on the projects already auctioned out before 30 July 2018 as the bidders did not factored in the additional duty at the time of bidding.
It is pertinent to note that the Standard Bidding Guidelines for Solar power projects allows solar developers to pass on any new levy under “Change in Law Clause” to the power purchaser under the power purchase agreement. But recovery of new levy under the change in law provisions has to go through the legal and regulatory process making it challenging and time consuming. In order to mitigate this situation, Union Ministry of Power issued a direction to Central Electricity Regulatory Commission (CERC) under Section 107 of the Electricity Act, 2003 to determine per unit impact of SGD on power tariff and dispose of the petition seeking pass through of SGD to end Consumer in a time bound manner. Although, Union Government has issued such directions but the State Governments are yet to issue similar instructions under Section 108 of the Electricity Act. Moreover, there should be also be a seamless process in place to pass on the safeguard duty to the contractors under the EPC contracts.
It is worth noting that currently the execution time allowed for commissioning of a solar power project is 21 Months. The commissioning date of the projects, which were auctioned out in April- July, 2018 will be around Jan-March, 2020. Since, solar modules are generally procured in the last 3-4 months of commissioning deadlines, the major offtake of solar modules in next two years (during which safeguard duty will be in force) will mostly be for the projects that were auctioned out before the imposition of SGD.
It is due to pass through of duty for already bid out projects, Solar Developers in India finds it beneficial to buy Chinese modules over indigenous modules even after imposition of safeguard duty for a simple reason that if imported and indigenous modules are available at same price, it will be beneficial for them to buy imported ones as they will be entitled to claim safeguard duty as pass through under change in law on the imported modules but not on indigenous modules. Thus for already auctioned out projects, procurement of modules is duty neutral as they can claim it as pass through and the projects, which are/will be auctioned out after the imposition of SGD, their commissioning date will fall in the second half of 2020, by that time SGD will be completely phased out.
It is evident that the sole purpose of imposition of safeguard duty has been defeated by the manner safeguard duty is implemented and imposition of SGD in the current form clearly fails to accord its intended benefit to the indigenous manufacturers. In the present circumstances, it is prudent to exempt procurement of solar modules for already bid out projects from safeguard duty instead of allowing them pass through under change in law to prevent unnecessary litigations.
Further, 60% of the domestic industry is located in the Special Economic Zones (SEZ) and a lot of uncertainty is prevailing on applicability of safeguard duty on DTA clearance of modules from SEZ. The provisions of Section 8B(2A) of Custom Tariff Act provides that any article which is subject to safeguard duty when imported into the SEZ and if used in manufacture of a product, while clearing such product from SEZ to DTA, custom duty including the safeguard duty will be charged on such article so used and not on the manufactured product. However, in the present case, since solar cells and solar modules both are placed in the same HSN code, while clearing the solar modules manufactured from imported solar cells, the competent authorities in SEZ are insisting on safeguard duty on the full value of modules. This has placed units in SEZ in a difficult position to compete with the DTA units, which was never the intention of the legislature. Moreover, in the absence of clarity and matter being sub-judice before the Hon’ble Supreme Court of India/ Orissa High Court, different SEZs are employing different mechanism to clear goods to DTA, some are demanding full duty on the value of module irrespective of origin of cells, others are clearing goods on submissions of letter of undertaking on provisional assessment and few of them have halted the assessment. The manufacturers in SEZ being aggrieved have approached Ministry of Finance and DGEP for clarification. The SEZ manufacturers also have big hope of relief from the Supreme Court of India, who is expected to hear the matter during later this October or early November. Ideally, government should have completely exempted the SEZ from the implication of safeguard duty to promote domestic manufacturing under section 25(1) of the Custom Act, 1962.
Thus, in order to revive bleeding domestic manufacturing solar industry, it is essential that the Government exempt already auctioned out projects from the implication of safeguard duty, clarify the applicability of safeguard duty/ exempt SEZ units and incentivise the existing manufacturers for backward integration through commercially viable manufacturing linked PPAs and to roll out CPSU scheme for domestically manufactured solar modules and implement Public Procurement (Preference to Make in India) Order 2017.