India-Iran DTAA – A Step Forward in India’s Economic Engagement with Central Asia

Posted by Written by Oliver Gonsalves Reading Time: 3 minutes

India and Iran signed a Double Taxation Avoidance Agreement (DTAA) in February, during Iranian President Hassan Rouhani’s official visit to India.

The ‘Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income’ aims to encourage the movement of investments and services between India and Iran. The details of the DTAA are yet to be made public.

In simple terms, under a DTAA, a business operating on foreign soil does not have to pay tax on the income or profits generated in that country as the liability will be offset against the taxes paid in the home country. Thus, the entity avoids being taxed twice.  

India's-trade-with-Iran,-2005-14-(US$bn).psdA shot in the arm for India-Iran trade

Considered a stepping-stone towards a Preferential Trade Agreement or a Bilateral Investment Treaty, the DTAA will reduce the tax burden on potential investors in India and Iran.

According to India’s federal tax agency, the Central Board of Direct Taxes (CBDT), the DTAA adheres to the G20 OECD Base Erosion & Profit Shifting Project (BEPS). Adherence to the BEPS measures reassures potential investors of Iran’s commitment to integrate its economy with the international trading system. It also strengthens India’s commitment to curb black money and tax avoidance.

In the backdrop of the agreement, Memorandums of Understanding (MoUs) to boost trade were signed between the Iran Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA) and major Indian trade representative bodies – Federation of Indian Chambers of Commerce & Industry (FICCI), Associated Chambers of Commerce and Industry of India (ASSOCHAM), and the PHD Chamber of Commerce and Industry (PHDCCI).

An MoU was also signed between the Engineering Export Promotion Council (EEPC) of India and the Trade Promotion Organization of Iran.

India-Iran relations after sanctions

Both India and Iran are intent on expanding their trade relations, which had soured in the aftermath of India’s support for US-led sanctions against Iran in 2011-2012.

The balance of trade between India and Iran leans in favor of Iran due to the former’s large imports of Iranian crude oil. In 2016, Iran was India’s third largest source of crude oil. Meanwhile, India’s pre-sanction exports to Iran consisted largely of cereals, iron and steel, and electrical equipment.

The joint statement by the two countries, at the conclusion of the presidential visit, proposed a rupee – rial arrangement; this would allow Indian investors to invest in Iran using Indian rupees. Iran will become only the third country, after Bhutan and Nepal, to have such an arrangement with India.

The conversion of Indian rupees to Iranian rial through the Asian Clearing Union (ACU) is reassuring to investors who are fearful of renewed US sanctions on Iran.

India and Iran have traded through the ACU in the past. The ACU is a banking mechanism between predominantly South Asian countries to conduct intra-regional transactions on a multilateral basis. The rupee-rial arrangement will increase Iranian FDI in India, which has remained stagnant at US$1 million since 2000.

Geopolitics between old partners

In recent years, India has made significant investments (including a US$150 million Line of Credit) in the Iranian port of Chabahar, in the Gulf of Oman. The port is expected to act as a direct sea-road access route into Afghanistan and Central Asia, bypassing Pakistan. It also links up with the International North-South Transportation Corridor (INSTC), which extends further up through Azerbaijan and into Russia, where it connects with the Trans-Siberian rail network. This allows access to both EU and China markets. 

In December 2017, India began shipping a consignment of 1.1 million tons of wheat to Afghanistan through Chabahar. India also established metallurgical units, fertilizer, and petrochemical plants in the Chabahar Free Trade Zone (FTZ).

The DTAA and rupee-rial arrangement indicates a strong desire on the part of both countries to expand bilateral trade, and demonstrate Iran’s desire to diversify into an expanding non-European market. Such agreements also assist India’s geopolitical aspiration of increasing connectivity and trade relations with the resource-rich countries of Central and West Asia. 

“The India-Iran DTAA reunites long standing neighbors and is another notch in the Belt and Road routes”, comments Chris Devonshire-Ellis of Dezan Shira & Associates. “Together with the infrastructure being put in place, it offers India improved access to the Caucasus, Turkey, and EU markets, while Iran can improve their sales capabilities to the massive Indian consumer market. Indian and Iranian import-export focused producers should be looking at how to benefit from this excellent opportunity to increase trade volumes”.   

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