India's Government Bond Lending Plan Faces Delays Due to Tax Uncertainty

India's plan to allow government bond lending remains stalled despite the necessary infrastructure being ready for over 18 months, according to informed sources. The delay is attributed to uncertainties surrounding the applicable tax regime. According to Jin10, since the establishment of a trading platform by the country's sovereign debt clearing house in July 2024, no transactions have been completed. Market participants are awaiting clarity on whether the lender or borrower of the bonds will be responsible for paying the Goods and Services Tax (GST). The Reserve Bank of India announced this initiative in February 2023, aiming to provide investors, such as insurance companies—the second-largest holders of government bonds—with a means to leverage their substantial bond holdings and enhance market liquidity. Sources indicate that the central concern is whether the 'reverse charge mechanism' used in stock lending, where the borrower pays the tax instead of the lender, will be applied. Authorities and market participants have discussed whether the same terms should apply to bonds, but no final decision has been made yet.