The Finance Ministry has done away with a hefty tax that hampered Indian oil companies in making rupee payments for oil imports from Iran.

Under a new payment mechanism, both countries had in January this year agreed to settle 45 per cent of their oil trade in rupees.

Iran planned to use the rupees to pay for exports from India. But the tax issues and absence of advance payment mechanism to Indian exporters had acted as barriers.

As any rupee payment received in India by a foreign company would be taxable here, the Indian oil companies and the seller of crude oil — Iran — were not inclined to bear this tax burden. To enable smooth oil import transactions, India has exempted the tax on them.

The Central Board of Direct Taxes (CBDT) has issued a notification that specifically exempts rupee payments made in India to the National Iranian Oil company (NIOC) from levy of income tax. The tax rate that would have otherwise been applicable was 40 per cent. The Reserve Bank of India had, a few days ago, allowed advance payments in rupees for exports to Iran.

India has been using Turkey's Halkbank for its payments to Iran after the earlier payment mechanism broke down in the wake of Western sanctions over Tehran's disputed nuclear programme. India's annual oil import bill from Iran is about $10 billion.

The income-tax exemption comes with a rider that NIOC will not engage in any activity in India other than the receipt of income from an agreement entered between the Centre (Finance Ministry) and the Central Bank of Iran in January this year.

The notification is deemed to have come into effect from April 1 this year and will apply to incomes of the assessment year 2012-13 and subsequent years, the CBDT has said.

>krsrivats@thehindu.co.in

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