The Ministry of Defence has clarified that startups, MSMEs and other entities receiving grants under the iDEX and Technology Development Fund schemes will be reimbursed the full 18 per cent GST on defence R&D grants, irrespective of the Input Tax Credit claimed.
More than a year after businessline wrote about the government taxing innovation, the Ministry of Defence (MoD) has finally settled the anomaly in grants to industry and institutions for research and development (R&D) of military products.The MoD issued an office memorandum on July 27, clarifying that the full 18 per cent GST will be reimbursed to entities receiving grants for defence product R&D and innovation, regardless of the Input Tax Credit (ITC) amount claimed.The Ministry provides grants to the industry through iDEX schemes and under the Technology Development Fund (TDF), managed by the Defence Research and Development Organisation (DRDO). The GST is calculated on the full value of goods or services provided, but the final tax amount actually paid to the government is determined after ITC is deducted.Issue traced to tax disparity highlighted in 2025In the exclusive report published on March 10, 2025, businessline questioned the government’s double standards, slapping an 18 per cent GST on R&D grants to private firms but exempting government entities from levying a similar tax.Two days later, the MoD swung into action and reached out to MSMEs that had received notices from the GST Commissionerates across the country to address the disparity in tax treatment between public and private players engaged in defence research.And later in July, the Ministry decided to reimburse the 18 per cent GST that startups and MSMEs had to pay on grants received for developing and manufacturing products under the iDEX scheme and the TDF.“..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, 2025.Fresh clarification on GST reimbursementSubsequently,, on April 17 this year, the Department of Defence Production (DDP) sought clarifications from the Ministry regarding the July 18 decision to resolve issues related to the reimbursement of GST under the iDEX scheme, which is also applicable to the TDF.Addressing whether GST reimbursement should cover the entire grant or be reduced by the Input Tax Credit (ITC) claimed by startups and MSMEs, the Ministry of Defence (MoD) clarified in the July 27 memorandum that the “GST is required to be paid on the entire value of consideration/grant irrespective of the amount of ITC claimed by the entities providing the R&D services,” the accessed official letter revealed. The Ministry said the decision has been taken in consultation with the Department of Revenue, Ministry of Finance.The MoD also stated that “reimbursement arrangements between the parties are to be governed by contractual terms between the two parties.”Since the reimbursement by the MoD is an interim arrangement and the GST Council deliberations regarding tax waivers for private players receiving grants are still pending, the Ministry also stated that “any refund of GST paid is governed by the provisions of section 31(3)(e), section 34, section 54(8) of the GST Act 2017 and its rules.”These sections largely deal with payment vouchers, credit and debit notes and refunds to the recipient or applicant.Growing scale of iDEX and TDF programmesThe Defence Acquisition Council (DAC) alone has granted Acceptance of Necessity (AoN) — the prerequisite for government buying — for over 30 iDEX products. The procurement contracts awarded to iDEX winners for mass production and deployment with the tri-services have surpassed ₹1,000 crore.Likewise, more than 79 sanctioned projects, valued at ₹334.02 crore, have come through TDF.Published on August 5, 2026
