The Indian Government Bond Initiative is facing delays due to unclear tax policy regulations.

The government bond lending scheme launched by the Reserve Bank of India continues to face hurdles despite the technical infrastructure being ready for over 18 months. The main cause of this delay is the ambiguity surrounding tax policy implementation, particularly regarding GST as a tax collection mechanism, which remains unclear about who will bear the burden in government bond transactions.

Uncertainty Over Goods and Services Tax Halts Market Momentum

The Reserve Bank of India announced this initiative in February 2023 with the goal of empowering institutional investors, including insurance companies as the second-largest holders of government bonds, to leverage their large bond portfolios and strengthen bond market liquidity. However, since the official trading platform was launched by the national debt settlement agency in July 2024, not a single transaction has been successfully completed.

Reports from trusted market sources indicate that the core concern is the lack of a final decision on who will be responsible for Goods and Services Tax. Market participants are awaiting an official announcement to determine whether the tax burden will be borne by the lender or the borrower.

Taxation Mechanism: Reference from the Stock Market

In the stock market, there is already a precedent with the reverse charge mechanism applied to stock lending transactions. In this scheme, the borrower is the party responsible for bearing the tax obligation rather than the lender. Authorities and industry players are currently considering whether the same model should be applied to government bond instruments.

Impact on Market Liquidity and Investor Expectations

This regulatory uncertainty significantly affects investor motivation to participate in the bond lending scheme. Investors need legal clarity to plan for the tax implications of each transaction. Clarification regarding GST is a crucial part of their investment decision-making process, given the financial impact it could have.

To date, although the market infrastructure is fully prepared, the lack of transactions indicates that regulatory certainty is the key factor determining the success of this initiative. The sector is awaiting an official announcement from authorities regarding tax treatment in the near future to unlock long-awaited market activity.