Five months after businessline highlighted a tax anomaly discouraging private industry, the Ministry of Defence (MoD) has decided to absorb 18 per cent GST levied on private start-ups and MSMEs on receiving government funds for carrying out research and development (R&D) for developing and producing military products.
While private MSMEs and start-ups are taxed, government research associations, universities, colleges and other entities, registered under the Department of Scientific and Industrial Research (DSIR), were exempted from the tax by the GST Council through a notification issued on October 8, 2024.
The MoD allocates a budget annually for carrying out R&D through schemes like the iDEX [(Innovations for Defence Excellence), which is an offshoot of Defence Innovation Organisation (DIO)] and the Defence Research and Development Organisation’s (DRDO’s) Technology Development Fund (TDF).
These are meant to financially help MSMEs and start-ups to get indigenous modern technology as the Centre realised limitations of defence PSUs in meeting futuristic warfare demands of the armed forces.
“..Approval is hereby conveyed for the reimbursement of GST, as applicable, over and above the grant-in-aid provided to MSMEs and start-ups under the TDF and iDEX schemes, based on documentary evidence and taking into account the avail of input-tax credit, prospectively,” the MoD said in an office memorandum issued on July 18. This issue has the approval of the competent authority, the letter stated.
Interim arrangement
Sources privy to the developments said that this appears to be an interim arrangement by the MoD—which had swung into action to address concern following the businessline report on taxing innovation —since ultimately the GST Council has to take a call for settling the industry upsetting move.
The GST Council has not met since December 2024 and no one has any idea when the next meeting, if at all is happening, is slated, sources remarked.
Minister of Defence Rajnath Singh himself had decided two months ago to take up the taxing innovation issue with Finance Minister Nirmala Sitharaman.
Once any matter is accepted by the Union Finance Ministry, it’s placed before the Fitment Committee which in turn either declines or gives nod to the proposal for putting up before the GST Council.
The process of implementation of the Council’s decision also takes time as States’ ratification is also needed.
The academia and the industry, waiting for a roll-back and amendment of the notification, are surprised by the GST Council’s stand over imposing tax on innovation by private players.
Possibly, the Council believes that since private companies make profit, they should not be entitled to tax relaxation but this argument is flawed as the industry growth is ploughed back into a nation’s rise, be it politically, economically or militarily, a defence scientist tracking the issue observed.
Such policies may push entities to look for opportunities outside as many foreign companies and countries are eyeing young minds for developing disruptive defence technologies to meet new challenges faced in global conflicts, an industry representative observed.
Prime Minister Narendra Modi too realised the importance of giving impetus to innovation culture in the country and came up with Anusandhan National Research Foundation, having a corpus of ₹50,000 crore from 2023-2028 for driving R&D in the country, government sources stated.
The newspaper published a series of articles after MSMEs and start-ups started getting notices to pay 18 per cent GST for R&D defence projects they were doing for the tri-services and others.
