The government has exempted rupee payments made to Iran's national oil company NIOC towards the purchase of crude oil from payment of any tax, according to a Gazette notification.
The finance ministry in a December 28, 2018 Gazette notification said the National Iranian Oil Company (NIOC) will not have to pay any withholding tax on payments it gets from Indian refiners.
India had on November 2, 2018, signed an agreement with Iran to pay for crude oil it imports from the Persian Gulf nation in rupees.
Any income a foreign company receives in an Indian bank account is subject to a withholding tax of 40 per cent, which together with sundry cesses totals to 42.5 per cent.
Exempting payments received by NIOC for crude oil it sells to Indian refiners, the notification said the Iranian firm "shall not engage in any activity in India, other than the receipt of income under the aforesaid arrangement".
It said, "the notification shall be deemed to have come into force from the 5th day of November 2018".
This will help clear close to USD 2 billion of payments Indian refiners are holding for oil they bought from Iran during November and October.
The rupee pact was signed following the US letting India and seven other nations to keep buying Iranian oil despite sanctions were reimposed on the Islamic state on November 5, 2018.
Sources said Indian refiners will make rupee payments in a UCO Bank account of NIOC.
Iran can use these funds to pay for imports of foodgrains, medicines and medical devices from India, the cost of its missions in the country, direct investment in Indian projects, and financing of Iranian students in India. It can also invest the funds in Indian government debt securities.
India had won the exemption after it agreed to cut imports and escrow payments.
Under the 180-day exemption, India is allowed to import a maximum of 3,00,000 barrels a day of crude oil. This compares to an average daily import of about 5,60,000 barrels in 2018.
India, which is the second biggest purchaser of Iranian oil after China, has since then restricted its monthly purchase to 1.25 million tonnes or 15 million tonnes in a year (3,00,000 barrels per day), down from 22.6 million tonnes (4,52,000 barrels per day) bought in the 2017-18 financial year, sources said.
Two of its refiners -- Indian Oil Corp (IOC) and Mangalore Refinery and Petrochemicals Ltd (MRPL) -- bought 1.25 million tonnes of oil from Iran in November and December.
India, the world's third-biggest oil consumer, meets more than 80 per cent of its oil needs through imports. Iran is its third largest supplier after Iraq and Saudi Arabia and meets about 10 per cent of total needs.
US President Donald Trump in May withdrew from the 2015 nuclear accord with Iran, re-imposing economic sanctions on the Persian Gulf nation. Some sanctions took effect from August 6, 2018, while those affecting the oil and banking sectors started from November 5, 2018.
Prior to this, India paid its third largest oil supplier in euros using European banking channels. These channels got blocked from November.
During the first round of sanctions when EU joined the US in imposing financial restrictions, India initially used a Turkish bank to pay Iran for the oil it bought. Beginning February 2013, India paid 45 per cent of the oil import bill in rupees, while keeping the remainder pending till the opening of payment routes. It began clearing the dues in 2015 when the restrictions were eased.
Sources said New Delhi may export goods, including wheat, soybean meal and consumer products, to Iran during the exemption period.
Iran was India's second biggest supplier of crude oil after Saudi Arabia till 2010-11 but Western sanctions over the Persian Gulf nation's suspected nuclear programme relegated it to the seventh spot in the subsequent years. In 2013-14 and 2014-15, India bought 11 million tonnes and 10.95 million tonne crude, respectively from Iran.
Sourcing from Iran increased to 12.7 million tonnes in 2015-16, giving it the sixth spot. In the following year, the Iranian supplies jumped to 27.2 million tonnes to catapult it to the third spot.
Iranian oil is a lucrative buy for refiners as the Persian Gulf nation provides 60 days of credit for purchases, terms not available from suppliers of substitute crudes -- Saudi Arabia, Kuwait, Iraq, Nigeria, and the US.
Besides blocking of banking channels from November, shipping firms are unwilling to transport Iranian oil. To get around this, Iran is using its own ships to transport crude to India. Its insurance companies are also providing insurance cover for such shipments, sources added.