Defence Minister Rajnath Singh is likely to take up the issue of GST levied on defence R&D grants with Finance Minister Nirmala Sitharaman, amid growing concerns from start-ups and MSMEs operating in India’s defence innovation ecosystem.

The move follows rising discontent among private companies receiving grants under the Defence Research and Development Organisation’s (DRDO) Technology Development Fund (TDF), who have recently been served notices demanding 18% Goods and Services Tax (GST) on these grants. Industry players argue that taxing such funding undercuts government efforts to promote indigenous defence technologies under the ‘Aatmanirbhar Bharat’ initiative.

The crux of the issue lies in a policy imbalance. In October 2024, the GST Council exempted State-funded R&D bodies, including universities and DSIR-registered institutions, from GST on research grants. However, no such relief has been extended to private firms, sparking demands for parity.

DRDO has already flagged the matter with both the Ministry of Defence (MoD) and the GST Council, warning that the current tax treatment could deter private-sector innovation. The issue has also been escalated to the Parliamentary Committee on Defence, which is expected to support the exemption in its forthcoming report.

This tax burden comes at a time when India is increasingly relying on the private sector to fill critical technological gaps through programmes like TDF, Innovations for Defence Excellence (iDEX), and the ADITI scheme. These initiatives have become vital pillars in India’s bid to modernise defence capabilities through local innovation.

Following media reports highlighting industry pushback in March 2025, the Defence Ministry acknowledged the concerns and the iDEX programme office reached out to impacted start-ups to gather GST notice details. The Finance Ministry has since asked Central GST Commissionerates to investigate the legitimacy of such demands.

The push for reform comes as government spending on defence R&D continues to rise. The Union Budget for FY 2025–26 saw DRDO’s allocation climb to ₹26,816.82 crore, with ₹14,923.82 crore earmarked for capital and R&D expenses. iDEX funding also saw a major boost to ₹449.62 crore—nearly triple what it was two years ago.

As the government ramps up investment in strategic innovation, a review of GST policy on R&D grants to private firms may be on the horizon. Industry stakeholders are watching closely, hopeful that the upcoming discussions between the Defence and Finance Ministries will result in tax relief that aligns with India’s defence innovation goals.

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