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NEW DELHI : Indian solar power developers have hit upon a novel way to defer payment of steep import duties on cells and modules that took effect on 1 April, by declaring their plants as “customs bonded warehouses," two people aware of the development said.

By declaring a solar plant as a “customs bonded warehouse," these developers are trying to skirt paying basic customs duty (BCD) of 25% on solar cells and 40% on modules. This assumes importance given solar modules comprise more than 60% of the cost of a solar project, and India plans to award large solar contracts to expedite its target of reaching 500 gigawatt (GW) of non-fossil fuel power generation capacity by the end of this decade.

According to the Central Board of Indirect Taxes and Customs’ (CBIC) website, “Manufacture and other operations in a bonded warehouse is a duty deferment scheme. Thus, both BCD and IGST on imports stand deferred. In the case of goods other than capital goods, the import duties (both BCD and IGST) stand deferred till they are cleared from the warehouse for home consumption, and no interest is payable on duty. In case the finished goods are exported, the duty on the imported inputs (both BCD and IGST) stands remitted i.e., they will not be payable. The duty deferment is without any time limitation."

While this ingenuity helps in deferring imposition of import duty, it negates the ambitious exercise of reducing dependency on cheap Chinese imports by encouraging building of domestic solar equipment manufacturing capacity.

The head of a large investment firm with a significant solar power generation portfolio said, however, that “developers are not breaking any law."

“There is a provision to exercise such a duty deferment which is being exercised," the person said, seeking anonymity.

Meanwhile, industry experts termed such practices as a blatant abuse of the customs bonded warehouse scheme’s original idea. “The spirit of the bonded warehouse scheme is to waive import duty on intermediate or capital goods to be used directly or indirectly for exports. In case the importer later decides to use the goods for domestic consumption, duty becomes payable but is deferred until such date. We have heard some cases of the scheme being used to defer duty payment for domestic solar projects," said Vinay Rustagi, managing director at consulting firm Bridge to India.

“But it seems a risky ploy as it is stretching the core principle of the scheme. We believe it is a matter of time before tax authorities clamp down on the practice," added Rustagi.

Spokespeople at the ministries of new and renewable energy, finance and CBIC did not respond to queries emailed on Thursday.

According to the Central Electricity Authority, by 2030, the domestic power requirement would touch 817GW, more than half of which would be clean energy. Of this, 280GW would be solar energy alone. To achieve the target of 280GW, around 25GW of solar energy capacity will need to be installed every year till 2030.

India currently has a renewable energy capacity of 153GW.

The approach by solar developers comes against the backdrop of the Centre’s plans to create additional domestic solar equipment manufacturing capacity and playing a bigger role in global supply chains. As part of the strategy, the budget for FY23 has made an additional allocation of 19,500 crore towards the production linked incentive (PLI) scheme for high-efficiency solar modules.

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