Jaswal, who is responsible for the state of Jammu and Kashmir, had intended to travel to China in August for a high-level defence exchange between the countries.
Beijing responded by saying he was not welcome because he controlled a disputed area, which China claims in part, the Times of India report said.
"An angry New Delhi shot off a strongly worded demarche to Beijing, protesting its decision," the newspaper said, without quoting sources.
"Soon thereafter, Delhi refused permission to two Chinese defence officials to come to India ... A subsequent visit by Indian military officials to China was also cancelled by India," it said.
India has very limited military ties with China, mainly focused on visits by respective military chiefs and government officials and occasional war exercises.
Mohan Guruswamy, the chairman for Indian think-tank Centre of Policy Alternatives, described the latest developments as a "major setback" to Indo-Chinese relations, which he said seemed to have been on the upswing in the last two years
"What China is signalling is that it does not recognise India's control of Jammu and Kashmir, which it claims as disputed territory," he told Al Jazeera.
"There are some factions in China pressing for a hardline approach towards India and they're using the border issue as a stick to beat India with.
"The Indian side has been responding very mildly but quite firmly also [such as] when it moved two divisions of the army to the eastern sector facing China and beefed up air forces with long-range aircraft."
While trade between the two countries has flourished, relations are hampered by unresolved border disputes in India's northwest and northeast.
The two neighbours fought a brief but bloody border war in 1962, partly over the northeastern Indian state of Arunachal Pradesh.
Last year, India protested against a Chinese embassy policy of issuing different visas to residents of India-administered Kashmir.
While other Indians receive a stamp in their passport when applying for visas, the embassy issued visas on separate pieces of paper stapled into the passports for Kashmiris.
The practice resulted in many Kashmiris being prevented by Indian immigration officials from boarding their flights on the grounds that the visas were not valid.
Kashmir is administered jointly by India and Pakistan and both countries claim the region in full. China claims part of the region should be part of Tibet.
India holds 45 per cent of the disputed Himalayan region while Pakistan controls a third. China holds the remainder of the territory.
Armed Kashmiri groups have been fighting for independence from India or a merging with Pakistan since 1989, with almost 70,000 people killed in the conflict.