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, citing concerns over lost revenue.

In an order that came into force on December 17, the Central Board of Indirect Taxes and Customs (CBIC) has banned the use of bonded warehouses for activities related to solar power generation. These warehouses are approved facilities where imported goods can be stored without immediate payment of customs duties.

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

Experts see the move as a government effort to combat potential revenue leakages and prevent misuse of warehousing arrangements.

Bonded warehousing, governed by Section 65 of the Customs Act, primarily allows for deferral of customs duties to promote trade and facilitate manufacturing for export or domestic consumption, explained Rajat Mohan, Associate principal at AMRG & Associates, an accounting firm.

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

The program targets various sectors, including pharmaceuticals, food processing, electronics, textiles and leather products.

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For businesses that rely 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 that requires them to move from bonded facilities to commercial environments. This change triggers the payment of unpaid customs duties and taxes, which may disrupt the cash flow of affected companies.

Saurabh Agarwal, tax partner at EY, explained that the decision has a retroactive impact on companies already benefiting from the program.

“This move may require unbundling of solar parks and payment of import duties on previously imported modules, which could result in significant cash flow disruptions for affected companies,” Agarwal said. “Furthermore, when power purchase agreements (PPAs) do not take into account tariff increases due to legislative changes, this can also impact the profitability of power plants that have received the benefits of this program .”

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