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India holds back entry into global bond indices over tax changes

(ATF) India’s efforts to have its sovereign bonds included in global benchmarks received a setback on Wednesday with the government reportedly postponing the plan because of tax changes sought by the international central securities depositories.

International depositories like Clearstream, Euroclear and US Depository Trust insist that India freezes the withholding tax it imposes on the coupon earnings from sovereign bonds by foreign investors before such bonds are included in global bond indices.

The depositories are also demanding written assurances from the government that India will be consistent in its taxation policies for foreign investors and not change them to their disadvantage.

“It appears that international depositors and foreign investors are uncomfortable about policy flip-flops and want India to freeze the withholding tax imposed on foreigner bond investors,” Sunil Gidwani, financial services partner at Nangia Andersen told Asia Times Financial.

“Currently this tax is applicable until June 2023, but there is no visibility on whether the government could extend, decrease, remove, or even increase the tax after that expiry,” he added.

India first imposed a withholding tax of 5% on interest earned by foreign investors in external commercial borrowings or in corporate and government bonds for four years in 2017, but that was extended subsequently till June 2023.

“India’s borrowing target for the current fiscal year is huge and the postponement is certainly a setback for the country’s borrowing programme,” Gidwani said.


Hard-pressed for funds to kickstart the country’s economy in the aftermath of the pandemic, India in the Budget 2021 increased its market borrowing programme for the financial year 2021-22 to $165 billion, an increase of 64% over the previous year. The money would be raised through dated securities and treasury bills.

Overall, offshore investors make up about 5% of India’s bond market – versus say 26% in Indonesia – hence, to be part of some of the global indices is important for New Delhi.

Pension and insurance funds that park trillions of dollars in global sovereign bonds follow these indices as per their allotment models. For instance, China – with its 23 listed debt papers – has a 7.2% weightage on Bloomberg Barclays Global Aggregate Index, which is just behind the US at 36.2% and Japan at 14.1%.

Debt papers included in these indices become automatic investment choices for these funds, since they allocate their portfolio of sovereign debt papers according to this ratio.

Inclusion in global indices also help bring in large passive investments from overseas, say experts.

While analysts expect additional foreign inflow of about $20 billion annually into the Indian sovereign debt market once the country joins the indices, the passive investments from overseas could be much larger, they said.


The Indian government has been looking at ways of entering global indices for several years.

In Budget 2019, finance minister Nirmala Sitharaman first announced plans for India to float a sovereign bond abroad and since then, both the finance ministry and the Reserve Bank of India (RBI) have been trying to enter at least three global benchmark indices, including the Bloomberg Barclays Global Aggregate Index and the JP Morgan GBI EM Index.

But the obstacles to the inclusion back then were lack of full capital account convertibility, as well as the 15% cap on foreign investors for sovereign bonds.

However, while that cap was removed last year in April, the adverse tax awards by international arbitration tribunals in the cases like Cairn Energy and Vodafone that India has decided to contest has emerged as a fresh hurdle.

Over the past few years India has also extensively revised its double taxation treaties with all international jurisdictions to give the government a greater right to tax foreign investors.

Concerned about India’s constantly changing tax policies, the indices managers are now reportedly demanding that Indian government debt papers should be made part of international central securities depositories, like Clearstream.

This means freezing of the withholding tax by India as well as relinquishing tax sovereignty.

“India will now have to either freeze the withholding tax or figure out an alternative route to join the international depositories, both of which will take a while,” Gidwani said.


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Indrajit Basu

Indrajit Basu is an India-based correspondent for Asia Financial and wears two hats: journalist and researcher (equity). Before joining AF he reported on business, finance, technology, wealth management, and current affairs for China Daily, SCMP, UPI, India Today Group, Indian Express Group, and many more. He is also an award-winning researcher. If he didn't have to pay bills, he would be a wanderer.

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