Around Rs 25,000 cr will be saved over the next 5 years on account of the rollback of customs duty on the import of defence equipment that is not manufactured in India while GST exemptions will augment the defence budget by Rs 35,000 cr. They said estimates show that the twin exemptions will significantly impact its budget and free up resources for modernisation and replenishment of equipment

by Manu Pubby

NEW DELHI: India’s defence budget will be augmented by more than Rs 60,000 crore over the next five years owing to exemptions from customs duty and goods and services tax (GST) that kicked in on October 1, said people aware of the matter.

They said estimates by the Rajnath Singh-led defence ministry show that the twin exemptions will significantly impact its budget and free up resources for modernisation and replenishment of equipment.

The defence ministry had been hit by the imposition of customs duty in 2016 on all imports of military equipment, followed by the GST the next year. Although the two levies were aimed at promoting indigenous production of defence equipment, it soon became evident that there was a lack of capability to produce certain items locally.

With the ministry forced to spend a significant chunk of its budget on imports, the twin taxes reduced the availability of modernisation budget, leading to the armed forces cutting back on plans to acquire new systems.

“A case was taken up with the finance ministry to reinstate the exemption on customs duty and exempt GST as well for imported defence items for which there is currently no domestic production capability,” said one of the persons, who spoke on condition of anonymity.

A key factor in the exemption is that it has been provided for a select number of defence items and for a limited period of five years, during which it is estimated that domestic production will not be available. This would safeguard interests of the Indian industry and allow it to provide alternatives after the five year window, said the person.

Officials said that around Rs 25,000 crore will be saved over the next five years on account of the rollback of customs duty on the import of defence equipment that is not manufactured in India while GST exemptions will augment the defence budget by Rs 35,000 crore.

As reported by ET, the withdrawal of customs duty on imported defence items that are not manufactured in India will improve cash flow, but the services are still short of resources to take forward their modernisation plans.

The defence allocation this year is pegged at Rs 3.18 lakh crore, with capital expenditure of Rs 1.08 lakh crore. The inadequate capital acquisition means that the three armed forces will fall short of almost Rs 18,000 crore on their committed liabilities to pay for equipment already purchased.

This gap could mean delayed payments to public sector units and a further delay in purchasing equipment.