In order to enable rupee payments to Iran for crude oil, the Indian finance ministry is likely to give some incentives to suppliers from the West Asian country. As per the plan, these payments will be exempt from withholding tax. This means while making payments to Iranian crude oil suppliers, Indian refiners will not have to deduct taxes. Additionally, the Reserve Bank of India is working on ways to convert outstanding payments by India for Iran oil into debt, allowing Iran to hold Indian government securities instead.
Currently, any payments made by an Indian company to a non-resident corporation is subject to a withholding tax of 40% of net income. The sum is deducted by the taxpayer in India, but the burden of which falls on the non-resident.
If Iran is not willing to accept this tax burden, then Indian refineries will have to bear it. ?That will boost the roughly $11 billion oil import bill from Iran by 40%,? said an executive with a public sector oil company. Withholding tax would not have applied if India and Iran had a double taxation avoidance agreement.
A senior government official said this is an extraordinary situation when India wants to resolve the payment crisis. ?The finance ministry will exempt payment in rupee from the withholding tax as otherwise, the newly agreed payment route in rupee will be non-attractive for both,? said the official, who asked not to be named.
Last month, had agreed to rupee payments for 45% for about 3,70,000 barrels per day of oil it sells to India. However, despite some progress, Indian oil companies had expressed apprehensions that the taxation issue will make the new mechanism unviable.
Payments received by the National Iranian Oil Company in India in rupees are liable to be taxed as it will be seen as income generated by the Iranian company in the country.
To get around the sanctions on Iran, New Delhi is working on several options. Sources suggest India may allow Iran to invest in government securities through the Uco bank account. Currently, Iran has no investment in India?s government debt, but the Reserve Bank of India is working out a mechanism to allow Iran to make such investments, the official said.
Iran can use the money through the rupee account to buy machinery, metal products, iron, steel, minerals, clothes, fibre, sugar, tea, wood and automobiles from India. The official said: ?The aim is to offset exports to Iran against the payment made by the rupee account.?
Despite sanctions by the US and the EU, India is working to step up its energy and business ties with Iran, with a commerce ministry team set to visit Tehran later this month.
Enhancing trade ties is part of a strategy to pay for Iranian oil. Sources said only those who have no exposure to the US will be allowed to invest in Iran. India is also informally discussing the Iran issue with the US for a solution. Government sources also confirmed that the finance ministry has sent a note to the cabinet committee on security.