Oil Ministry wants tax exemption on rupee payments to Iran

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The Oil Ministry wants Finance Ministry to waive withholding tax on rupee payments Indian oil refiners plan to make for crude oil they buy from Iran, as the high tax rate makes the newly agreed payment mechanism unviable.

Iran had last month agreed to receive 45 per cent of the payments for about 370,000 barrels per day of oil it sells to India in rupee.

But the mechanism that was devised on fears of its existing payment conduit through Turkey being blocked by the US and European sanctions, hasn't started because of taxation issues.

Payments received by National Iranian Oil Co in India in Indian rupee are liable to be taxed as tax authorities would view it as income generated by the Iranian national oil companies in the country, an oil ministry official said.

The income tax levied on such income is called withholding tax, which is as high as 40 per cent.

Neither NIOC nor Indian refiners want to pay this tax. For Iran, the tax will reduce its revenues and it thus wants the Indian refiners to bear the tax. Indian refiners do not want to pay the tax as it would make oil imports significantly costlier and they would prefer buying oil from somewhere else.

The official said the oil ministry is writing to the Finance Ministry requesting waiver of withholding tax on payments made to Iran.

Indian refiners are keen to make payments in rupee as they suspect the current payment route through Turkey may close due to the US and European sanctions.

Under the mechanism agreed last month, 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 US or European exposure and thus would not be impacted by sanctions.

A part of the rupee payments will also be deposited in two Iranian private banks, Bank Persian and Karafarin Bank. These are still not under sanctions that have been imposed on all state-run Iranian banks, he said.

Iran is India's second largest oil supplier accounting for 12 per cent of its needs. Indian refiners currently pay Iran about USD 1 billion a month in euro equivalent through the Turkish bank, Turkiye Halk Bankasi.

There are apprehensions that Turkey may be forced to stop this after the move by US and the EU to ban any entity involved in Iranian oil and gas or petrochemical sectors.

Iran can use the money it receives to buy machinery, metal products, iron, steel, minerals, clothes, fibre, sugar, tea, wood and automobiles from India.