The Ministry of Defence has confirmed that start-ups, MSMEs and other private entities engaged in defence innovation will now receive full reimbursement of the 18 per cent GST levied on R&D grants under iDEX and the Technology Development Fund schemes, regardless of Input Tax Credit (ITC) claimed. 

This measure removes a long-standing anomaly, easing cash flow pressures and levelling the playing field with government research bodies.

The Ministry of Defence issued an office memorandum on 27 July 2026, clarifying that the reimbursement covers the entire GST amount charged on grants, not reduced by any ITC claimed.

This decision was taken in consultation with the Department of Revenue, Ministry of Finance, and is intended to provide immediate relief to private innovators in the defence sector.

The issue dates back to March 2025, when BusinessLine highlighted the disparity of taxing private firms at 18 per cent GST on R&D grants while exempting government entities. Following this, the MoD reached out to MSMEs that had received notices from GST Commissionerates and, by July 2025, announced reimbursement of GST paid on grants under iDEX and TDF.

However, ambiguity remained over whether reimbursement should be net of ITC. The latest clarification settles this matter by confirming full reimbursement.

The Ministry’s memorandum states that reimbursement arrangements will be governed by contractual terms between parties. It also notes that the measure is interim, pending GST Council deliberations on possible tax waivers for private players.

Refunds of GST paid will continue to be governed by provisions of section 31(3)(e), section 34, and section 54(8) of the GST Act 2017, covering payment vouchers, credit and debit notes, and refund mechanisms.

The iDEX and TDF programs have grown significantly in scale. The Defence Acquisition Council has granted Acceptance of Necessity for over 30 iDEX products, with procurement contracts exceeding ₹1,000 crore.

Meanwhile, more than 79 sanctioned projects worth ₹334.02 crore have been approved under TDF, managed by the Defence Research and Development Organisation. These initiatives are central to India’s push for self-reliance in defence manufacturing.

The reimbursement policy is expected to ease cash flow constraints for start-ups and MSMEs, allowing them to allocate more capital towards product development and testing.

Defence innovation often involves long gestation periods, and the removal of tax burdens ensures that grant money is not depleted prematurely. This strengthens the ecosystem by encouraging greater participation from smaller firms and levelling the field with government-affiliated institutions.

Industry observers note that while the reimbursement is a positive step, its effectiveness will depend on the speed and efficiency of disbursement. Companies will need to provide adequate documentation to claim refunds, and administrative bottlenecks could delay access to funds.

The GST Council’s final decision on permanent exemptions will determine whether this interim measure evolves into long-term tax certainty for private defence innovators.

The move also aligns with India’s broader defence modernisation agenda, which emphasises indigenisation, innovation, and operational readiness.

By addressing the tax anomaly, the government has signalled its commitment to supporting private sector participation in defence R&D, thereby strengthening the Atmanirbhar Bharat initiative.

Agencies