Winds of Change: Issue 31
In this week's issue, we focus on the basic customs duty on solar imports, and the long-drawn history behind it.
Welcome to Winds of Change, a weekly newsletter that collates my work as I chase the winds that bring us the monsoon and drive our turbines.
Nothing basic about customs duties
In this issue, I'll regale a story that I've been tracking for nearly a year now. Over the past week, the saga finally reached a suitable conclusion and is a major landmark in the field of renewable energy. I thought giving a primer on the issue of basic customs duty on solar imports would make for a good focused issue. Ready your books, it's time to get an education!
The government uses various taxes to promote and discourage the use of certain products. For example, there's the ‘sin tax’ imposed on liquor and cigarettes. The argument is that since these are harmful substances, increasing the taxes on them will not lead to any backlash while discouraging their use.
Similarly, various countries are now flirting with the idea of a ‘sugar tax’, which would be imposed on sugar-rich drinks such as sodas. The World Health Organisation (WHO) argues that these drinks are a major contributor to obesity the world over, and the money raised from this tax can be used to promote health initiatives for the general public. India, along with a bevy of other countries such as France and the UK currently have taxes on carbonated sugary drinks.
The scope of these can be widened to include candies and sweets (cakes or cookies) as well, but we haven't reached that phase yet.
What you can't (or at least, should not) do is tax essential goods. Think about things you need for basic sustenance such as food or vaccines — they come under this purview.
Now, transpose your viewpoint. Instead of a regular citizen, you're a multimillion-dollar company operating in the field of renewable energy in India. You're building wind farms and solar parks across the country, business is good. The government has made a push for improving the share of renewable energy in the overall power mix, so they are issuing projects. At the same time, international companies want to switch to greener sources of energy, so you're receiving contracts from them too.
What would be your basic requirements to conduct your business?
You need raw materials such as wind blades and solar panels. You also need the software to operate these projects after their completion. You need labour which is preferably skilled and cheap. You need land which is cannot be used for other purposes such as farming, and which is conducive to generating enough power throughout the year — high wind speeds for wind power; at least 200-250 days of direct sunlight for solar power.
These now become your basic sustenance items.
For a business to run efficiently, it needs a good supply of these materials. To have a steady supply at decent rates, you need government support that is reflected in its policy. And what better way to gauge that than taxes?
India is not a hotspot to manufacture renewable energy components. Much of our wind equipment came from Europe, while over 80% of our solar equipment is brought from China. As such, we need to import both of these raw materials to construct our RE-based power plants in the country.
The main reason why China wins out is the cheap prices of its components. With plenty of cheap labour and few taxes for exports, China is the world's manufacturing hub, and solar components such as cells and modules are not any different.
On an average, solar components from China are 20% cheaper than their Indian counterparts. That's it, that's the main difference: cost.
China has done this with plenty of other goods — initally price it low, corner the market, and then increase the prices to profit off the industry's overrealiance on them. This practice is called ‘dumping’, and affects various industries such as chemicals, steel, and even tyres.
Indian manufacturers of renewable energy components have long called for some sort of a barrier for these imports. Dumping of goods creates a dependence on the supplier, and some sort of an opposition is necessary to protect national interests. However, because Chinese suppliers cost less, Indian companies don't set up manufacturing units, and becasue there isn't a domestic supply chain, imports continue to meet our renewable energy targets.
It's a vicious cycle.
Three year ago, the government decided to intervene. It imposed an import duty on foreign solar imports, calling it a safeguard duty. However, since India is an ASEAN country and part of the World Trade Organisation (WTO), it is subjected to a few trade agreements.
Firstly, any safeguard duty can only be imposed for a maximum of four years. The rationale is that in four years, the host country should have developed an ecosystem to manufacture the good by then.
Seconly, these duties cannot be imposed on fellow ASEAN countries. So if any components are imported from Thailand, Malaysia, or any other neighbouring country, by virtue of our trade agreements we will need to honour them and can't put such a charge on them.
Having kept all of this in mind, last year, the government mooted the idea of imposing a basic customs duty on solar imports. This would replace the safeguard duty, and would be a permenant tax. Power and renewable energy minister R.K. Singh told reporters in June that the proposal is ready, and was awaiting clearance but would be implemented from August 1, 2020.
However, one problem plagued renewable energy companies. When they bid for such projects, they make very precise calculations for their budgets that have very little wiggle room. The imposition of such duties would throw their budgets off; keeping that in mind, the companies asked for either exemptions or ‘grandfathering’ of projects.
The industry requested for exemption of duties for the projects were signed and their construction began before the announcement of such a duty. If that was not possible, they asked for ‘grandfathering’, through which these companies would recieve compensation for the unplanned hike in costs in the form of payments later on.
However, the Ministry of Finance, which has to ultimately approve of any tax-related decisions, objected to the exemption and the ‘grandfathering’. This led to the last-minute extension of the safguard duty in July, with the renewable energy and finance ministries at an impasse.
The stalemate continued for months, especially after it became evident that the Ministry of Finance is not going to allow any exemptions whatsoever.
However, the matter was finally resolved this week, when the ministry announced a basic customs duty of 40% on solar modules and 25% on solar cells, effective April 2022. No exemptions will be provided, the government's notification clarified.
This draws a conclusion to a long-drawn saga in the Indian renewable energy industry. Domestic manufacturers remain happy at a formal announcement; developers get another year to wrap up projects and plan for the future accordingly.
In the short term, tariffs are set to rise, said rating agency ICRA. My colleague (and Odia sweets aficianado) Rachita Prasad goes into detail about this issue, speaking to the biggest names in the renewable sector. Tariffs are set to rise by nearly 50 paise per unit as the Indian manufacturing companies ramp up their production to make up for the gap from Chinese imports.
A personal note
If you've made it till here, I applaud your attention to be interested in this story till now. Thank you for reading this issue, and the ones prior to this!
After over 30 weeks of doing this, there is a bit of a career shift I'll be undertaking from the next week. Don't worry, I'm still with ET, but after shifting to Bombay, I'll be working with a different team. Excitement abounds!
Renewable energy might not be at the forefront of my coverage henceforth. It feels a little weird to see Winds of Change divert so much from its original purpose — I've included so many different sectors and fields, thanks to the podcast. Keeping in mind my next stop and the diversification of everything I cover, I think it might be time to retire the Winds of Change moniker.
However, no firm decisions have been taken yet!
I might take a sabbatical from writing the newsletter for a week or two, until I figure out my new sector, and how to proceed with the newsletter. However, I will continue to cover my work in this format, that's for sure. I hope you'll be patient!
That's all for this week's issue. Thank you for reading! This issue was written by me, Shashwat Mohanty, and the artwork was produced by Devika Menon for Winds of Change.
I hope you learnt something new. Please feel free to reply to me about any errors or typos you spotted, any clarifications, and most importantly, any feedback. Till next Sunday!
Sorry for reading this episode so late. But learning continues as usual from the newsletter of yours. Eagerly awaiting for the next episode covering various important issues affecting our lives. All the best for the new portfolio. Go great!