India's plan to allow lending and borrowing of sovereign bonds remains stalled by uncertainty on how taxes will be applied, despite infrastructure being in place for more than 18 months, according to people familiar with the matter, complicating an effort to deepen the nation's $1.3 trillion debt market.
No trades have been executed on a portal set up in July 2024 by the nation's sovereign debt clearing house, as market players await clarity on whether lenders or borrowers of bonds are responsible for paying goods and services tax, the people said, asking not to be named while discussing private matters.
The issue has been raised at regular meetings of the Clearing Corporation of India Ltd. and its members, financial institutions that trade government bonds, the people said.
The Reserve Bank of India had announced the move in February 2023, saying it was meant to give investors like insurers — the second-largest holders of sovereign debt — an avenue to use their large debt holdings and improve trading liquidity in the market.
Thin trading, particularly in long-tenor bonds, has amplified spikes in yields and pushed up borrowing costs. The country's sovereign bond trading is still heavily dominated by the benchmark 10-year paper, which often accounts for more than half of daily volumes.
The concern centers around whether to apply a so-called reverse charge mechanism, used in stock lending, the people said. Under this facility, borrowers — not lenders — pay the tax. Talks have been held between the authorities and market participants about whether the same provision would apply to bonds, they said. No decision has been finalized.
An email sent to the Reserve Bank of India, which supervises the CCIL, seeking a comment on the matter did not receive a response.
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