In a move that could significantly impact India's defence innovation ecosystem, Defence Minister Rajnath Singh is expected to raise concerns with Finance Minister Nirmala Sitharaman over the 18% GST levied on grants provided to private companies for defence-related research and development (R&D).
The issue has come into sharp focus after several MSMEs and start-ups that received R&D grants under the Defence Research and Development Organisation's (DRDO) Technology Development Fund (TDF) reported receiving GST notices. These entities argue that the tax burden undermines government efforts to promote indigenous defence innovation under the 'Aatmanirbhar Bharat' initiative.
Disparity in GST Treatment
The concern stems from a policy disparity. In October 2024, the GST Council exempted State-run research institutions-including universities, colleges, and DSIR-registered bodies-from GST on R&D grants. However, private companies and start-ups continue to face the 18% tax, raising questions about equal treatment.
The DRDO has already flagged the issue with both the Ministry of Defence (MoD) and the GST Council, arguing that this tax structure is discriminatory and discourages innovation in the private defence sector.
Impact on Defence Innovation Initiatives
The issue is particularly significant given the increasing reliance on private sector innovation under schemes such as:
- Technology Development Fund (TDF) by DRDO
- Innovations for Defence Excellence (iDEX) by the Ministry of Defence
- ADITI (Acing Development of Innovative Technologies with iDEX), a sub-scheme under iDEX
These schemes are vital in bridging the technological gap that public sector defence undertakings (DPSUs) cannot address alone.
A senior official from the defence establishment confirmed that the DRDO has escalated the issue to the Parliamentary Committee on Defence, which is expected to support the DRDO's call for removing GST on such grants in its upcoming report.
Ministries and Industry React
Following a report published on March 11, 2025, highlighting industry concerns, the Defence Ministry acknowledged the issue. The iDEX programme office soon reached out to start-ups and MSMEs, requesting details of any GST notices received.
The Union Finance Ministry responded as well, with the Central GST Commissionerates launching internal inquiries to determine the basis of such notices and whether they were consistent with GST law.
Rising Budget for R&D and Innovation
In the Union Budget for FY 2025-26, the DRDO's allocation rose to Rs 26,816.82 crore, a 12.41% increase over the previous fiscal. Of this, Rs 14,923.82 crore is earmarked for capital and R&D expenditure.
Meanwhile, funding for iDEX increased to Rs 449.62 crore, a near three-fold rise in two years, underscoring the government's commitment to fostering innovation in defence technologies.
What Lies Ahead
As India intensifies its push for self-reliance in defence, a policy rethink on taxing innovation grants to private players may be imminent. Defence Minister Rajnath Singh's planned meeting with FM Nirmala Sitharaman could pave the way for GST relief, particularly for MSMEs and start-ups that form the backbone of India's military-tech future.
Experts and industry stakeholders await clarity, hoping that the government will align taxation policy with its stated objectives of encouraging indigenous defence innovation and private sector participation.
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