Merchant Trading: export directly from your Indian factory and avoid double import duties

India is becoming a very popular manufacturing location for European companies because of its large talent pool of highly skilled workers, low costs, excellent knowledge of the latest technology and strategic location. This makes India not only a great manufacturing hub, but also the perfect home base from where the region can be easily supplied. More and more European companies are therefore choosing India as a manufacturing location to export their products to neighboring countries.

If you use India as a regional manufacturing hub, you naturally want to be able to export your products directly from the factory, rather than having to send them to your European headquarters first. This direct way of exporting is called merchant trading. In this article, we explain how merchant trading from India works and how to get the right permits.

Merchant Trading as a European company

Merchant Trading means that a shipment of goods takes place from one foreign country to another foreign country through an "intermediary" or "merchant" in a third country and without entering or leaving the merchant's country. Merchant trading thus helps companies avoid paying double import duties.

Let's simplify this with an example. A Dutch company has a subsidiary in India that manufactures its products. The Dutch company has found a Singaporean customer who wants to buy the products manufactured in India. Instead of importing the products to the Netherlands and then exporting them to Singapore, the Dutch company asks the Indian subsidiary to deliver the products directly to the buyer in Singapore. This means the products never enter or leave the Netherlands.

In this case, we speak of merchant trading because:
- the supplier of the goods to be exported is the subsidiary in India;
- the buyer of the goods to be exported is the customer in Singapore;
- the merchant or intermediary is the parent company in the Netherlands.

But we speak of merchant trading not only when a subsidiary is involved, but also when a company purchases the products it will ship to the customer from a third party.

For example, the Dutch company receives an order from a customer in the US for a specific product that it does not produce itself from a customer in the US. The Dutch company places an order with a supplier in India who manufactures the product and asks the Indian supplier to ship the goods directly to the customer in the US. Again, the goods do not enter or leave the Netherlands, so again in this example the Dutch company is the merchant trader.

In this example, the Indian supplier sends its invoice to the Dutch company, which then sends its own invoice to the American customer. In the example where the goods are delivered by the Indian subsidiary, the international and local transfer pricing rules apply to the sale of the goods from the Indian subsidiary to the Dutch parent company.

Paying GST (VAT) on a Merchant Trade

According to the IGST Act delivery to a location outside India by an Indian supplier is treated as delivery of goods between two Indian states. In the CGST Act states that activities or transactions are not treated as a supply of goods if the goods are delivered from one place in a non-taxable territory to another place in a non-taxable territory without the goods entering India.

This means that in our examples, where the goods are supplied from India, the IGST Act applies and GST is payable. In the case where the trader is the Indian company, the CGST Act applies and no GST is due either.

Required documents for Merchant Trading from India.

The documents needed to ship goods from the supplier to the customer depend on the specific products being sold and whether the Indian company is the supplier or the merchant in the deal. If the latter, at least 13 documents must be submitted to enable the Merchant Trade. It is therefore strongly recommended to work with a local expert in this field, who can advise you on how best to set up the merchant trade and support you in obtaining all the necessary documentation.

Our experts are available to answer all your questions on this topic and to help you successfully complete your first merchant trade.

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Shashank Verma

Vice President of Supply Chain Management

This article was written in collaboration with vice president of Supply Chain Management, Shashank Verma.

Verma has over 22 years of experience in establishing business strategies, managing the supply chain of hundreds of European companies, establishing sound logistics in India and other related functions with a focus on revenue growth and profit maximization of organizations.

Sourcing from India: this is how you do it efficiently

Due to political tensions and rising labour costs in China, more and more companies are switching to India as a sourcing location. India offers access to a wide availability of raw materials, good quality producers and the costs are lower than in China. But how do you best go about sourcing from India?

In the last decade, India has become one of the world's major manufacturing centres. The Indian government has invested heavily in the development of the industrial sector, with the result that India's automobile, aerospace, IT and pharmaceutical sectors (e.g. vaccines) now produce for the entire world. India's exports have grown in recent years from USD 226 billion in 2010 to over USD 400 billion in 2021. This growth is based on a few pillars:

- Availability of raw materials

India is one of the largest producers of raw materials worldwide. A wide range is available such as steel, metal, wood, bamboo, marble, cotton, silk and jute.

- Attractive labour costs

One of India's strengths is its low costs, as wages in India are much lower than in competitor countries. 

- High level of staff training

Indian companies invest heavily in training their employees to ensure that they can meet the quality requirements of international companies.

- Stable government and supportive policies

India is relatively stable economically and politically. Moreover, the Indian government stimulates the development of the manufacturing sector with favourable regulations for exports from India and for foreign companies that want to manufacture in India. 

- Advanced infrastructure and technology

India's development in IT, aerospace and automobile industries benefits other sectors in the country. In fact, the new advanced technologies developed in these industries quickly find their way to the other parts of the manufacturing sector. 

Read what the German family business Viega learned while setting up their factory in India. 

Convinced? Get started with sourcing from India

Step 1: Start with proper market research

Many companies see India as one country, but it is better to approach it as a continent like Europe. The different industries are therefore often located in a specific cluster in a state where the best materials, infrastructure and personnel can be found for this specific sector. For example, the automotive industry has four large clusters in Gujarat and around the cities of Chennai, Pune and New Delhi. 

Do not focus on these clusters, but look at all the options across India. Sometimes, the options outside these clusters may be more advantageous as wages are lower outside the cities, for instance. Once you have identified the locations that suit your needs, make a list of potential suppliers and manufacturers in these regions.

Step 2: Evaluate potential producers

In order to guarantee the desired specifications and quality, your potential supplier must have the right expertise and experience within your sector. In addition, you want to be sure that they work with quality systems, what the annual output is and whether the supplier has enough experience with exporting the product.

If you have little experience in doing business in India, it is advisable to hire a local consultant for this step. They know exactly which legal requirements products must meet and which permits are needed to produce and ship your products. Our experts have the know-how to guide your organisation smoothly through this process. 

Step 3: Schedule a visit or call 

From your list of potential candidates, you choose the three to five best options after evaluation. With them, you go into more detail about your requirements and the possibilities the producer can offer you. In this step, it is advisable to schedule a visit to the facility or, if a visit is not possible, a video call to get an even better idea of the working methods and the quality of the products manufactured there. If you are satisfied, ask for a quotation so that the price and conditions can be negotiated. 

Please note that a factory in India usually looks different from what you are used to. This does not mean that the products delivered are of inferior quality. Often, factories in India are more simply furnished, and there is no air conditioning, for example, but the machines are of the same calibre as in Europe. 

Step 4: Samples and quality control

Once you have agreed on the price and conditions with the producer, samples can be made. It is important that you have people available in India who can check the manufacturing process and quality before you do the same in Europe. If everything is to your liking, the first batch can be manufactured. Although you have already screened your new supplier in various ways, it is then advisable to have quality checks carried out every year or perhaps even more frequently.

Sourcing in India is a great way to get to know the market

India is one of the largest and fastest growing consumer markets in the world. Although you may be 'only' starting to source products or raw materials in India, your presence and local contacts give you the opportunity to explore the market further. India is expected to have the largest population in the world in 20 years and you will not be able to ignore this important market in the long run. Start your sourcing adventure in India with an open mind and a long-term strategy, because India has an incredible amount to offer European companies.

Geleen top location for Indian chemical company Technoforce

More and more Indian companies are investing in the Netherlands. Manufacturer of physical separation devices for the (chemical) industry, Technoforce from Nashik, Maharastra, settled at the Brightlands Chemelot Campus in Geleen five years ago. "Thanks to the Dutch branch, the whole company professionalises," says Ben Bovendeerd, Managing Director of Technoforce in the Netherlands.

Pilot plant Technoforce (Photo: Technoforce)

Indian company Technoforce develops and manufactures separation plants for the manufacturing industry, in Nashik, a city some four hours' drive from Mumbai. "We build enormous industrial machines, sometimes as high as four floors, that can separate all kinds of complex mixtures such as chemicals, waste water, oils and fats," explains director Ben Bovendeerd. "Think, for example, of water treatment plants from which components must be removed before factories are allowed to discharge the waste water." The customer base includes large pharmaceutical companies, producers of (bio-based) chemicals and the food industry. "In principle, wherever production takes place, separation is required, because without separation there is no pure substance."

Technoforce has a European Pilot Plant Development Centre in Geleen. Bovendeerd: "Customers come to us for tailor-made solutions. Since this involves capital-intensive installations, ranging from one tonne to several million, it is important to minimise the investment risks for customers. Optimisation and evaluation in pilot plants is crucial in order to be able to offer a robust and economical solution. In the pilot plant sufficient tests are performed to be able to calculate a reliable upscaling to industrial production scale and to make a process design, for which Technoforce also gives a process guarantee. Then the final product, a modular separation plant complete with piping, instruments, pumps, vacuum systems and automation is built in Nashik."

Before the Indian company opened a branch in Geleen, it regularly received requests from Europe, but these deals often fell through somewhere in the process. "In our business, you have to be able to spar with your customer, exchange products/chemicals and carry out tests," says Bovendeerd. "That was simply too difficult because of the distance. Just try exporting a container with 1,000 kilos of waste water to India for a test. You can't do that just like that."

Director Technoforce Netherlands Ben Bovendeerd (Photo: Technoforce)

Five years ago, the management decided it was time for a pilot plant development centre in Europe. The company chose the Netherlands, partly because of its good command of the English language. The Brightlands Chemelot Campus soon caught their eye because of its favourable location (between Germany and Belgium and three airports in the vicinity) and the good facilities on the campus. Bovendeerd: "Chemelot is a perfect match for our business; in theory, half of the companies at Chemelot could be our customers. The campus' umbrella environmental permit was also an important reason for choosing Chemelot. "It would have been far too expensive and time-consuming to set up our test centre outside this complex."

The Dutch branch does not only help to win European orders, notes Bovendeerd, but also leads to further professionalisation of the entire company. "By establishing ourselves here, we are raising the level of the entire organisation. We already complied with European legislation, but we have now obtained all kinds of new certifications. ICT has also been improved and we have taken a firm grip on the company's image. An international advertising agency has developed a new house style, including a new logo and strict guidelines for all our communications, which has improved the image."

As an Indian company, Technoforce sometimes has the wrong impression, acknowledges Bovendeerd. "Many customers think that Indians produce inferior quality, but that is a thing of the past. I always encourage people to visit our workshops in India, because then the penny drops. Our factory is heavily automated, with welding robots and production management systems, for example. Most people don't know what they see. Technologically, we can measure up to the European competition. We have to, because we're not just competing with them in Europe, but all over the world."