Budget Expectations 2025: Space

Current environment: Quick recap of 2024

• The year 2023 showcased the bright future of the space sector, highlighted by ISRO's successful missions to the sun and the moon. The private sector experienced unprecedented investments, while India strengthened international collaborations through key agreements such as the US-India Initiative on Critical and Emerging Technology (iCET) and the Artemis Accords. As we look ahead, 2024 is poised to build on this momentum and drive even more progress in the field.

• First and foremost, the budgetary allotment for the Department of Space in the Union Budget, 2024 was increased by 18 percent, which saw a spur of activities and announcements by ISRO on the deep-space exploration front, including:

o The Chandrayaan-4 mission, which aims to develop and demonstrate key technologies required for returning to Earth after a successful lunar landing, collecting samples from the moon, and retrieving them, has been approved with an outlay of INR2104.06 crore.
o The Venus Orbiter Mission (VOM), which aims to improve our understanding of the planet's surface, subsurface, atmospheric processes and the Sun's influence on its atmosphere, has been approved with an outlay of INR1,246 crore.
o The Gaganyaan mission has been expanded to include precursor missions for the construction of the Bharatiya Antariksh Station (BAS-I), additional hardware and an additional uncrewed mission, raising the total budget to INR11,170 crore.
o All the above have been envisioned to be developed in collaboration with the industry and academia, creating a very robust space exploration and scientific ecosystem in the country.

• The budget also announced the creation of a Venture Capital Fund (VCF) of INR1,000 crore to be invested by the Government of India in 40 start-ups over 5 years to spur growth and innovation. The overall guidelines for the scheme have also been unveiled, which has maintained the overall investment momentum of the sector amid global moderation in private investments.

• In addition to codifying the administrative allocation of spectrum for satellite communication in The Telecommunication Act, 2023, the government of India has reaffirmed its position, bringing regulatory certainty. In this regard, TRAI is expected to provide its recommendations to the Department of Telecommunications (DoT) regarding the proposed regulations for spectrum allocation in satellite communications.

• In line with the vision and strategy under the Indian Space Policy 2023, the Union Cabinet has eased the Foreign Direct Investment (FDI) policy in the space sector by liberalising entry routes and providing clarity for FDI in satellites, launch vehicles and associated systems or subsystems. This includes the creation of Spaceports for launching and receiving Spacecraft and manufacturing space-related components and systems. Under the amended FDI policy, 100 percent FDI is allowed in the space sector, subject to government approval beyond 49 percent/74 percent, as provided below.

The liberalised entry routes under the amended policy aim to attract potential investors to invest in Indian companies in the space sector.

• Further, the Indian National Space Promotion and Authorisation Centre (IN-SPACe) issued the Norms, Guidelines and Procedures (NGP) in 2024 to implement the Space Policy with respect to authorisation of space activities. The NGP authorises space activities from IN-SPACe by adhering to criteria for granting the authorisation and necessary conditions/guidelines.

• Although not formally announced, initiatives targeting global markets for Indian start-ups in regions such as the Middle East and North Africa (MENA), South America, Eastern Europe and Southeast Asia are boosting the sector.

• On the technology development front of the private sector, the year also saw another Indian Non-Government Entity (NGE) successfully test and demonstrate a sub-orbital launch vehicle, which was the world’s first rocket with single-piece 3D printed engine and India’s first semi-cryogenic engine-powered test rocket.

• As the space sector continues to evolve, it serves as a beacon of India's commitment to exploration, innovation and self-reliance. The path ahead is challenging and thrilling, with immense potential waiting to be harnessed. In the following segment, we delve deeper into critical economic and policy imperatives and recommendations that could propel India's space industry to even greater heights.

Expectations

Top asks

• While the Indian Space Policy, 2023 and the associated Norms, Guidelines and Procedures, 2024 to the Indian Space Policy, 2024, communicated the government’s vision for the sector and provided procedural certainties, the industry feels that the possibility of a policy being non-justiciable in a court of law does not augur well for the sector. This is because challenges around international and national obligations and liabilities and enforcement of standards can be conclusively answered only in the form of legislation. Hence, the early enactment of the much-anticipated Space Activities Act may be optimal for the ecosystem.

• The industry widely acknowledged GST exemption provided on satellite launch services. However, the exemption can be extended to other critical components of satellites, ground systems and launch vehicles to benefit the sector's value chain. Further, while such exemption reduces GST cost on output activity of satellite launch services, the impact of the input tax credit on procuring goods and services should also be analysed. This adds to the cost of providing service. Thus, a similar exemption should be provided for the procurement of key goods and services (including capital goods) by businesses for the purpose of satellite launch services. This will help reduce the GST input tax credit costs, and the supply chain will enjoy the intended benefit.

• Specific customs duty exemption and concessions on imported goods/equipment/machinery used to manufacture notified goods under the Import of Goods at Concessional Rate of Duty scheme (IGCR) should be considered for the sector.

• Further, to enhance India's competitiveness in the global space sector, it would be essential to streamline the Special Chemicals, Organisms, Materials, Equipment and Technologies (SCOMET) license process. Despite having ready products, such as reaction wheels, and sufficient production capacity, Indian companies are losing market opportunities for export. Currently, the procedure takes 3–4 months and requires repeated permissions for every invoice, even for repeat purchases by developed nations. India can adopt a more efficient approach by introducing a blanket license mechanism to allow exports to pre-approved countries for dual-use applications. This would reduce administrative delays and enable Indian manufacturers to meet short-notice demands, levelling the playing field with Western competitors. The modernisation of export rules is crucial for the private sector to integrate into global supply chains and establish a robust presence in the international space market.

• The planned establishment of space industrial parks across multiple states has sparked interest from diverse non-governmental entities, including established corporations and innovative start-ups eager to make significant greenfield investments. To further catalyse this momentum, it is crucial to consider targeted fiscal incentives such as tax exemptions, tax holidays or accelerated depreciation for entities directly or indirectly involved in space sector activities. Additionally, the government could introduce a concessional tax rate of 15 percent for companies engaged in distributing satellite capacity or manufacturing or R&D specific to the space sector, fostering a competitive environment for growth.

• To align with the growing reliance on satellite communication in driving digital transformation, bridging connectivity gaps and advancing space-based technologies, it is imperative to extend International Financial Services Centre (IFSC) benefits to entities involved in distributing satellite capacity. These incentives, including tax and regulatory reliefs, would attract global investments, promote innovation and position India as a strategic hub for satellite communication services. By using the advantages of IFSCs, India could foster growth in this critical sector while strengthening its role in the global space economy.

• Payments to Indian companies providing satellite services currently attract a withholding tax rate of 10 percent under Section 194J of the Income-tax Act, 1961. However, for entities operating under a distribution model, where satellite capacity is distributed within India, the effective income tax on profits often falls below this rate due to arm’s length profit margins ranging between 5–10 percent. Similarly, service providers using owned or leased satellites typically experience lower effective income tax rates during the initial operational phases. To ensure efficient working capital management and avoid unnecessary capital lock-ups, it is recommended to reduce the withholding tax rate to 2 percent on payments made to Indian satellite service providers.

• The space industry is inherently capital-intensive, requiring substantial funding for projects such as R&D, satellite manufacturing and the development of satellite launch and ground infrastructure. To enable Indian companies to access cost-effective foreign funding for these large-scale initiatives, the tax rate on interest from foreign borrowings should be reduced to 5 percent. This measure would enhance the availability of affordable financing, accelerating the execution of critical space projects and driving long-term growth in the sector.

• As self-reliance has been one of the key objectives behind opening the sector for private participation, it is important to ensure the journey towards self-reliance is focused on each value chain segment. To that extent, it may be time to consider a dedicated Production Linked Incentive (PLI) scheme to manufacture space-grade components, much like the dedicated PLI scheme for drones and drone components. This will help incentivise domestic production under the “Make in India” campaign and attract investment by providing financial incentives to manufacturers based on their output.

• As the space sector matures, the space economy’s size and composition should be regularly measured. Most mature space-faring nations, such as the US, the UK and the EU, have annual exercises to scientifically measure and quantify the space economy. ISRO has completed its exercise of estimating the socio-economic impact of the Indian space sector. In addition to making the findings public, an annual exercise anchored by the competent authority within the government to measure and disclose the size of the space economy will enable quick and hassle-free investment decisions by the government, private and international stakeholders.

Policy recommendations and expected impact/outcome

• Provisioning spectrum for several satellite applications, viz., remote sensing and communications, is mission-critical for the sector. With Indian enterprises gearing up to meet global demands, adherence to global standards both nationally and internationally is important for innovating in India. Hence, a long-term commitment from the government to provisioning spectrum for satellite applications in India is needed. Sustained efforts at international forums to maintain global standards and a level playing field for countries will be critical.

• To streamline processes and attract international investment, the government should implement a single-window clearance system for In-Space authorisation and Foreign Direct Investment (FDI) approvals. This initiative would significantly expedite the approval process for overseas satellite operators, enabling them to commence operations in alignment with the Space Policy, 2023.

• Currently, payments to overseas satellite service providers for satellite capacity require approval from the Ministry of Information and Broadcasting, a process often marked by delays. Introducing a more efficient mechanism, such as a one-time approval per payee, would eliminate the need for repetitive authorisations for each payment, reducing administrative bottlenecks and promoting ease of doing business.

• In alignment with practices in the telecom sector, satellite service providers may be required to remit a one-time licence or spectrum fee to secure rights to deliver satellite services in India, along with an annual licence fee based on revenue. Under the current framework, as applied to telecom entities, one-time licence or spectrum fees are amortised over the typical licence tenure of 10 to 20 years. Additionally, a Supreme Court ruling has classified annual licence fees as akin to a one-time fee, necessitating their amortisation over the remaining licence period. This delayed cost deduction has resulted in elevated tax liabilities for service providers. For the satellite sector, a more balanced and sector-specific approach is recommended. Allowing a 25 percent depreciation rate for a one-time licence or spectrum fees, similar to that applied to intangible assets, and recognising annual revenue-based licence fees as deductible revenue expenditure would optimise the tax impact. This reform would reduce taxable profits and provide a much-needed economic impetus, enabling satellite service providers to allocate resources more efficiently and support sectoral growth.

• Even in the NewSpace era, where private-sector efforts will complement national space agencies and public-sector efforts, the nature of space-based applications and services makes governments a critical consumer/customer to the sector: As space technologies find applications in governance areas, such as agriculture, disaster management, infrastructure planning and development monitoring, urban development and remote area connectivity, the government’s commitment to adopt and consume NewSpace solutions will catalyse adoption and innovation in the sector. In line with the above:
  o A Digital Public Infrastructure (DPI) and Digital Public Goods (DPG) approach for Earth observation-based geospatial analytics and insights can unlock value and innovation for several stakeholders well beyond the space sector. In line with previous budget announcements to create DPI for sectors, including agriculture, a budget announcement for a DPI/DPG for earth observation will pave the way for democratising access to space technology.
  
  o The nascent private space ecosystem has advocated for adoption and demand-related challenges. To that extent, as governance operations and service delivery stand to benefit greatly through the adoption of space-based applications and services, it is time to consider a mission mode approach for the adoption of space technologies within governments across the country, perhaps a National Earth Observation Mission.

Contributed by: Jimit Shah, Deloitte India