The finance ministry has exempted rupee payments done to the National Iranian Oil Co (NIOC) for crude oil imports from a steep withholding tax, according to a government order reviewed by Reuters.
The exemption, put in place December 28 but backdated to November 5, will permit Indian refiners to settle about $1.5 billion of outstanding payments to NIOC. Those have been constructing up since Tehran was put under stringent US sanctions in early November.
The two countries on November 2 signed a bilateral agreement to settle oil trades by the government-owned UCO Bank, in rupees, which is not freely traded on international markets.
However, the income of a foreign company that is deposited in an Indian bank account is subject to a withholding tax of 40 percent plus other levies, leading to a whole take by the authorities of 42.5 percent.
That done the agreement unworkable for Iran and led to the freeze in payments by the refiners until the exemption could be introduced.
Iran will be able to utilize the rupee funds for a range of expenses – including imports from India, the cost of its missions in the country, direct investment in Indian projects, and its financing of Iranian students in India, as per another government document reviewed by Reuters. It can also invest the funds in Indian government debt securities.
“In the previous round of sanctions Iran was allowed to use funds for imports from India but this time we have expanded the scope for use of funds to benefit both nations,” commented an Indian government official, who declined to be named because of the sensitivity of the matter.
The move may help India fix its trade balance, which is currently tilted in favor of Iran.
The tax exemption order, though, only refers to crude oil. That means it does not apply to imports of other commodities, such as fertilizer, liquefied petroleum gas, and wax.
India, Iran’s top oil client after China, has turned to pay for Iranian oil in rupees as major banking channels dealing in global currencies are closed off by the US sanctions.
“Passing of this notification eases constraints for Indian refiners to make payment,” said Sanjay Sudhir, Joint Secretary in the oil ministry.
An official from Indian Oil Corp, the country’s top refiner and Iran’s top customer, said his company would commence making payments to Iran from January.
The finance ministry did not respond to a request for comment. Indian Oil Corp and UCO Bank also did not respond.
Last month, the United States introduced the sanctions focused at crippling Iran’s oil revenue-dependent economy because of its nuclear and ballistic missile programmes and its support for militant proxies in the Middle East. Washington did, though, give a six-month waiver from sanctions to eight nations, comprising India, and allowed them to import some Iranian oil.
India’s overall imports from Iran totaled about $11 billion in April-November 2018, with oil accounting for about 90 percent of the imports.
Iran will be able to register as a foreign portfolio investor, permitting it to invest in government debt.
The direct investment provision could help Iran in participating in Indian oil refiner Chennai Petroleum Corp Ltd’s expansion plans. Iran owns 15.4 percent of the company.
Iran which held to be the third biggest oil supplier to India slipped to No. 6 in November, according to ship-tracking data and industry sources.