New Delhi: Exemptions under Customs Duty and Goods and Service Tax on defence equipment bought by Indian armed forces could save up to Rs 60,000 crore ($8.5 billion) of the military budget over a five-year period, the Economic Times reported today.

This saving could be used by the funds-starved armed forces to buy more urgently required military hardware by freeing up resources for modernisation and recurring purchases of equipment, it said.

The Customs Duty were imposed on arms imported by armed forces by the Narendra Modi government in 2016 and the GST was also made mandatory for purchases in 2017, both aimed at promoting indigenous production of defence equipment. However, it dawned on the government that India did not possess enough capability to produce all defence equipment 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, the ET report said.

A case was taken up with the finance ministry to reinstate the exemption on customs duty for imported defence items that are not produced locally in India and exempt GST as well for armed forces purchases, the report said, without naming the persons from whom it got the information.

The armed forces could save around Rs 25,000 crore ($3.5 billion) over the next five years from customs duety rollback, while GST exemptions will augment the defence budget by Rs 35,000 crore ($5 billion), it is estimated.

India’s defence budget for the financial year 2020 stood at Rs 318,000 crore ($45 billion) of which Rs 108,000 crore ($15 billion) is for capital acquisitions.

However, the armed forces are short of Rs 18,000 crore ($2.6 billion) to pay up for equipment that they have already contracted for in the previous years and the pay outs are staggered over several years.

The shortfall could mean delayed payments for the domestic purchases from public sector undertakings this year and postponing contracts for new purchases of equipment.