India’s Growing Space Sector Presses for More Tax Incentives

India’s space sector has been making significant strides in its its advances in global space research. According to a September 2023 report, NewSpace: India Perspective, investment in the sector saw 77% growth in fiscal year 2021–22. The Indian space economy is now valued at around $8.4 billion, with a 2% share in the global space economy.

The sector is also set to attract more global attention and investment with recent amendments to foreign direct investment rules. The liberalization of foreign participation could lead to a vibrant landscape of increased competition and innovation in the sector, a prospect that should interest potential investors.

Liberalizing Foreign Investment

The Indian Ministry of Finance in April notified significant amendments in the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. These changes open a route to liberalizing foreign participation in the space sector in India.

The changes introduced in the FDI policy are:

• 100% FDI allowed under the automatic route for manufacturing components and systems/subsystems for satellites
• FDI up to 74% allowed under the automatic route and above 74% subject to government approval for satellite manufacturing and operation, satellite data products
• FDI up to 49% allowed under the automatic route and above 49% subject to government approval for launch vehicles and associated systems/subsystems, creation of spaceports for launching and receiving space craft

The investee entity is occasionally subject to sectoral guidelines issued by the Department of Space.

Considering the above changes in the FDI norms, overseas investments in India’s space sector likely will increase immediately—and will be crucial for the sector’s growth.

Tax Incentives

The Goods and Services Tax exemption on the supply of satellite launch services, previously available only to certain government undertakings, was extended to private entities in July 2023. This policy change is significant as it levels the playing field for private entities, allowing them to compete more effectively in the space sector, and signals the government’s strong commitment to promoting private sector participation in the industry.

While this is a step in the right direction, the industry needs a more extensive set of tax benefits to curb the embedded costs effectively. This is a pressing issue requiring immediate attention from policymakers.

The Indian Space Association in January presented a tax wish list for the Union Budget 2024–25 to the Ministry of Finance that included several suggestions.

Production-linked incentive scheme. A PLI scheme might be introduced to boost domestic equipment manufacturing in the space sector. These are government schemes that provide subsidies to manufacturers of the goods covered in the scheme. A similar scheme is already in place for drones and drone component manufacturers.

A PLI scheme in the space sector would also contribute to overall efficiency in manufacturing space-grade components because of economies of scale, making these products globally competitive.

GST exemption on supply of certain goods. The GST exemption provided for satellite launch services might be extended to goods such as satellites, launch vehicles, ground equipment manufacturing, and the inputs required to manufacture these goods.

This exemption would reduce costs for the entities purchasing these goods or components, particularly those supplying satellite launch services, which aren’t eligible for input credit of the GST paid on purchasing the goods.

Lower tax rate on external commercial borrowings. The space industry also seeks a lower tax rate of 5% on ECBs in the space sector. ECBs are commercial loans for India-resident entities from nonresident lenders. The interest income earned by the nonresident lenders on account of ECBs is taxable in the hands of the lenders, and the borrowing resident entity is liable to withhold such tax in India.

Given the capital-intensive nature of the space industry, a lower tax rate would promote the inflow of capital for the resident entities.

Permitting depreciation to satellite operators. To optimize the tax impact, the government could also consider enabling satellite operators to claim accelerated depreciation on one-time fees and license charges. This is a method of depreciation where the book value of a capital asset is depreciated at a higher rate.

Other tax benefits. In addition to the above, private entities operating in the space sector have also sought tax holiday exemptions and customs duty concessions on importing specified goods.

These tax benefits, if implemented, could significantly reduce the operational costs for private entities, making their products and services more competitive. Tax benefits with sunset clauses may also create a sense of urgency for investors to promptly capitalize on the investment opportunities in the Indian space-tech sector, as they may not be available in the long term.

Looking Forward

Now that the government has opened the space sector in India for foreign players, the potential tax benefits to the concerned entities should reassure investors and provide further impetus to the Indian space tech industry. This is a call to action for policymakers to act swiftly and decisively to capitalize on this potential.

With the recent changes in FDI norms and the potential introduction of tax incentives, the Indian space sector isn’t just evolving but is poised for rapid growth in the upcoming decade. These developments present an opportunity for overseas investors to be part of this growth story.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Aditya Singh Chandel is partner and Akshat Jain is an associate at AZB & Partners, New Delhi. The views expressed in this article are those of the authors and do not necessarily reflect the views of the organization with which the authors are affiliated.

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