India, Iran work out payment mechanism

New Delhi: India and Iran have worked out a way for India to pay for Iranian crude oil, the Islamic republic’s ambassador Seyed Mehdi Nabizadeh said on Tuesday, resolving an issue that had threatened to halt supplies from one of the South Asian country’s key sources.

This is the first official confirmation from either side that a method for payments has been agreed upon. “A mechanism has been found. One of the proposals was that part of the payments must be made in Indian rupees into Indian banks... This was proposed by India and we accepted this,” the envoy said, adding that both sides were “satisfied” with 45% rupee payment.

Iran had opened accounts in India’s UCO Bank and “two or three other banks” for this purpose, he said. There was also the possibility of Iran opening up offices of its own banks in India, the envoy said.

The two countries will find a mechanism to make the remaining 55% payment, he said. On reports that India could use gold to pay for oil imports, he said, “We can accept (this), but gold is not a suitable mechanism.”

India’s foreign ministry and the Reserve Bank of India did not comment on Nabizadeh’s comments. Government officials, however, have said that “all options (for payments) are being explored”.

“The new mechanism cannot be used unless payments are exempted from withholding tax... If we include other levies total tax liability will translate to over 40%,” said a person at an Indian refiner.

A second person at another refiner said his company wants clarity on this and was waiting for a response from the finance ministry. Both officials spoke on condition of anonymity.

“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 person.

Last month, finance minister Pranab Mukherjee was quoted by news reports as saying that “it is not possible for India to take any decision to reduce the imports from Iran drastically, because among the countries which can provide the requirement of the emerging economies, Iran is an important country amongst them”.

Mukherjee said this at the end of a two-day visit aimed at wooing US investment in Chicago. It came after the US announced new sanctions in December that penalize any financial institution dealing with Iran’s central bank. The European Union (EU), too, has banned oil imports from Iran.

India imports around 400,000 barrels of crude oil a day, or 12-13% of its needs, from Iran, amounting to about $11 billion a year. But payments have been a problem since last January after India decided to discontinue making them through the Asian Clearing Union (ACU) system.

Established in 1975, the system was used by India and Iran to reduce foreign exchange spending on account of transaction costs. But with Iran under economic sanctions for its controversial nuclear programme, India pulled out of the ACU after the EU issued a regulation that made it mandatory for any transaction with Iran involving the euro to be accompanied by a certificate. Since July, India has been paying for oil it buys from Tehran through Turkey, and was exploring the option of making payments through Russia.

Iran is to boost imports from India to utilize a part of the rupee amount, Nabizadeh said. There was potential for India to widen its trade basket to include exports of iron, steel, machinery and equipment, besides agricultural products such as rice, and minerals, he said.

Iran’s imports from India are around $2.7 billion. Indian firms could look at investing in projects in Iran such as developing gas-to-liquid plants, mining, building roads and railway infrastructure, and developing oil and gas fields, Nabizadeh said.

Reuters contributed to this story.

elizabeth.r@livemint.com