New Delhi: The finance ministry will exempt payments to Iran from hefty withholding tax if the Persian Gulf nation were to receive full payment for oil it sells to India in rupees.

With sanctions against Tehran blocking payment channels, 45% of the oil India imports from Iran are settled in rupees since January 2012. The remaining gets accumulated and cleared as and when easing of sanctions opens payment window.

In June last year, Iran agreed to receiving all of the payment in rupees but wanted waiver of 40% withholding tax. Finance ministry is agreeable to such waiver, a senior government official said.

“The Budget for 2012-13 had exempted Indian refiners from paying withholding tax when paying 45% of dues in rupees to Iran. The same benefit will be extended to 100% payments made in rupees," he said.

As of now, Indian refiners owe Iran $5.8 billion. Cabinet approval for exempting payments to National Iranian Oil Co (NIOC) would be sought, he said.

But Iran may no longer be keen on taking payments in rupee when the option of getting payment in hard tradable currencies like US dollar and Euro is on the verge of opening. Oil and banking sanctions against Iran may be lifted as early as this month following a historic deal the Persian Gulf nation reached with the US and other western powers in July last year.

Sanctions are to be lifted on Iran agreeing to limit its nuclear programme. Sources said Iran was using the rupee payment it received since January 2012 to pay for imports from India. It had planned to use the full payment received in rupee for the same purpose.

Rupee is not freely traded on international markets. In March 2012, the finance ministry had issued a notification exempting 45% of payments made to Iran in rupee from any local tax. The notification, under Section 10 (48) of the Income Tax Act, related with tax exemptions in regard to foreign oil companies selling crude oil in India has notified the National Iranian Oil Company has as a “foreign company". T

his followed fears that the money paid to NIOC may be considered as income generated by Iranian firm in the country and liable to be taxed.

Iran is India’s 5th largest crude oil supplier, selling 6.53 million tons of oil in the first half of 2015-16. Iranian supplies made up for 6.6% of the 99.36 million tons of oil India imported during April-September.

Iran was India’s second biggest supplier of crude oil after Saudi Arabia till 2010-11 and made up for 12 per cent of India’s oil needs. But sanctions relegated it to 7th spot last fiscal with supplies of 10.95 million tons. This year it has regained some lost ground.

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