India’s Purchase of F-35 Jets: What Are the Tax Implications?
India’s growing strategic alignment with the US, highlighted by the proposed purchase of F-35 fighter jets, opens a parallel discussion — not just on defence, but also on taxation and compliance.
Focus Keyphrase: Tax implications on defence imports
This isn’t just geopolitics. These billion-dollar deals come with heavy tax, GST, and duty consequences, especially under India’s evolving defence procurement and taxation framework.
Key Tax Implications on Defence Imports
- Customs Duty
- While defence imports are often exempt under Customs Act, each deal is case-specific.
- Exemption notifications (like Notification No. 50/2017-Customs) govern aircraft and parts if imported by MoD or designated entities.
- IGST on Imports
- Defence imports by the Government may be exempt from IGST (see Notification No. 9/2017-IGST).
- But purchases routed via JV/private partners may attract full IGST.
- Withholding Tax on Tech Transfers
- Any technology collaboration (e.g., assembly rights, maintenance contracts) could trigger Section 195 TDS on payments to US entities.
- Offset Obligations and Taxability
- Under India’s offset policy, US vendors must invest a portion back in Indian defence ecosystem.
- These offsets often take the form of manufacturing or service contracts, which are taxable in India under normal provisions.
Beware of PE Risk in Offset Deals
If US firms set up local project offices or provide continuous services under offset obligations, they may create a Permanent Establishment (PE) — leading to income tax liability in India.
Where It Still Applies
- Services like training, software integration, or civil works tied to defence projects are taxable unless exempted.
- Developers in SEZs may benefit from zero-rated supplies, but this depends on contract structuring.
Case Law Check
- Elbit Systems Ltd vs. UoI (2023 Delhi HC): Ruled that defence offset contracts with profit-making elements are not exempt from Indian taxation.
- Reinforces the need for clear documentation in structuring these high-value agreements.