Finance ministry rules out Customs duty relief for magnet PLI scheme

Finance ministry has ruled out customs duty exemption for REPM-making machinery, saying capital subsidy under the PLI scheme will offset high import costs amid China's export curbs

No exemption from Customs duty or cess is required for importing machinery and equipment used in manufacturing rare-earth permanent magnets (REPM) under the proposed production-linked incentive (PLI) scheme, the Department of Revenue in the Ministry of Finance has told the Ministry of Heavy Industries.

 

Officials said the capital subsidy being planned under the scheme would be sufficient to offset the higher costs involved.

 

Expenditure on plants and the machinery to be imported to set them up in India is expected to be significantly higher since almost all such equipment will have to be sourced from countries other than China, such as Germany, Japan, and South Korea, officials stated.

 

The PLI scheme proposes financial incentives — both capital subsidy and sales-based — for winning bidders (private players) that will set up five manufacturing plants with a combined production capacity of 6,000 tonnes per year.

 

The Ministry of Heavy Industries (MHI) is the nodal ministry for the scheme, which is under inter-ministerial discussion.

 

Officials mentioned the draft PLI scheme initially included a provision for exemption from basic customs duty (BCD) and cess on capital goods (plants and machinery) required for setting up REPM-manufacturing units.

 

However, the Department of Revenue told the MHI that such exemption should not be part of any scheme or policy document and, if needed, would be examined separately on a case-by-case basis.

 

Following this, the MHI removed the provision for duty exemption from the draft scheme.

 

Officials said the Department of Atomic Energy (DAE), which is involved in the scheme’s technical aspects, had estimated that the “effective” capital expenditure to set up a plant, which would manufacture 1,200 tonnes of REPM per year, in India could be four times higher than that in China.

 

The DAE has indicated that such a facility would require an investment of about ₹1,000 crore in India. Therefore, it has been decided that instead of exemption from customs duty, a capital-subsidy support of up to ₹150 crore — around 15 per cent of the investment cost — for a plant that can manufacture 1,200 tonnes of REPM per year.

 

For smaller plants with 600, 800-, or 1,000-tonne annual capacities, the subsidy would be capped at ₹75 crore, ₹100 crore, and ₹120 crore, respectively.

 

The capital subsidy will be released after the plants are commissioned.

 

The DAE has informed the MHI that restrictions on exports from China will force companies to procure plant machinery and technology from countries like Germany, Japan, and South Korea.

Neither the Ministry of Finance nor the MHI responded to Business Standard’s queries on this matter.

 

Since April this year, China has restricted the export of REPMs to India, affecting production in the Indian automobile industry.

 

Almost 90 per cent of global production takes place in China. The country also leads in the production of rare-earth elements and in the technology and machinery required to convert rare-earth oxides into REPMs.

 

Last week, Business Standard reported that the Department of Expenditure had raised multiple questions over the MHI’s ₹7,350-crore PLI scheme to boost the domestic manufacturing of REPMs.

 

It warned that while the scheme aimed to reduce dependence on imported magnets from China, it could leave India reliant on rare-earth oxides from abroad and offer subsidies so generous that winning bidders might have little incentive to improve efficiency or cut costs.

 

According to the MHI’s calculations, about two-thirds of the requirements of rare-earth oxides to run plants with a combined capacity of 6,000 tonnes per year of REPM will have to be arranged through import.

 

The Department of Expenditure had also said the scheme could set a precedent for launching new PLI programmes whenever a crisis emerged in automotive components dominated by China, and questioned why a separate scheme was needed instead of leveraging the National Programme on Critical Minerals (NCMM), Business Standard has learnt.