Relief for defence startups as MoD agrees to fully reimburse 18% GST on R&D grants
The Ministry of Defence issued an office memorandum agreeing to reimburse Goods and Services Tax (GST) charged on grant-in-aid disbursed to private-sector startups and MSMEs undertaking defence research and development
The reimbursement covers projects funded under the Innovations for Defence Excellence (iDEX) scheme and the Technology Development Fund (TDF), accounting for input tax credit already available to the recipient
The move follows GST demand notices issued to several defence startups and MSMEs on R&D grants they had received, which had created uncertainty over the effective value of government innovation funding
The reimbursement arrangement is an interim administrative measure; a permanent resolution — extending the existing exemption enjoyed by government research institutions to private innovators — would require a formal decision by the GST Council
iDEX and the Defence Innovation Organisation
Innovations for Defence Excellence (iDEX) is the Ministry of Defence's flagship framework to engage private industry, startups, MSMEs and individual innovators in defence and aerospace technology development, reducing historical reliance on public-sector defence R&D alone. It is executed by the Defence Innovation Organisation (DIO), a Section 8 (not-for-profit) company set up by the two major defence public sector undertakings.
Key Details
- iDEX launched: April 2018, at DefExpo 2018
- Implementing body: Defence Innovation Organisation (DIO), a Section 8 company formed by Hindustan Aeronautics Limited (HAL) and Bharat Electronics Limited (BEL)
- Funding routes include Defence India Startup Challenges (DISC) and the Support for Prototype and Research Kickstart (SPARK) framework, with grants of up to ₹1.5 crore for eligible startups/MSMEs
- Distinct from the Technology Development Fund (TDF), which is administered by the Defence Research and Development Organisation (DRDO) and targets more established MSMEs and larger industry for component/subsystem development
The GST reimbursement directly affects the net value of grants disbursed under iDEX (DIO-administered) and TDF (DRDO-administered) — the two principal channels through which private defence-tech innovators receive government R&D funding, making the tax treatment of these grants a material factor in the schemes' effectiveness.
GST Treatment of Research Grants — The October 2024 Exemption and Its Gap
The GST Council, at its 54th meeting, recommended exempting research and development services supplied by a government entity, or by a research association, university, college or institution notified under the Income-tax Act, when the consideration takes the form of a grant — regardless of whether the grant is publicly or privately funded. This exemption was notified with effect from 10 October 2024. Private companies, including defence startups and MSMEs performing functionally similar R&D, were not covered by this notification and remained liable to 18% GST on grant income.
Key Details
- GST Council 54th meeting: held 9 September 2024; exemption notified via Notification No. 08/2024-CT(Rate), dated 8 October 2024, effective 10 October 2024
- Exemption applies to entities notified under clauses (ii) or (iii) of Section 35(1) of the Income-tax Act, 1961 (broadly, recognised research associations, universities and DSIR-registered institutions) — a category that excludes ordinary private companies
- Absent this exemption, private defence R&D recipients faced 18% GST on the full grant amount, effectively reducing usable project funding by that proportion
The MoD's reimbursement is a targeted, scheme-specific fix for defence startups and MSMEs that sits outside the October 2024 GST Council exemption, addressing the same underlying tax-on-innovation problem but only for iDEX/TDF grants rather than through a general amendment to the GST exemption notification.
The GST Council — Composition and the Path to a Permanent Fix
The GST Council is a constitutional body established under Article 279A, inserted by the 101st Constitutional Amendment Act, 2016, that recommends rates, exemptions and administrative rules for the Goods and Services Tax across the Union and states. Because GST exemption notifications are issued only on the Council's recommendation, extending the October 2024 research-grant exemption to private defence innovators requires a fresh Council decision rather than a unilateral Finance Ministry or Defence Ministry order.
Key Details
- Constitutional basis: Article 279A, inserted by the 101st Amendment Act, 2016
- Composition: Union Finance Minister (Chairperson), Union Minister of State for Finance/Revenue, and one minister nominated by each state government
- Voting weightage: Centre holds one-third of votes; all states together hold two-thirds; decisions require a three-fourths majority of weighted votes cast
- The MoD's GST reimbursement is explicitly described as an interim administrative workaround pending a formal GST Council decision on extending the research-services exemption to private-sector defence R&D
Until the GST Council formally amends the exemption notification to cover private-sector defence innovators, the MoD's grant-in-aid reimbursement functions as a stopgap that keeps individual scheme funding whole without changing the underlying tax law — leaving the sector dependent on future Council action for a durable fix.
- GST rate applied to R&D grants received by private defence startups/MSMEs: 18%
- iDEX launched: April 2018; implementing body: Defence Innovation Organisation (Section 8 company, HAL + BEL)
- iDEX grant ceiling for startups/MSMEs: up to ₹1.5 crore
- GST exemption for government/university research grants notified: effective 10 October 2024 (Notification No. 08/2024-CT(Rate))
- GST Council constitutional basis: Article 279A, via the 101st Constitutional Amendment Act, 2016
- GST Council voting shares: Centre 1/3, states combined 2/3; decisions need a three-fourths weighted majority
- MoD office memorandum on GST reimbursement: issued 18 July 2025 [Unverified — date sourced from secondary reporting, not the primary MoD notification]