11 Healthy Tax practices an Indian Exporter must know

Exports play a key role in a country's economy because they increase foreign remittances, create jobs, and reduce the current account deficit. In recent years, India's exports have earned more than $200 billion. India's overall exports have increased more than 16 times since 1990-91, and its imports have risen more than 19 times.

India's exports climbed by $9.61 billion (34.9 percent) from $27.5 billion to $37.1 billion between February 2021 and February 2022. A significant portion of Indian exports is done to the US which accounts for 20% of all its exports and another 19% is done to Europe between the US & EU they account for 40 % of Indian exports. Most remaining exports of around 45% are done to Asian countries.

The Government of India on its part offers a slew of incentive schemes to boost Indian exports' competitiveness in the global market. Exporting overseas is difficult but rewarding for small and medium-sized enterprises (SMEs). E-commerce peaked in 2020 and opened more opportunities for international sales. Global trade growth offers many benefits. It can also be a lifeline for small and medium-sized enterprises (SMEs) in rural areas, but one key thing that most of them miss out on, i.e., being tax compliant in the country to which they are exporting, can affect their future business with that country.

1. Account for tax complexity: When selling across borders, additional taxes such as excise levies or custom charges may apply. Failure to grasp the tax implications of your cross-border operations might result in multiple issues for you and your consumers. First, your consumers may be exposed to hidden taxes or levies that they were unaware of at the time of purchase, thus affecting international customer retention and brand loyalty. Furthermore, your company may receive letters from fiscal authorities for unpaid income taxes or levies that you were not aware of. These unanticipated costs can slash corporate margins and generate financial issues. Furthermore, including a tax calculator in your eCommerce checkout might be beneficial to your clients. This solution adds an extra degree of transparency to your overseas clients' charges.

2. Consider Duties and Taxes: Taxes are an unavoidable reality when selling internationally. Duties are frequently levied on purchases that cross borders, whether through import or export. Furthermore, buyers and sellers should be aware of value-added national and municipal sales taxes, which are applied to the transaction price. UK purchasers are subject to value-added tax (VAT). Other nations have various tax thresholds and may or may not require VAT.

3. Classify products correctly: HS Codes or The Harmonized System (HS) or Schedule B codes used to classify products for duty, quota, and statistical purposes are well-known to most exporters. However, many exporters are unaware that they must determine whether their products are controlled for export by the Departments of Commerce or State. Hence it is essential to identify the correct Harmonized System (HS) number for your products, which is used to determine how much duty you must pay for the goods.

4. Single Platform: The exporters should strive to create a single platform for various manual cross-border business services such as payments, money flow, compliance, documentation, and export reconciliation reports or bills of exchange.

5. Developing integrated logistics infrastructure near SME clusters: The first thing new exporters should do is invest in good holistic software that can manage the entire logistics chain. The establishment of end-to-end logistics for such clusters would lead to huge economies of scale and cost competitiveness for businesses in these regions.

6. Negligence or error: Each import or export of products produced by your company is registered with an employer identification number (EIN). Inspectors can easily retrieve the EIN code, verify the transaction, and then ask to view the history of a particular transaction. Failure to do so will result in hefty fines and penalties. It is always recommended to keep a check on all foreign transactions.

7. Keep an eye on restricted items: It is crucial to keep track of all the restricted items and permissible items for export to avoid paying penalties and stay tax compliant. When an item is restricted, it indicates that special licenses or permissions are needed from a government agency before it may enter the country. Guns, specific fruits and vegetables, animal products, animal by-products, and some animals are only a few examples of banned or restricted items.

8. Automation in foreign trade ensures compliance with the myriad of applicable international trade rules and regulations. Tax automation allows a company to adapt to new tax demands when it expands into new markets or product lines. At the highest level, the aim is to automate the entire life cycle of global business functions in the supply chain to maintain compliance, reduce total tax costs and prevent violations.

9. Protecting companies from export violations: Businesses that are already exporting or plan to start should take some basic precautions to ensure compliance with US export regulations to avoid tax penalties. 

10. Create an online sales team and provide tips on using online markets, such as Amazon Global Selling. They are export-oriented and help to promote small exporters outside India. The biggest challenge for exporters is market access, which is now being addressed through major platforms such as Amazon Global Selling or Walmart Global Selling, or eBay. This gives access to the market from day one, without making large investments.

11. Digital Documentation: Exporters should adopt paperless documentation using a platform to help them digitize their documents and maintain them conveniently over the phone or on-site. It saves a lot of time and cost of compliance for trade.

As a new exporter, you are bound to make mistakes. There is a lot of tax compliance that you may need to adhere to, but you may not realize it right away. Investing in a platform that can help you do all of that seamlessly and easily, will allow you to focus on getting your supply, inventory, and pricing right, so you can compete in the global market.

The Small and Medium Enterprises (SME) sector, which accounts for more than 40% of India's exports, is the second-largest employer after agriculture and accounts for 30% of India's GDP. Despite its importance to industrial production, the SME sector continues to face challenges. These include a lack of reasonable credit terms, indirect taxes, high transport and logistics costs, unpredictability in certification and testing procedures for international acceptance, and so on.

To help mitigate some of the industry's difficulties, the government offers export incentives through the Foreign Trade Policy (FTP), which is governed by the Directorate General of Foreign Trade (DGFT). Direct incentive schemes for exports, such as the Merchandise Export from India Scheme (MEIS), have rewarded exporters to the tune of Rs 40,000 crores in five years through duty credits used to import duty-free goods into India under the current FTP 2015-20.

Avalara's software solution for cross-border firms assists in resolving these tax issues with timely and error-free compliance. Explore our resources to learn all you need to know about selling across borders.