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.

India's major taxes: you need to know about the Goods and Services Tax (GST)

The Goods and Services Tax (GST) is the Indian version of VAT. Anyone doing business in India will eventually have to deal with it. The GST was introduced in 2017 to make the country's complex existing tax system more manageable.

Despite having made doing business in India considerably easier, the GST tax can still be a challenge for European companies starting their operations in India. In this article, we'll explain how the tax works and how it affects you as a foreign entrepreneur.

The old, Indian GST tax system consisted of an accumulation of indirect taxes, excise taxes and surcharges levied not only at the national level, but also at the state level and even at the city level. A major tax collected by Indian states was the Value Added Tax (VAT), but there was no fixed national rate for it.

States independently determined what VAT was charged for a product, resulting in much red tape for businesses. In addition, state-to-state sales also required a Central State Tax (CST) to be paid to the national government, further underscoring the fragmentation of the old tax system.

All these different taxes from different Indian governments brought about a waterfall effect and made tax evasion and corruption relatively easy. Indian tax authorities were losing a lot of revenue as a result, so change was much needed. 

One centralized sales tax

With the new Goods and Services Tax, there came one centralized sales tax for all of India in 2017. It unifies all taxes by product type and is levied at the national level in New Delhi.

There are five rates, ranging from 0% to 28%, under which 1211 categories of goods and services are divided. Under the GST system, tax is charged at any point when value is added to the product and a sale occurs. This runs up to the final sale to the customer. To clarify this a simplified example: 

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In addition, GST is a destination-based tax. This means that if a product is manufactured in the state of Andhra Pradesh, but sold in Karnataka, the entire tax goes to Karnataka. A big improvement from the previous system where tax had to be paid at each step to a different government body. 

The benefits of Goods and Services Tax

The list of benefits of a centralized sales tax is long. First, the GST greatly simplifies India's unwieldy tax system. In addition, the GST makes it possible to effectively make India a single market in which free movement of goods between states becomes a reality.

This allows companies to organize their distribution from a central nationwide warehouse - and not have to set it up separately in each state. Furthermore, tax evasion becomes more difficult, increasing revenues for the Indian treasury. The above benefits in turn lead to positive macroeconomic effects: doing business in India becomes easier, (foreign) investment increases, the Indian government itself can invest more, and the Indian economy will grow faster.

But the GST also has disadvantages

The GST is far from perfect because it still does not bring taxes together under one roof. In fact, there are 38 different ones: a separate GST for all 29 states (SGST) and the seven "union territories" (UTGST), a federal GST (CGST) and an integrated GST (IGST) for interstate supplies of products and services.

Despite the fact that the GST system is supposed to eliminate the water vale effect and thus lower the price of products, certain products have actually become significantly more expensive. For example, since the introduction of the new tax, products such as shampoo and deodorant suddenly fall into a higher tax rate. 

What does the GST mean for you as a European entrepreneur in India?

All European companies wishing to start their own branch, joint venture or any other type of sales organization in India will face this tax. To pay this tax, you will need a PAN number and must register with the GST portal where you will get your unique GSTIN code. Through this portal, a tax form has to be submitted and paid every month.

European companies that only export to India hardly have to deal with the taxes. However, it is important to understand how the GST taxes the Indian distributor or importer you are working with.

GST is one of India's most important taxes, besides of course Corporate Tax and all sorts of other taxes such as Minimum Alternate Tax (MAT), Dividend Distribution Tax (DDT), Custom Duty and Excise Duty.

Outsourcing production to an Indian party - here's how to find the right partner

India has become one of the world's leading manufacturing centers in the past decade. The Indian government has invested heavily in developing the industrial sector with the result that India's automotive, aerospace, IT and pharmaceutical (think vaccines) sectors now produce for the entire world. In addition, India offers access to a wide availability of raw materials and costs are lower than in China. The country therefore offers a lot of interesting opportunities for European companies looking to outsource their production.

Finding the right production site in India

Many companies see India as one country, but India is incredibly large and diverse. India is better approached as a continent, like Europe. Therefore, to find a good producer, it is smart to do or have a thorough location analysis done. India has manufacturing clusters in which companies of a specific sector are located. Several clusters of each sector exist in the states where the best materials, infrastructure and personnel can be found for this industry. For example, the auto industry has four major clusters in Gujarat and around the cities of Chennai, Pune and New Delhi.

Companies should not focus on these clusters, but look at all options across India. Sometimes the options outside these clusters are more advantageous because, for example, wages are lower outside the cities. Once it is determined which locations meet the needs, a list of potential suppliers and manufacturers in these regions can be made.

An Indian partner with experience

To ensure the desired specifications and quality, a potential supplier must have the right expertise and experience within the sector in which the European company operates. It is also necessary to check whether quality systems are in place, what the annual output is and whether the supplier has enough experience in exporting the product.

If you have little experience doing business in India, it is advisable to hire a local consultant for this step. They know exactly what legal requirements products must meet and what permits are needed to produce and ship your products.

Quality control

From the list of potential candidates, after extensive evaluation, the three to five best options for the industry and product are chosen. With these producers, the European company then goes deeper into the opportunities offered by the producer. In this step, it is advisable to schedule a visit to the production facility, or, if a visit is not possible, to organize a video call to get an even better idea of the process and quality of the products manufactured there. Once the selection is narrowed down to 1 manufacturing company, a quote can be requested so that price and terms can be negotiated.

Keep in mind that a factory in India usually looks different than in Europe. This does not mean that the products being delivered are also 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 caliber as in Europe.

Once there is agreement with the manufacturer on the price and terms, samples can be made. The key here is that the European company has people available in India who can check the manufacturing process and quality before it is checked again in Europe.

If everything is satisfactory, the first batch can be manufactured. Even though the new supplier has already been screened in various ways, it is then advisable to have quality control checks done every year or even more frequently.

Protecting your Intellectual Property

When outsourcing your manufacturing to a partner in another country, you want to make sure your intellectual property (IP) is well protected. India has been a member of WIPO (World Intellectual Property Organization) for nearly 50 years, which means that most intellectual property laws in India meet international standards.

In our IP manual, you will read not only how your intellectual property is legally protected in India, but also what you can do and have documented yourself to protect your IP if you will be working with an Indian partner.