In a signal that it had no intentions of giving up on sourcing its crucial crude oil supplies from Iran, Finance Minister Pranab Mukherjee on Friday exempted payments made for crude oil purchased from the Persian Gulf nation from any local tax, virtually facilitating oil companies in India to pay Iran in the Indian rupee.

Iran had in January agreed to accept 45 per cent of the value of its oil exports to India in Indian rupees but the scheme could not be implemented as the oil companies raised certain taxation issues which could affect the payment route and impact both Iran and the oil companies themselves. Iran had at that time represented to the Petroleum Ministry seeking exemption from payment of withholding tax on payments made to Iran.

It was feared that the money paid to National Iranian Oil Co (NIOC) may be considered as income generated by Iranian firms in the country and liable to be taxed. The withholding tax was to the tune of 45 per cent, which neither NIOC nor the refining companies were willing to pay. Mr. Mukherjee in his Budget for 2012-13 exempted payments to Iran from taxes in “national interest”.’ The exemptions would be effective from April 1, 2012.

Iran is India's second largest crude oil supplier accounting for some 12 per cent of its total crude oil imports. Despite Western sanctions, New Delhi is keen to continue with Tehran as its key crude supplier but had faced problems paying for oil imports. India currently pays about $1 billion a month through a Turkish bank. However, there are fears that U.S. and European sanctions against Iran may eventually block even this route. As a way out, rupee payments had been agreed to.

Under the mechanism agreed, NIOC will accept 45 per cent of the payments in an account opened in 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.  

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