India introduced protectionist policies to promote domestic solar industry manufacturing

Indian solar manufacturers say that this tax puts SEZs at a natural disadvantage compared to domestic tariff zones.

The Indian government recently introduced several protectionist policies to promote the manufacturing of the domestic solar industry. Some measures include anti-dumping duties, safeguard taxes and basic tariff proposals.

These measures are aimed at safeguarding the interests of domestic solar manufacturers. Manufacturers say that cheap products imported from China harm the interests of domestic manufacturers.

In this year's federal budget, the government proposed to impose a basic tariff of 20% on solar cells and modules. The main reason behind this measure is to reduce dependence on Chinese imports and increase solar import prices to bring them closer to domestic prices. However, India has not considered the impact of the basic tariffs on solar manufacturers in the special economic zones of the country, which will have serious adverse consequences.

To understand the impact of this proposal, we need to understand how the special economic zones operate. Traditionally, special economic zones have been established as open markets within an economy. Special economic zones were created mainly to attract foreign direct investment into the country. The main purpose of the establishment of special economic zones is to promote the export of goods and services, encourage investment by domestic and foreign entities, create employment opportunities, and develop infrastructure.

Special economic zones enjoy privileges in the form of tax exemptions and incentives. They enjoy the convenience of tax-free imports and domestic commodity purchases. 100% of their export income is exempt from income tax in the first five years, 50% from income tax in the next five years, and 50% income tax on export profits in the next five years. In addition, India’s special economic zones are also exempt from the minimum replacement tax and goods and services tax.

Manufacturers said that the latest proposal on basic tariffs would create an imbalance between manufacturers located in domestic customs zones and special economic zones. To put it simply, a domestic customs zone refers to a region outside India's special economic zones that does not enjoy privileges. In terms of trade and commerce, special economic zones are considered international territories. Local raw materials purchased by producers within the special economic zone are considered as export commodities, while commodities produced in the special economic zone and sold within the domestic customs zone are considered as imported commodities.

If manufacturing units in the special economic zone wish to sell products in India, they must pay this tax, while units in the domestic customs zone are exempted. This proposal goes against the intention behind the imposition of basic tariffs-to protect Indian manufacturers.

If the proposed tariffs are implemented, the manufacturing units in the special economic zone must pay additional value in addition to the basic tariffs on imported goods. The added value here simply means the value added by the companies in the special economic zone before providing these imported products to customers. For solar manufacturers, value-added refers to the process of bringing together components such as glass, aluminum frame, EVA, and back sheet during the production process to form the final product.

In contrast, manufacturers located in the domestic tariff zone only need to pay basic tariffs for imported goods, while they do not need to pay basic tariffs for value-added within the domestic tariff zone.

India currently has nearly 10GW of solar module manufacturing capacity, including companies like Adani Solar, Tata Solar, Waaree Energies, RenewSys and Vikram Solar. According to official data from the Ministry of New and Renewable Energy as of 2018, more than 60% of battery manufacturing plants and about 40% of component manufacturing plants in India are located in special economic zones. This proposed measure to help domestic manufacturers may cause harm to the industry.

Compared with its counterparts in the domestic tariff zone, this proposal will make these manufacturing units extremely uncompetitive. Many manufacturers planning to expand their factories in the special economic zone now do not know whether to continue or wait for government intervention. If basic tariffs are implemented without considering all of the above issues, it will be difficult for solar manufacturers to survive in the special economic zones.

Saibaba Vutukuri, CEO of Vikram Solar, told Mercom India: "The Indian government plans to impose basic tariffs on the import of solar cells and batteries assembled in modules or panels. Basic tariffs will affect manufacturing units operating in special economic zones. , This is reasonable.

If this tax is levied, manufacturing units located in special economic zones will be adversely affected compared to manufacturing units located in domestic customs zones, because manufacturing units located in special economic zones are responsible for paying basic value-added tariffs. The manufacturing plants located in the domestic customs zone do not need to pay basic tariffs for the added value completed in the domestic customs zone."

"When collecting basic tariffs, the units that produce solar cells and modules in the special economic zone must be treated equally with those in the domestic customs zone. Otherwise, these units will die unnaturally and thousands of people will lose their jobs. If not In doing so, India will lose the manufacturing capacity in the special economic zone, which will defeat our goal of self-reliance."

Recently, leading solar manufacturers Webel Solar, Vikram Solar and RenewSys sought the intervention of Prime Minister Narendra Modi in a letter to provide all manufacturers with a level playing field and realize the true potential of the renewable energy industry.

Speaking of the adverse impact of the proposed measures on the special economic zones, Avinash Hiranandani, Global CEO of RenewSys, said: "Manufacturers like RenewSys will invest in the expansion of the scale of the special economic zones. At that time, the Ministry of New and Renewable Energy continued to treat manufacturers in special economic zones and domestic customs zones equally.

This measure will ensure the continued growth of the entire solar industry. The Ministry of New and Renewable Energy and other ministries are fully aware of this situation and assure us that they will take care of solar energy manufacturers headquartered in special economic zones, and we believe they will do the same. However, if basic tariffs are implemented without exempting sales from the special economic zone to the domestic customs zone, then the existing special economic zone factories will immediately face an unnatural disadvantage. This will hinder our operations and also be detrimental to the industry. "

Avinash added, "Basic tariffs are good for all manufacturers. Therefore, I am convinced that both special economic zones and direct investment agreement manufacturers will support and benefit from basic tariff collection. The only modification we ask to consider is to make special economic zones and domestic tariff zones Of manufacturing plants are at the same level. RenewSys is a member of the Indian Solar Manufacturers Association, and several manufacturers with factories in the domestic customs zone also support the same treatment of sales in both places."

Special economic zone manufacturers hope that the government will provide specific basic tariff exemptions for solar cells and modules supplied from special economic zones to domestic customs zones in accordance with customs laws.

However, the proposal to adjust the special exemption for solar projects in special economic zones is not easy, which requires amendments to the special economic zone laws. The final decision must be made by the Ministry of Commerce and Finance.

Officials of the ministry believe that basic tariffs will be levied similarly to safeguard taxes. At present, the safeguard tax is only applicable to the value of imported items, but not to the added value in the special economic zone. The same applies to the collection of basic tariffs. For example, since silicon wafers (the raw materials for manufacturing batteries) do not need to pay a safeguard tax, solar cells manufactured in a special economic zone and then sold in a domestic customs zone are not subject to a safeguard tax.

Similarly, as far as modules are concerned, taxes are only imposed on imported solar cells and other raw materials, not on final products (modules). In short, basic tariffs will be levied on imported raw materials, not on the value-added part of the special economic zone.

A senior manager of a manufacturing unit in the domestic customs zone told Mercom: "The main purpose behind the establishment of the special economic zone is to promote the export of Indian goods. However, Indian battery and component manufacturers did not focus on this, but tried Selling their goods on the Indian market is against the original intention of developing special economic zones. If they want to sell to domestic customs zones, then they should be relocated. They cannot be exempt from paying basic tariffs, because this requires parliamentary bills.

In the special economic zone, we have production plants for several commodities, and solar energy is not the only one, which makes it impossible to exempt basic tariffs. If they plan to move out, they will need to seek support from the Ministry of New and Renewable Energy. All manufacturing units in special economic zones have enjoyed many benefits, and they do not have to pay anti-dumping duties, which makes the grounds for exemption from basic tariffs untenable."

Manufacturers also believe that the government needs to come up with other incentives to promote the development of domestic manufacturing. One of these initiatives is to provide 25% of central financial assistance to entities building solar cell manufacturing plants in China. Another step is to provide 3-5% fixed-term loans and working capital interest subsidies to manufacturing units engaged in renewable energy manufacturing in the past decade.

In order to reduce dependence on imported solar products and promote the development of domestic manufacturing, the Indian government has imposed a safeguard tax on solar products imported from China and Malaysia. This safeguard tax plan will end in July 2020, and the government is currently considering whether to continue to collect the tax.

Raj Prabhu, Chief Executive Officer of Mercom Capital Group, said, "I made important policy recommendations without careful consideration. This is another example. Different government officials have given conflicting dates for basic tariffs, which has brought more Certainty.

The industry is struggling to recover from the New Crown epidemic blockade, and uncertainty is what we don’t need most. We do not want unpleasant surprises, and India will implement the policy after considering all factors and seeking industry opinions. "