India not to tax rupee payments for Iranian oil

India has exempted payment in rupees for oil imports from Iran from hefty local taxes, a move that would help refiners settle some of their oil trade with the sanctions-hit country if the current mechanism through Turkey folds under fresh sanctions.

The finance bill, part of the annual budget presented on Friday, said the exemption in the "national interest" would be implemented from April 1.

India and Iran in January agreed to settle 45% of oil trade in rupees, which are not freely traded on international markets. Iran planned to use rupees to pay for imports from India.

But the mechanism had not been taken up because of the 40% withholding tax, which both Indian refiners and the National Iranian Oil Co (NIOC) had refused to pay on transactions.

India's State-run Hindustan Petroleum Corp in February said Indian firms cannot pay for Iranian crude imports in rupees unless the federal finance ministry exempted such payment from the tax.

"It is therefore proposed to insert a new clause ... to provide for exemption in respect of any income of a foreign company received in India in Indian currency on account of sale of crude oil to any person in India," subject to certain conditions, including government approval, the bill said.

India buys 12% of its oil needs from Iran, worth about $11 billion annually.

Iran, facing ever tighter sanctions from the US and the European Union over its nuclear ambitions, is the second-biggest oil supplier to India while New Delhi is Tehran's second biggest client after China.

Currently Indian refiners are paying for their oil imports through Turkey's Halkbank, but refiners fear this system may fall foul of the new sanctions.

Sources at Indian refiners said they would be making 45% of payments in rupees and the remainder through Halkbank as long as that mechanism functions.

"If the Budget is passed by the parliament, we may pay 100% through (the rupee mechanism) if the Turkey route stops," said one of the officials.