NEW DELHI, April 5 (Reuters) - The Indian government will offer tax incentives to exporters for sales in rupees to Iran, in the latest effort by New Delhi to bolster exports in return for oil from the Islamic Republic squeezed by Western sanctions, a finance ministry official said.
Following U.S. and European Union sanctions against Tehran over its nuclear programme, New Delhi is under pressure to cut oil imports from its second-biggest supplier, which provides about 12 pe r cent of its oil needs.
India has publicly taken a stand alongside other rapidly emerging countries, including China and Brazil, that it would follow only U.N. sanctions, a position criticized by conservatives in Washington.
To skirt the sanctions, India this year decided to buy oil through a mechanism that lets refiners deposit rupees, which are not freely traded on global markets, for about 45 percent of Iranian crude purchases in an account at India's UCO Bank.
India sent a trade delegation in March to Iran to boost merchandise exports as a way of securing oil in return. But the delegation came back empty handed, and Indian exporters have complained of difficulties in trading through the new mechanism.
In response, the finance ministry will now offer tax incentives in the range of 4-12 percent of the value of products to exporters for sales to Iran in rupees. That brings them on a level playing field with exports sold in freely convertible currencies, such as the dollar.
"The benefits under the duty drawback scheme would be available to exporters under rupee trade with Iran also," S.K. Goel, chairman of the Central Board of Excise and Customs (CBEC), under the ministry of finance, said on Wednesday.
The government reimburses the payment of local taxes to exporters including customs and excise duty on goods either bought domestically or imported, which are used to make about 4,000 export items, from food products, textiles to auto parts.
That reimbursement generally excludes exports paid for in rupees, but the government will now exempt trade with Iran from that rule.
"Tax officials were not so far accepting our claims for incentives under Indian currency trade with Iran. Now it has been clarified and people are satisfied," M. Rafeeq Ahmed, president of the Federation of Indian Exporters (FIEO), a quasi-government body under the trade ministry, told Reuters.
Ahmed said India's central bank is close to approving a demand from exporters to allow advance payments from Iran in rupees under the new mechanism, as a way of reducing the threat of volatility in commodity prices and falls in the Iranian rial currency.
"The RBI is okay with it, I think the issue will be soon resolved," he said.
The latest incentives follow Finance Minister Pranab Mukherjee's proposal, in the annual budget last month, to exempt payments in rupees for oil imports from Iran from hefty local taxes from the 2012/13 fiscal year that began on April 1.
India and Iran plan to increase their annual bilateral trade by more than 60 percent to $25 billion by 2015. Indian exports to Iran currently total about $2.7 billion a year, with oil imports making up most of the difference.
"If all the incentive issues are resolved, India-Iran trade in rupees can touch $5 billion in next two years," Ahmed said.
Indian exporters received tax incentives worth around $11.6 billion under various schemes in the last fiscal year, including nearly $2 billion under the duty drawback scheme.