Iran had in January agreed to accept 45 per cent of the value of its oil exports to India in Indian rupees but the scheme could not be implemented due to taxation issues.
It was feared that the money paid to National Iranian Oil Co (NIOC) may be considered as income generated by Iranian firm in the country and liable to be taxed. The withholding tax was up to 40 per cent, which neither NIOC or the Indian refiners wanted to pay.
As a way out, Finance Minister Pranab Mukherjee in his Budget for 2012-13 exempted payments to Iran from taxes in "national interest".
The exemptions would be effective from April 1, 2012. Iran is India's second largest crude oil supplier accounting for some 12 per cent of its total crude oil imports. Despite Western sanctions, New Delhi is keen to retain Tehran as its key supplier but has faced problems paying for oil imports.
India currently pays about $1 billion a month through a Turkish bank but there are fears that US and European sanctions against Iran may block even this route.
As a way out, rupee payments have been agreed to. Under the mechanism agreed, NIOC will accept 45 per cent of the payments in an account opened in Kolkata-based UCO Bank.
UCO Bank has been chosen because it has no US or European exposure and its overseas presence is limited to Hong Kong, Singapore and China.