The finance ministry has exempted refiners from paying tax on rupee purchases of Iranian crude, thereby reducing costs for Indian refiners.
Import duties on crude oil are as high as 40 per cent currently. At the same time, rupee payments could boost Indian exports of wheat, rice and other commodities to Iran, since the two nations have agreed on allowing import and export payments in rupees.
India's grain stocks are overflowing from the godowns; the government sees exports as a measure to sell the wheat and rice before it rots in open storage under monsoon conditions. At the same time, Iran's oil stocks are also piling up and unable to export, it is running short of money to buy basic necessities for its people.
India and Iran agreed in January to settle 45 per cent of the oil trade in rupees, which are not freely traded. Iran planned to use the rupees to pay for imports from India but tax issues and lack of advance payments to Indian exporters blocked progress.
India is currently the second-biggest importer of oil from Iran after China. Before the US-led sanctions, Iran accounted for over 11 per cent of India's oil imports; the figure is now less than 9 per cent.
After earlier Western measures directed against Iran's nuclear programme hit the then existing payment conduit through an Asian clearance mechanism in December 2010, India has been using Turkey's Halkbank to pay its oil import bill to Tehran, which is over $10 billion a year.