When one thinks of defence preparedness, thoughts naturally turn to modern weaponry, strategic deployments, or cutting-edge technologies. Rarely does the tax regime come into consideration. Yet, with the rollout of GST 2.0 in September 2025, India’s fiscal policy has taken a decisive step to bolster the nation’s military capabilities.
For the first time since the introduction of the Goods and Services Tax, nearly all core defence platforms, systems, and components have been fully exempted from GST, transforming procurement economics, enabling faster modernisation, and uplifting the morale of soldiers and veterans alike.
This reform, hailed as the most significant since GST’s inception in 2017, is more than a fiscal adjustment; it is a strategic intervention. By removing tax burdens on essential equipment and services, the government has ensured that emergency budgets stretch further, training infrastructure becomes more efficient, and India’s defence industrial base gains a much-needed competitive edge.
A Comprehensive Reset
Until now, procurement in the defence sector was beset by classification disputes, input tax burdens, and ambiguous exemptions that inflated costs and delayed acquisitions. GST 2.0 marks a structural shift. Military drones, high-performance batteries used in UAVs and communications equipment, software-defined radios, air defence weapon components, rockets above 100 mm calibre, military transport aircraft, and even unmanned underwater platforms have all been zero-rated.
Crucially, simulators, sonobuoys, ejection seats, diving systems, and a wide range of spare parts and accessories for artillery, rifles, and aircraft have also been exempted.
In effect, items that were once taxed at 18 per cent are now free from such liabilities, enabling armed forces to procure cutting-edge equipment without worrying about tax overheads. Even more notable is the distinction between military and civilian technologies. While defence-related platforms enjoy full exemption, commercial drones have seen their tax rates sharply reduced to 5 per cent, encouraging broader adoption and innovation in sectors like agriculture, logistics, and surveillance.
Why This Matters for Combat Readiness
For the Army, Navy, and Air Force, these reforms translate into tangible gains. Emergency procurement windows totalling Rs 7,100 crore for capital requirements and Rs 9,100 crore for revenue expenditure now go much further. Where previously a portion of the budget was consumed by tax liabilities, every rupee can now be channelled toward acquiring more drones, communications gear, simulators, and spare parts.
Training infrastructure benefits immediately—simulators and ejection systems that were taxed are now more accessible, reducing downtime and enhancing readiness.
Furthermore, lower lifecycle costs mean that equipment can be maintained more efficiently over time. Spare parts and maintenance tools previously burdened by tax now extend the lifespan of military hardware and reduce repair expenses. As a result, operational continuity improves across units stationed in remote areas or high-altitude regions where logistical challenges are already significant.
Empowering India’s Defence Ecosystem
Beyond hardware purchases, GST 2.0 signals a new era for the defence industrial base. MSMEs and start-ups, long hindered by tax-related complications, now find a level playing field. The simplification of tax slabs has removed a key barrier that discouraged innovation and slowed procurement cycles. With clear exemptions and reimbursement mechanisms, research and development initiatives are gaining new momentum.
The government’s decision to reimburse 18 per cent GST on R&D projects is especially noteworthy. By ensuring that start-ups and MSMEs are not penalised for investing in innovation, this reform empowers a generation of defence entrepreneurs to contribute meaningfully to national security. These policy shifts align with the broader Atmanirbhar Bharat vision, making India’s defence sector self-reliant, resilient, and globally competitive.
Human Impact: From Barracks to Villages
The ripple effects of GST 2.0 extend well beyond procurement files. Nearly Rs 1.47 lakh crore is spent annually on salaries and pensions for soldiers and veterans. By reducing GST on household consumption items, the reform directly improves the disposable income of defence personnel and their families. In military townships and cantonments, this uplift fuels local economies, particularly during peak festive seasons when consumption spikes.
For soldiers on the frontlines, cheaper communication devices, maintenance tools, and training systems translate into a better quality of life and more efficient operations. Reduced cost of living and easier access to essential services contribute to higher morale—an intangible but critical factor in sustained operational readiness.
A Strategic Signal
The government’s decision to absorb an estimated Rs 1.1 lakh crore in foregone revenue is a clear message to both adversaries and allies: national security is a non-negotiable priority.
The reform reflects the understanding that defence expenditure is not merely about procurement but also about empowering the armed forces to train smarter, repair faster, and operate more effectively. GST 2.0 also strengthens India’s position as a key security partner in the Indo-Pacific. Lower tax rates on defence equipment not only bolster domestic capacity but also make India’s defence industry a more attractive partner for technology transfers, collaborations, and exports.
Beyond Defence: Economic and Technological Spillovers
The strategic dividend of GST 2.0 also extends to the civil sector. The reduction in tax on commercial drones is expected to create a thriving ecosystem for innovation, enabling sectors like agriculture, disaster relief, logistics, and environmental monitoring to benefit from advanced technologies. These spillovers, in turn, feed back into defence capabilities by making dual-use technologies more affordable and widely available.
Additionally, by streamlining tax compliance and eliminating classification disputes, GST 2.0 accelerates procurement timelines and reduces bureaucratic friction, allowing critical equipment to reach units faster—whether in conflict zones or remote deployments.
A Reform That Secures the Future
GST 2.0 is far more than a tax adjustment. It is a deliberate, carefully calibrated reform designed to reinforce India’s defence posture, enhance industrial innovation, and uplift the welfare of soldiers and veterans. By turning tax relief into a force multiplier, the government has ensured that fiscal prudence and strategic foresight go hand in hand.
In an era where security threats are increasingly complex and technological innovation is essential, GST 2.0 empowers the armed forces to modernise, adapt, and excel. Every rupee saved strengthens procurement, supports research, and uplifts families. Every reform implemented reflects the government’s resolve to make national security a priority in both policy and practice.
With GST 2.0, India has ensured that economic policy is not merely a ledger exercise—it is a tool of resilience, readiness, and strategic empowerment. For the soldier, the citizen, and the nation at large, it is a reform that secures not just budgets but the very future of India’s defence.
Ashu Maan is an Associate Fellow at the Centre for Land Warfare Studies. He was awarded the Vice Chief of the Army Staff Commendation card on Army Day 2025. He is pursuing a PhD from Amity University, Noida, in Defence and Strategic Studies. His research focuses include the India-China territorial dispute, great power rivalry, and Chinese foreign policy.
