India's income tax department is currently investigating approximately 40 Chinese solar module manufacturers, including companies like Trina Solar Ltd and Longi Green Energy Technology Co. Ltd, along with their Indian distributors, over suspicions of tax evasion.
According to an exclusive report by Mint, the inquiry involves a deep examination of their business operations, transactions, invoices, and strategies to determine their permanent establishment (PE) status. The concept of PE is pivotal in determining the tax liability of foreign companies operating within India. Tax authorities assess the tax obligations of foreign entities in India by considering tax treaties and local laws.
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When a foreign entity conducts business in India through a PE, it may be subject to taxes on the profits generated within the country. However, in the absence of a PE, there is no tax liability in India since no income is deemed to accrue within the country.
This inquiry is particularly significant, given that solar modules constitute over 60% of the total project cost. India, which is implementing the world's largest clean energy program, imported solar photovoltaic (PV) cells, panels, and modules worth $3 billion in FY22. To reduce imports from China, India imposed a 25% basic customs duty on solar cells and a 40% duty on modules starting from April last year.
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Despite these measures, India's imports of solar cells and modules from China increased by 55% in the first quarter of this fiscal year, totaling $926.6 million, according to data from India's Ministry of Commerce. Prominent Chinese solar module manufacturers include Trina Solar Ltd, Jinko Solar, Longi Green, Canadian Solar, ET Solar, Chint Solar, and GCL-Poly Energy Holdings Ltd.
One of the sources involved in the matter pointed out, "The issue revolves around the concept of permanent establishment, as these Chinese firms have employees and offices in India, yet billing is not conducted here."
This investigation occurs against the backdrop of strained relations between India and China, with Chinese companies facing heightened scrutiny in India. New Delhi has been implementing tariff and non-tariff barriers to restrict Chinese imports and has canceled projects and contracts awarded to Chinese firms. In April 2020, India's Department for Promotion of Industry and Internal Trade revised its foreign direct investment (FDI) policy, making government approval mandatory for all FDI from countries sharing a land border with India.