Decks cleared for rupee payment mechanism with Iran.

In a move that is bound to bring cheers to exporters, facilitate clearance of a Rs. 1,500-crore backlog of payments and give a fillip to trading with Iran, the Finance Ministry has issued a notification exempting payments made for imports from any local tax.

This will enhance economic engagement with Tehran in the coming months. The move will not only facilitate further purchase of crude but also give exporters and businesses in both countries access to each other’s markets. On June 2, The Hindu highlighted how delay in the notification was slowing the pace of expansion of trade relations with Iran and also hindering the process of putting in place a smooth payment mechanism

The notification, under Section 10 (48) of the Income Tax Act, related to tax exemptions in regard to foreign companies selling crude in India, has notified the National Iranian Oil Company (NIOC) as a foreign firm. “This notification shall be deemed to have come into effect from the first day of April 2012, and shall, accordingly, apply in relation to the income of the assessment year 2012-13 and the subsequent years,” says the Central Board of Direct Taxes.

Under the new payment system agreed to between the two countries, Indian importers of Iranian crude can make 45 per cent of their payments in rupees, which Iran will park in a local bank and use it to settle payments to Indian exporters.

The oil marketing companies and the exporters had expressed a fear that money paid to NIOC might be considered income generated by Iranian firms in the country and liable to be taxed. Withholding tax was up to 40 per cent. Iran is India's third largest crude supplier, accounting for less than 10 per cent of its total imports.

India will import 15.5 million tonnes of crude from Iran this fiscal, down from 17.44 million tonnes last year. India currently pays about $1 billion a month through a Turkish bank. Under the mechanism agreed upon, NIOC will accept 45 per cent of the payments in an account opened in the Kolkata-based UCO Bank. UCO Bank has been chosen because it has no U.S. or European exposure and its overseas presence is limited to Hong Kong, Singapore and China.

In his Union budget presentation on March 16, Finance Minister Pranab Mukherjee announced his decision to exempt rupee payments to Iranian oil companies from withholding tax as it would help in full fledged implementation of the rupee payment mechanism established for carrying out trade with Iran despite U.S. sanctions.

Source : thehindu.com