What is India's plan to boost its renewable energy sector through tax cuts on solar panels?

India's renewable energy ministry has initiated discussions with the finance ministry to seek approval for reducing the import tax on solar panels from 40% to 20%.

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India is contemplating a significant reduction in import taxes and goods and services taxes (GST) on solar panels to address the shortfall in domestic production and meet the increasing demand for renewable energy, as reported by Reuters. The move aims to support the country's target of achieving 365 gigawatts (GW) of installed solar capacity by 2031-32.

The tax cuts would benefit solar power giants such as Tata Power, Adani Green, and Vikram Solar, who have won contracts but face a shortage of local equipment. However, the proposal also raises concerns about the sustainability of the domestic manufacturing industry.

Cutting Import Taxes and GST:

India's renewable energy ministry has initiated discussions with the finance ministry to seek approval for reducing the import tax on solar panels from 40% to 20%. The two ministries may also recommend lowering the GST on solar panels from 12% to 5%. These measures would incentivize imports, bridge domestic capacity gaps, and make solar panels more affordable.

Boost for Solar Power Giants:

The tax cuts on solar panels would significantly boost Indian solar power companies such as Tata Power, Adani Green, and Vikram Solar. These companies have secured contracts by offering competitive tariffs but struggle to complete them due to the limited availability of local equipment. The tax reductions would enable them to access imported panels at lower costs, helping them fulfill their obligations.

India's Self-Reliance Goals:

The decision to impose high import taxes on solar panels in 2022 was aligned with Prime Minister Narendra Modi's vision of self-reliance and reducing emissions by expanding renewable energy generation. However, domestic production capacity has fallen short of demand, necessitating reliance on imports. The proposed tax cuts reflect the government's recognition of the need to balance self-reliance with the requirements of the renewable energy sector.

Challenges in Domestic Manufacturing:

The current annual manufacturing capacity for solar panels in India is 32 GW, while the demand stands at 52 GW. The slow growth of domestic component supplies, coupled with high import taxes, has hindered the development of the domestic manufacturing industry. The volatile changes in government policy have created uncertainty for businesses and dampened the prospects of domestic manufacturing.

Decentralized Solar Plants for Farmers:

Implementing decentralized solar power plants through the Pradhan Mantri Kisan Urja Suraksha Evam Utthan Mahabhiyan (PM-KUSUM) program can have multiple benefits. It can enhance farmer incomes, contribute to achieving the target of 50% non-fossil power capacity by 2030, improve the financial viability of distribution companies (DISCOMs), and positively impact local communities and state governments, according to the report, ‘Implementing Solar Irrigation Sustainably’, co-authored by the International Institute for Sustainable Development (IISD), Consumer Unity and Trust Society International (CUTS), and The Energy and Resources Institute (TERI).

Reducing Reliance on China:

Recently, External Affairs Minister S. Jaishankar said Indian businesses need to stop looking for a "China fix", while terming the Make in India programme a strategic statement to spur the country's manufacturing. While Jaishankar was voicing the general sentiment that China's cheap imports de-industrialise India, take away millions of jobs and keep it dependent on China, therefore, India's trade imbalance with China calls for more local manufacturing. India aims to reduce its trade imbalance with China and promote local manufacturing through initiatives like the Make in India program. The widening trade gap and dependence on Chinese imports have led to calls for greater emphasis on domestic production. However, as India's local industry struggles to meet the rising demand for solar modules, the country must continue to import them, highlighting the need for a balance between imports and domestic manufacturing. India's trade gap with China widened to $83.2 billion in the last fiscal as against $72.91 billion in 2021-22. Exports to China dipped by about 28 per cent to $15.32 billion in 2022-23, while imports rose by 4.16 per cent to $98.51 billion in the last fiscal.