FinMin, PMO to discuss fresh overhaul of basic customs duties; 300 items likely on the table

These discussions, are primarily to consider the on-going exercise to hike customs duties in line with the 'Atmanirbhar Bharat' program, to support and encourage domestic manufacturing, sources said, who did not want to be named.

'Atmanirbhar Bharat' is a vision announced recently by Prime Minister Modi to make India a self-reliant country.

These discussions are likely to be on more than 300 items and an immediate hike is likely to be approved for “textiles, electronic goods such as cameras and laptops, solar modules, solar panels, and solar inverters.”

Besides, some import restrictions could also be put in place for some steel and aluminium products, sources added.

Solar has been one big area where the government has been proposing a hike for quite some time.

In July, power minister RK Singh had said that India needed to bring tariff barriers for imported power equipment, as it posed security threats to the power system in the country.

Singh had highlighted that the government is pushing for measures to make India self-reliant in both power and solar power sectors.

The minister reiterated that India intended to bring 25 percent basic customs duty immediately on import of solar modules and cells and gradually increase it to 40 percent.

“This particular, proposal to immediate hike basic customs duty of 25% on solar modules, panels, cells and inverters is under active consideration,” sources quoted earlier added.”

“We have decided not to buy any power equipment from china, we are going to release a list of prior reference countries which will include China and Pakistan. The government will not give any permission for imports from prior reference countries. Import from any other country will be inspected under stringent norms because the power system is a sensitive system,” Singh had said.

“The power system is vulnerable to cyberattacks because of trojan and malware, this can lead to power shutdown, and then communication lines will be impacted and lead to a database crash,  manufacturing, defence industries, etc. Most of the equipment imported are made in India. I urge even states to not use power equipment which is made in China.”

India imported power equipment worth Rs 71,000 crore in FY19, and about Rs 21,000 crore worth equipment alone was imported from China.

India has a target of 175 GW of renewable capacity by 2022, of which 100 GW target is for solar capacity.

Some of the players in solar power equipment manufacturing sector are Vikram solar, Adani group, Tata Power, Moser baer and BHEL.

Say in the case of Tata Power, for 29 years, through its solar arm, TPSSL, has been manufacturing cells and modules by focusing on cutting-edge technology and worldclass innovation. With over 1.9 GW of modules shipped globally, Tata’s solar cells and modules are recognised for their quality and reliability across the world.

TPSSL claims to be the first solar manufacturer in India to achieve the milestone of shipping 1 GW modules worldwide, cementing its position as a leading player in the global PV module manufacturing industry with in-house production capacity of 300 MW cell line and 400 MW module line.

Similarly, for aluminum sector, recently, Ministry of Mines had constituted an Inter-Ministerial Committee (IMC) to analyse import curbs in aluminium and also propping up the domestic smelters of the metal to substitute overseas supply. Idea being to see how measures to restrict “cheap” and “low quality” Chinese imports can be put in place.

More than 60 percent of India’s aluminium demand is met through imports and China contributes 16 percent to the import basket of the metal. Other countries that supply the metal to India include the US, Malaysia, the UK & the UAE.

In FY19, aluminium imports from China grew 58 percent at 380 (Kilo Tonne) kT vs 238 kT in FY18. The trade deficit between India and China on the metal widened by a whopping 369 percent from $248 million in FY11 to $1.16 billion in FY19.

China also has almost 80 percent share of India’s secondary aluminium products, which includes foil, tubes, doors, windows, nails, staples, screws, etc.

Aluminium Association of India has suggested the government impose 12.5 percent import duty on secondary aluminium products. The industry has also suggested an increase in basic customs duty on primary aluminium import to 10 percent from 7.5 percent.

Similarly, a hiked customs duty at 10 percent has been sought for aluminium scrap and waste, which has seen an unprecedented surge in imports due to the low custom duty of 2.5 percent.

Scrap import has increased from countries like the US, the UK, the UAE, Saudi Arabia, and Australia. The US is the biggest exporter of aluminum scrap, China imposed 25 percent duty on US scrap that is now being diverted to India.

In FY20, India's aluminium capacity stood at 4.1 Million tonnes (MT) as against 2.2 MT of consumption.

Experts say such moves will help in fostering domestic manufacturing.

Abhishek Jain, Tax Partner, EY says, "Tariff spikes on imports should help foster the Government's leitmotif of a self-reliant India.  Nonetheless, these hikes would need to be well evaluated especially in the currently financially pressed times, for products which are currently not available in India/ are deficient in supply."

Rajat Bose, Partner, Shardul Amarchand Mangaldas said, "... Merely increasing basic customs duty may not serve the intended purpose of localisation unless a conducive ecosystem is created in India to manufacture goods which are equal in terms of quality and technology as compared to imported goods. Unless this is done, it may only result in increase in prices of high-quality finished goods in India."

Mahesh Jaising, Partner Deloitte India said, "... An increase in duties may be good for finished products for which there exists a reasonable ecosystem to manufacture these products in India, which once encouraged has the capability to scale up. In the past, phased manufacturing programs were rolled out for mobile phones and electronic vehicles and this has done well for attracting the manufacture of these products in India. Hence, on similar lines, the Government can consider implementing Phased Manufacturing Programs for certain identified industries, to boost its idea of ‘self-reliant’ India and at the same time giving the industry sufficient lead time to ramp up it's manufacturing in India."

"The proposed increase in customs duty on import of solar modules/ cells, inverters, re-emphasis govt's continuous efforts towards 'Atmanirbhar bharat'. The intent is clearly to promote 'make in India' and push industry to increase manufacturing capacity of key components of Solar Power plants in India. With Safeguard duty already applicable on Solar modules, increase in BCD on imports, in the short-term, would significantly increase the cost of setting up on-going solar projects. The industry could seek reimbursement of incremental costs from govt wherever the tariffs have already been fixed, thus increasing the cost of electricity generation," Prashanth Agarwal, Partner PwC said.

Currently, import of solar modules is exempt from Basic customs duty and Social Welfare surcharge. However, there is a safeguard duty which is applicable on import from specified countries (China and Malaysia - this was extended for one more year recently). Further, GST is levied at 5%. The effective duty rate is 20.65% if importing from China/Malaysia. The breakup is as under:

BCD - Nil

SWS - NIl

Safeguard duty - At the rate of 14.9% during the period 30 July, 2020 and 29 January, 2021 and at the rate of 14.5% during the period 30 January, 2021 and 29 July, 2021 -- GST - 5%.

Currently, inverters are being imported at a concession rate of BCD and IGST of 5% by taking exemption certificate from MNRE - Benefit of concessional rate also taken practically under GST in view of S.No. 234 of notification 1/2017-Central Tax (Rate). The effective customs duty is currently 10.78% (there is no safeguard duty on inverters). The customs duty components are as follows:

BCD - 5%

SWS - 10% of BCD

IGST - 5%

In case basic customs duty is increased for inverters also, the same would increase the tax costs.