India fixes drone GST at 5% to boost manufacturing and innovation

The Indian drone market is positioned for exceptional growth, estimated at USD 2.22 billion in 2023 and projected to reach USD 10 billion by 2035. The GST reform is the latest and, in many ways, most impactful component of a larger framework designed to foster a self-reliant drone ecosystem.

Before the recent reforms, the Indian drone industry was hampered by a complex and inconsistent tax structure. The previous GST framework created significant ambiguities and compliance challenges for manufacturers and operators.

Under this regime, drones with integrated cameras were subjected to a high GST rate of 18%, while personal drones could be taxed as high as 28%. A lower rate of 5% was applicable only to drones without cameras, leading to cost distortions and a lack of a level playing field among firms.

The GST Council decision, which will take effect on 22 September 2025, represents a fundamental shift in this approach. The new structure simplifies and rationalises the tax burden with a uniform 5% GST on all commercial drones.

In a significant move to accelerate the defence sector, military-grade drones, including high-performance batteries, flight motion simulators, and specialised communication equipment, were made completely tax-exempt with a 0% (NIL) GST.

GST rate comparison for drones and key components

Impact on input tax credit and cost of production

The reform’s design goes beyond a simple rate cut to address a more fundamental economic challenge: the tax burden created by an inverted duty structure. Prior to this change, manufacturers faced high and inconsistent GST rates on their inputs, with high-performance batteries alone costing a significant amount in taxes. The previous tax regime created a scenario where the GST on the final product was often disproportionately low or varied widely, complicating the process of claiming a full input tax credit.

The new policy rectifies this by simplifying the final GST rate to a low, flat 5% and, for the critical defence segment, by making key inputs like batteries and simulators tax-exempt. This ensures a more seamless flow of input tax credit and removes the tax-related cost arbitrage that previously existed between different firms.

How the GST cut boosts manufacturing

The GST reform provides a direct mechanism for drone manufacturers to increase their investments in R&D. The cash that was previously tied up in complex tax filings and compliance, or that was lost to the tax burden, is now freed up.

The affordability boost also has a significant, indirect effect on the Drone-as-a-Service (DaaS) business model. DaaS providers, who purchase fleets of drones to offer services, will see a substantial reduction in their initial capital expenditure (capex). This lowered cost of entry and a faster path to breakeven will empower more entrepreneurs and startups to launch or expand their DaaS operations. The exemption of high-performance batteries from GST for military use, and their general affordability under the new regime, will also lower operational costs for these service providers, enabling them to offer their services at more competitive rates.

The reform works in concert with the Make in India and Atmanirbhar Bharat campaigns by making domestically produced drones more attractive and competitive. The GST cut, the PLI scheme, and the import ban form a powerful, self-reinforcing policy trifecta. The import ban creates a protected market, the PLI scheme provides financial incentives for companies that achieve a certain level of domestic value addition, and the GST cut then makes the final, indigenous product more affordable for the end-user.