The duty-free import will, however, be limited to projects above 1500 mw in case of coal and LNG and 600 mw in the case of hydel.

The domestic capital goods industry, which is bound to vociferously oppose the move, will be pacified by a deemed export status scheme, sources said.

The cabinet committee on economic affairs is likely to clear the proposal at its meeting on Friday, according to power ministry sources.

The government will lose revenue to the tune of Rs 4,500 crore following waiver of customs duty, according to power ministry estimates. However, the ministry, in its note, has claimed that this revenue loss would be more than compensated by duties to be paid on import of coal and LNG for these mega projects. The duty earnings from import of coal and LNG have been estimated at Rs 28,000 crore over a period of 30years.

Sources said that the proposal had full backing of power minister PR Kumaramangalam who is also learnt to have convinced finance minister Yashwant Sinha on the need to grant the import duty exemption to mega power projects.

Interestingly, though the revenue losses would be entailed in the next few years, the earnings from the import of coal and LNG are spread over a period of 30 years which is too long a period to justify such a massive revenue loss. It would also increase the custom duty shortfall which is already way behind the target in the current fiscal.

Besides, the move will also hit the domestic capital goods manufacturers. The domestic capital goods industry suffered a blow last year too when the government decided to allow duty free capital goods for the refinery and fertiliser sector.

The domestic industry argues that even the deemed export status to them does not bring them on level playing field vis-a-vis the duty free import of capital goods. According to Confederation of IndianIndustry, the deemed export status sets off only the excise and import duty payable on inputs but does not include state taxes such as sales tax, central sales tax, octroi and high cost of capital due to higher interest rates prevalent in the country. Thus, the difference between the cost of production due to government levies and high interest rates of the domestic capital goods manufacturers vis-a-vis foreign companies remains at 13-16 per cent even after taking into account the benefits arising out of deemed export status for the domestic industry.

According to the power ministry, the coal-based mega power projects total 17,000 mw while another 6000 mw projects are LNG-based. The hydel sector has mega projects proposals of 3000 mw.

The power ministry has also projected revenue gains by way of corporate tax to be paid by the companies setting up these projects. The ministry has argued that if mega power projects are not set up by the private sector, addition of fresh power capacity will be left toNational Thermal Power Corporation and state electricity boards. Since most of the SEBs are in losses and NTPC mostly sets off its profits against depreciation of new plants, the government would earn very little corporate tax.