Defence Minister Rajnath Singh is expected to raise with Finance Minister Nirmala Sitharaman the issue of grants provided to private companies for military research and development (R&D) being subject to an 18 per cent Central Goods and Services Tax (GST).
This concern arises because State-owned research associations, universities, colleges, and other entities registered under the Department of Scientific and Industrial Research (DSIR) were exempted from this tax by the GST Council in October 2024, creating a disparity for private sector players.
It is understood that Singh plans to meet Sitharaman soon to highlight the difficulties faced by MSMEs and start-ups, many of whom have received GST notices after obtaining R&D grants under the Defence Research and Development Organisation’s (DRDO) Technology Development Fund (TDF). Other issues are also part of the agenda in the meeting between the two Cabinet Ministers.
Discourages innovation
The DRDO has already escalated this matter with both the Ministry of Defence (MoD) and the GST Council, arguing that this taxation is discriminatory and discourages defence innovation – a key priority for the Modi government’s ‘aatmanirbharta’ (self-reliance) initiative in the military sector.
Beyond the DRDO, the MoD also fosters innovation through its Innovations for Defence Excellence (iDEX) scheme, which provides financial and logistical support to MSMEs and start-ups. This is crucial given the limitations of defence public sector undertakings (PSUs) in meeting the modern technological requirements of the armed forces.
Defence establishment sources have indicated that the DRDO also brought this issue of taxing innovation to the attention of the Parliamentary Committee on Defence during a recent meeting. These sources added that the parliamentary panel, which is set to submit its report to both Houses of Parliament shortly, concurred with the DRDO’s argument against the 18 per cent GST levied on innovation funding for MSMEs and start-ups via the TDF.
Other GST notices
This issue gained public attention after a businessline report on March 11, 2025, highlighted industry concerns that the tax was a setback to government R&D initiatives in the military domain. Two days later, the Defence Ministry took cognisance of the report, with iDEX, an offshoot of the Defence Innovation Organisation (DIO), initiating inquiries with firms to ascertain if they had received such GST notices.
The Program Executive at iDEX, publicly requested affected iDEX winners to provide details, stating, “The matter is being deliberated at a higher level in the Ministry.” The Union Finance Ministry also reacted, with the Commissionerate of Central Goods and Services Tax (CGST) commencing internal investigations to understand the grounds on which such notices, if any, were issued to firms within their jurisdictions.
In the fiscal year 2025-26, the DRDO’s budgetary allocation increased to ₹26,816.82 crore from ₹23,855.61 crore in FY 2024-25, marking a 12.41 per cent increase over the previous year’s Budget Estimates. Of this, ₹14,923.82 crore, is earmarked for capital expenditure and R&D projects. Similarly, ₹449.62 crore has been allocated for iDEX schemes, including its sub-scheme Acing Development of Innovative Technologies with iDEX (ADITI), to fund projects under this category. The allocation for iDEX has shown a near three-fold increase within two years.
