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• India and Iran's new mechanism to partially settle their oil trade in rupees may remain a non-starter unless India's finance ministry exempts the payments from hefty local taxes, sources at Indian oil refiners said on Tuesday.India will make 45 percent of the payment for its oil from Iran in rupees, which Tehran will use to pay for imports from its second-biggest crude customer, the Islamic Republic's envoy to New Delhi Seyed Mehdi Nabizadeh said on Tuesday.Indian refiners are keen to use the new mechanism using rupees as they suspect the current payment route through Turkey may close due to global sanctions. "The new mechanism can not be used unless payments are exempted from withholding tax...If we include other levies total tax liability will translate to over 40 percent," said a source at an Indian refiner.
• A second source at another refiner said his company want clarity on this and was waiting for a response from the finance ministry."We have taken a view on this from tax experts and such payment are liable for withholding tax. Either we or the Iranians have to bear that cost. If we don't deduct that amount then we will face problem when our accounts will be audited," the first source."Iranian supplier ( National Iranian Oil Co) can be considered to be receiving income in India, even if the account is held in some other entity's name. So Indian companies may withhold tax, unless some government notification is there specifically exempting it," said a tax expert at an international consultancy firm.India's Bharat Petroleum Corp has not bought Iranian crude since November as it could not open an account with Turkey's Halkabnk for payment to NIOC.
• Both the sources said BPCL could not make payment through the new mechanism as there is no clarity as to who will bear the withholding tax. No comment was available from BPCL. Nabizadeh said he was not aware of such tax issues while Indian finance ministry officials declined comment.Iran's oil sales to India have been fraught with payment problems in the past 13 months after a clearing mechanism was scrapped and Indian refiners have sought alternative supplies.

STEPPING UP EXPORTS

• "A suitable mechanism has been found out. All the payment not being paid by India last year has been paid ... This was the proposal by India and we accepted it," said Nabizadeh, adding both sides were "satisfied" with 45 percent payment in rupees.He said the two countries will find a mechanism for payment of the remaining 55 percent. The rupee is not fully convertible which means trade and payments face restrictions from the Indian central bank. India has been paying for its daily imports of 350,000-400,000 barrels from Iran through Turkey's Halkbank since July last year. It buys 12 percent of its oil needs from the Islamic nation, worth about $11 billion annually.
• Nabizadeh said Iran will not offer a discount on crude sales to Indian refiners. "Oil prices are an international issue... The price of oil is based on a formula," he said, adding demand from Indian customers was normal.Last month, Reuters reported that India would pay for some of its oil imports in rupees via an Indian bank, resorting to the restricted currency after more than a year of payment problems following fresh, tougher US sanctions.Iran is looking at boosting its imports from India to utilise a part of the rupee amount. Its annual imports are much smaller than the oil trade at around $2.7 billion according to latest figures from the commerce ministry. India will send a delegation to Iran this month to explore boosting exports to smooth use of the restricted rupee currency.
• Nabizadeh said Indian companies could look at investing in projects in Iran such as developing gas-to-liquid plants, mining, building roads and railways infrastructure and developing oil and gas fields. He also said for India, there was potential to boost exports of iron, steel, machinery, equipment, agricultural products like rice, and minerals.Iran has given to end-March for an Indian consortium headed by Oil and Natural Gas Corp's overseas investment arm to sign a deal for the development of Farzad B gas field, he said.

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