India scraps duty-free import scheme for solar power equipment

India has scrapped a policy allowing duty-free imports of equipment for solar power generation owing to concerns over revenue losses

In an order effective 17 December, the Central Board of Indirect Taxes and Customs (CBIC) has prohibited the use of customs-bonded warehouses for activities related to solar power generation. These warehouses are licensed facilities where imported goods can be stored without immediate customs duty payments.

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The move marks a significant change in the application of the Manufacturing and Other Operations in Warehouse Regulations (MOOWR). Designed to boost local production, the framework allows deferred customs duties on imports for manufacturing items sold domestically or exported, with no time limit for storage. CBIC said the withdrawal was taken in public interest.

Experts view the decision as a government effort to tackle potential revenue leakages and prevent misuse of warehousing provisions. 

Bonded warehousing, governed under Section 65 of the Customs Act, primarily allows duty deferment to promote trade and facilitate manufacturing for export or domestic consumption, explained Rajat Mohan, senior partner at AMRG & Associates, a chartered accountancy firm.

“However, allowing power generation within warehouses could lead to indefinite deferment of duties and unintended utilization of customs benefits, particularly in a sector as dynamic as renewable energy,” said Mohan. “The solar power industry enjoys significant policy incentives such as GST concessions and subsidies. Thus, additional warehousing advantages may create an uneven playing field and strain government revenue.” 

The scheme is available to a variety of sectors including pharmaceuticals, food processing, electronics, textiles and leather products.

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For companies relying on duty-free imports in bonded warehouses, the decision introduces immediate operational challenges. Goods used for power generation must now undergo “de-bonding,” a process requiring them to transition out of bonded facilities into commercial settings. This shift triggers payment of outstanding customs duties and taxes, potentially disrupting cash flow for affected firms.

Saurabh Agarwal, tax Partner at EY, explained that the decision retroactively impacts companies already leveraging the scheme. 

“This move may necessitate the de-bonding of solar farms and the payment of import duties on previously imported modules, potentially leading to significant cash flow disruptions for affected companies,” Agarwal said. “Further, where the Power Purchase Agreements (PPAs) do not account for tariff increases due to changes in law, this may also impact the profitability of those power plants who have availed of the benefits under this scheme.”

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Agarwal added that businesses will need to evaluate the amendment in conjunction with “change in law” clauses in PPAs, which could allow claims for tariff adjustments. Without this, affected companies may face compounded financial stress.