Customs Duty for Importing Manufacturing Equipment

The Customs Duty Landscape for Manufacturing Equipment in India

India's customs duty regime for manufacturing equipment is designed to balance two competing policy objectives: protecting domestic equipment manufacturers while facilitating the import of capital goods that boost India's manufacturing capacity. For foreign companies setting up or expanding manufacturing operations in India, understanding this duty structure is critical. The stack runs from 18% of the CIF (Cost, Insurance, and Freight) value where BCD is nil and only IGST applies, up to the 27.74% worked through below on the standard 7.5% BCD — and it can drop to zero under specific schemes.

The Union Budget 2025-26 introduced significant reforms, eliminating seven additional customs tariff rates and reducing the total number of tariff slabs to eight (including a zero rate). The government also capped levies at one cess or surcharge per item and exempted the Social Welfare Surcharge (SWS) on 82 tariff lines subject to a cess. These changes mark a continued shift towards a simpler, lower-duty regime for capital goods imports.

Understanding the Duty Structure: Components Explained

When importing manufacturing equipment into India, multiple duty components stack on top of each other. Each component is calculated sequentially, creating a compounding effect.

Basic Customs Duty (BCD)

BCD is the primary import duty levied under the Customs Tariff Act, 1975. For most manufacturing equipment classified under HS Code Chapters 84 and 85, the standard BCD rate is 7.5%. However, specific exemptions can reduce this to 0% under the EPCG scheme or a sector-specific exemption notification.

Social Welfare Surcharge (SWS)

SWS is levied at 10% of the BCD amount (not on the product value). For equipment with a 7.5% BCD, the SWS is 0.75% of the CIF value. The Budget 2025-26 exempted SWS on 82 tariff lines, so importers should verify whether their specific equipment falls under these exemptions.

Integrated Goods and Services Tax (IGST)

IGST is levied on imports in lieu of CGST and SGST. The IGST rate for most manufacturing equipment is 18%, calculated on the assessable value (CIF + BCD + SWS + any other applicable duties). Critically, IGST paid on imports is fully eligible for input tax credit (ITC), which means the effective cash cost of IGST is nil for manufacturers who use the imported equipment in taxable production.

Anti-Dumping Duty (ADD) and Safeguard Duty

Certain categories of manufacturing equipment may attract additional anti-dumping or safeguard duties, particularly for equipment imported from China. These duties are product-specific and country-specific, determined through investigations by the Directorate General of Trade Remedies (DGTR). As of 2026, ADD applies to items including certain steel products, machinery components, and electronic components — importers must check the current ADD notifications for their specific product categories.

Duty Calculation: Worked Example

Let us walk through the duty calculation for importing a CNC machining centre with a CIF value of INR 1,00,00,000 (INR 1 crore):

However, since the IGST component of INR 19,48,500 is eligible for input tax credit, the net cash outflow (after ITC claim) is INR 8,25,000 — an effective rate of just 8.25% on the CIF value. This distinction between the total duty payable at customs and the net cost after ITC is critical for accurate financial planning.

The EPCG Scheme: Zero-Duty Import of Capital Goods

The Export Promotion Capital Goods (EPCG) Scheme under India's Foreign Trade Policy is the most powerful tool for reducing customs duty on manufacturing equipment to zero. Under this scheme, capital goods — including new machinery, equipment, spares, moulds, dies, jigs, fixtures, and tools — can be imported at 0% customs duty.

How the EPCG Scheme Works

• Zero customs duty: All components — BCD, SWS, and compensatory duties — are waived on capital goods imported under the EPCG licence
• Export obligation: The importer must export goods or services worth six times the duty saved within six years from the date of authorisation
• Average export obligation: In addition to the specific export obligation, the importer must maintain the average export performance of similar products from the preceding three licensing years

EPCG Application Process

1. Apply to the Directorate General of Foreign Trade (DGFT) through the online portal
2. Submit the following: IEC, GST registration, list of capital goods to be imported with HS codes and estimated values, export plan with projected volumes and destinations
3. DGFT issues the EPCG authorisation electronically once the application and supporting documents are accepted
4. Import the capital goods against the authorisation, presenting it to customs at the time of clearance
5. Fulfil the export obligation over the six-year period, submitting annual performance reports to DGFT

Who Should Use EPCG

The EPCG scheme is ideal for foreign manufacturers setting up export-oriented production in India. Companies importing equipment worth INR 5-50 crore for manufacturing operations that will generate exports can save INR 40 lakh to INR 4 crore in customs duty — a substantial saving that can influence the entire project ROI calculation.

Project Imports: Single-Point Assessment for Industrial Projects

Project Imports is a customs classification under heading 9801 of Chapter 98 of the Customs Tariff, operated through the Project Imports Regulations, 1986. Its benefit is procedural rather than rate-based: an entire industrial plant — machinery, instruments, components and specified spares imported for the registered project — is classified and assessed under one heading at one rate, instead of being classified item by item across dozens of headings. The older 5% concessional project-import rate no longer applies. In the Budget 2025-26 customs proposals the government confirmed the policy set out in Budget 2022-23 of "gradually phasing out of the concessional rates in capital goods and project imports; and applying a moderate tariff of 7.5 per cent" (Ministry of Finance, Budget 2022-23 customs proposals). Confirm the rate against the current entry for heading 9801 in the First Schedule to the Customs Tariff Act, 1975 before modelling a project budget.

Eligible Projects

• Industrial plants for manufacturing or producing any article
• Power generation projects
• Mining operations
• Irrigation projects
• Other infrastructure projects as notified by the government

Application Process

1. Register the project with the sponsoring authority (the relevant line ministry — e.g., DPIIT for manufacturing, Ministry of Power for power generation)
2. Obtain a project import registration from the customs authority at the port of import
3. Import goods against the registered project, paying duty at the rate in force for heading 9801 on the whole project value
4. Submit an installation certificate within the prescribed period, confirming that the imported equipment has been installed and commissioned at the project site

What Project Imports Actually Saves

Because the project-import rate has been aligned with the standard 7.5% tariff, registering a project under heading 9801 no longer produces a headline BCD reduction. What it does produce is certainty and administrative economy: one classification and one assessment for the whole plant, no item-wise classification disputes across a shipment containing hundreds of line items, and a single set of documentation. For a plant assembled from many sub-assemblies arriving in separate consignments, that is frequently worth more than a rate concession — but it should be evaluated as a process benefit, not modelled as a duty saving.

Sector-Specific Exemptions and Concessions

The Budget 2025-26 and the consolidated exemption notification, Notification No. 45/2025-Customs dated 24 October 2025, introduced sector-specific duty exemptions that significantly benefit foreign manufacturers:

Electric Vehicle Manufacturing

35 additional capital goods for EV battery production and 28 additional capital goods for mobile phone battery manufacturing have been added to the exempt list, with 0% BCD. This is a significant incentive for foreign EV and electronics manufacturers setting up production in India under the PLI scheme.

Semiconductor Manufacturing

Capital goods for semiconductor fabrication and assembly, testing, marking, and packaging (ATMP) operations are exempt from BCD under the India Semiconductor Mission. This includes photolithography equipment, etching systems, deposition tools, and testing equipment.

Critical Minerals

Budget 2025-26 fully exempted from Basic Customs Duty cobalt powder and waste, lithium-ion battery scrap, lead, zinc and twelve further critical minerals (Ministry of Finance, Budget 2025-26 customs proposals). The exemption is on the minerals and scrap themselves as inputs, not on the plant used to process them — capital goods for a critical-mineral processing facility are dutiable at the rate for their own classification unless they fall within a separate exemption entry.

Textile Machinery

Two shuttle-less looms have been added to the fully exempted textile machinery list. Certain other textile processing equipment attracts a reduced BCD of 5%.

Shipbuilding

The BCD exemption on raw materials, components, consumables, and parts for shipbuilding has been extended for 10 years. Capital goods for shipyard modernisation also attract concessional rates.

Special Economic Zones: Duty-Free Manufacturing

Manufacturing equipment imported into a Special Economic Zone (SEZ) is entirely exempt from all customs duties — BCD, SWS, IGST, and any other applicable levies. SEZs function as duty-free enclaves, making them the lowest-cost option for importing manufacturing equipment.

However, SEZ operations come with their own set of obligations: all production must be export-oriented (with limited domestic tariff area sales), and the entity must meet positive net foreign exchange (NFE) requirements. For manufacturers planning to serve both export and domestic markets, a combination of SEZ and Domestic Tariff Area (DTA) operations may be optimal.

Customs Clearance Process for Manufacturing Equipment

The customs clearance process for capital goods follows a structured procedure through the ICEGATE (Indian Customs Electronic Gateway) portal:

Step-by-Step Process

1. Obtain IEC: An Import Export Code (IEC) from DGFT is mandatory before any import. This is a one-time, PAN-based registration obtained electronically from DGFT
2. Appoint a Customs Broker: Engage a licensed customs broker (formerly known as a customs house agent) to handle documentation and clearance
3. File Bill of Entry: The customs broker files the Bill of Entry on ICEGATE, declaring the goods, their classification (HS code), value, and applicable duty
4. Pay duties: All duties (BCD, SWS, IGST) must be paid electronically through the ICEGATE payment gateway before goods are released
5. Assessment and examination: Customs officers assess the declared value and classification. For high-value capital goods, physical examination is common, particularly for first-time importers
6. Release and delivery: Upon duty payment and clearance, the goods are released for delivery. For equipment requiring installation, temporary bond facilities allow delivery before final customs formalities are completed

Timeline and Costs

Clearance time for capital goods varies by port, by whether the Bill of Entry is facilitated or selected for assessment or examination, and by whether a no-objection is needed from a technical agency (for example BIS, where the equipment falls under a compulsory certification order). CBIC publishes measured release times by port in its periodic National Time Release Study, which is the right benchmark to plan against. Customs documentation and broker charges are negotiated per consignment and scale with value and the number of line items.

Second-Hand Machinery: Special Considerations

Foreign manufacturers sometimes import used or refurbished equipment, particularly during early-stage operations. India permits the import of second-hand capital goods, but with additional requirements:

• Chartered engineer certification: A certificate from a chartered engineer or an authorised valuer covering the year of manufacture, present condition, residual useful life and the value of the equipment. Customs rely on it both for valuation and for confirming the machine is what the Bill of Entry says it is; the Foreign Trade Policy imposes separate, category-specific conditions, so check the current policy entry for the exact machine before shipping
• Customs valuation: Second-hand goods are assessed at their depreciated value, calculated using the straight-line method from the original purchase price. This can result in lower assessable value and consequently lower duty
• DGFT restrictions: Some categories of second-hand equipment may require DGFT approval or be subject to restrictions under the Foreign Trade Policy
• Environmental compliance: Used equipment containing hazardous materials (e.g., equipment with asbestos components) may be prohibited under the Hazardous Waste Management Rules

Duty Optimisation Strategies for Foreign Manufacturers

Foreign manufacturers can legally reduce their effective customs duty burden through these strategies:

1. Leverage Free Trade Agreements

India has Free Trade Agreements (FTAs) with ASEAN, Japan, South Korea, and several other trading partners. Equipment sourced from FTA countries may qualify for preferential (reduced) BCD rates. For example, equipment from Japan under the India-Japan CEPA may attract BCD rates of 0-5% instead of the standard 7.5%.

2. Use the EPCG Scheme

For export-oriented manufacturers, the EPCG scheme eliminates all customs duty, as discussed above. The export obligation of 6x duty saved over 6 years is manageable for companies with established export markets.

3. Apply for Project Imports

Register the manufacturing project for project import classification under heading 9801. This will not cut the headline rate, but for a large plant arriving in many consignments it removes item-by-item classification risk and the disputes and demurrage that follow from it.

4. Consider SEZ Location

If the manufacturing is primarily export-oriented, setting up in an SEZ eliminates all customs duties on equipment imports. This decision must be weighed against the restriction on domestic sales.

5. Optimise HS Code Classification

Accurate HS code classification can make a material difference in duty rates. Some components or sub-assemblies may attract lower duty rates than the complete machine. Working with an experienced customs broker or trade compliance consultant to optimise classification is a legitimate and effective strategy.

6. Claim ITC on IGST

Ensure that the GST registration is in place before importing, so that IGST paid at customs can be claimed as input tax credit immediately. This converts the 18% IGST from a cost to a cash-flow timing issue.

For foreign companies evaluating India manufacturing entry, our FDI advisory service covers equipment import planning, duty optimisation, and scheme eligibility assessment. See also our guide on EPCG and Advance Authorization schemes for a detailed comparison of duty exemption options.

Common Mistakes Foreign Manufacturers Make

Based on practical experience, these are the most frequent customs duty errors that inflate costs or create compliance risks for foreign manufacturers importing equipment into India:

1. Incorrect HS Code Classification

Misclassifying equipment under the wrong HS code is the single most common — and costliest — error. A CNC lathe classified under a general machinery heading may attract 7.5% BCD, while the same machine correctly classified under a more specific heading could qualify for a reduced rate or exemption. On a INR 5 crore consignment, each percentage point of BCD is INR 5 lakh before the surcharge and IGST that stack on top of it.

2. Not Claiming IGST Input Tax Credit

Some manufacturers, particularly those in the pre-revenue phase, fail to register for GST before importing equipment. Without GST registration, the 18% IGST paid at customs becomes a sunk cost rather than a recoverable credit. Always complete GST registration before the first import.

3. Ignoring the EPCG Scheme

Many foreign manufacturers are unaware of the EPCG scheme or assume it is too complex. In practice, the DGFT application is straightforward, and the six-year export obligation is manageable for companies with any export component. Even if exports represent only 20-30% of production, the duty savings can be substantial.

4. Failing to Leverage FTA Benefits

Equipment sourced from FTA partner countries (Japan, South Korea, ASEAN nations) may qualify for preferential rates, but only if the correct Certificate of Origin is obtained from the exporting country and presented at the time of import. This requires coordination with the foreign supplier — a step that is frequently overlooked.

5. Undervaluing Equipment for Customs

While importers sometimes attempt to declare a lower value to reduce duty, Indian customs has sophisticated valuation mechanisms including transaction value databases, comparable import data, and valuation rules under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. Undervaluation exposes the importer to confiscation of the goods and to penalty — including, where false or incorrect material is knowingly used in a transaction under the Act, a penalty not exceeding five times the value of the goods under section 114AA of the Customs Act, 1962 (a multiple of the value of the consignment, not of the duty short-paid).

Key Takeaways

• Standard effective duty on manufacturing equipment is approximately 27.7% (BCD 7.5% + SWS 0.75% + IGST 18%), but the net cost after IGST input tax credit is only 8.25% of CIF value
• The EPCG scheme offers zero customs duty on capital goods for manufacturers who can fulfil an export obligation of 6 times the duty saved within 6 years — the most powerful duty elimination tool available
• Project imports give single-point assessment, not a lower rate — the former 5% concessional rate for heading 9801 has been phased out in favour of the standard 7.5% tariff, so the benefit is classification certainty for a whole plant rather than a duty saving
• Sector-specific exemptions exist for EV battery, mobile phone battery, semiconductor and textile manufacturing equipment under Budget 2025-26 and Notification No. 45/2025-Customs — critical minerals are exempted as inputs, not as processing plant
• SEZs offer complete duty exemption but restrict the manufacturer to primarily export-oriented production, making them ideal for companies with established global markets