Top challenges in cross-border trade for Indian exporters

In the past few years, India has been exporting mainly precious and semi-precious stones, jewelry and pearls, mineral fuels, bituminous substances, oil and waxes, vehicles and their accessories, nuclear reactors, boilers, machinery and related parts, pharmaceutical products, and organic chemicals. India’s main export partners include US (about 15% of the total exports), UAE (11% of the total exports), Hong Kong (5%), China (4%), and the UK (3%). In the month of March, an increase in the sales of petroleum products and engineering goods resulted in the rise of exports by 19.76% (USD 42.22 billion in value).

Indian officials have noted an increase in the exports for the agricultural sector despite the  COVID 19 global pandemic, which had created problems with transportation and manpower as offices and roads were shut down due to the lockdown.  The Department of Commerce, Government of India realized the huge opportunity to export surplus agricultural produce as the demand for food had increased globally. They utilized this occasion to identify new markets, increase their presence in new markets, and assess the new markets' requirements and the tax structure. Their efforts were rewarded in 2022 when they achieved USD 50 billion worth of agricultural exports. This has turned India into the food basket for the world.

Looking at these statistics, it is important to understand the challenges faced in cross-border selling faced by Indian exporters and whether it is possible to overcome them.

   1. Complexities of having numerous documentation in different countries

Generally, cross-border trade involves exporting and importing various goods to and from foreign countries. The main problem faced by Indian exporters is the cumbersome process of preparing a large number of documents for different stages of shipping. They must note the different tax requirements for each type of cargo and record the documentation accordingly. Take the example of the export of food and pharmaceuticals products, they require compulsory submission of health and safety certificates.
Since April 2015, the Indian government has revised the Foreign Trade Policy to reduce the mandatory documents to only 3 key shipping documents. The main objective was to simplify the export-import process and increase the ranking of India’s Ease of Doing Business. 

   2. Additional overhead and supplementary costs

One of the biggest challenges of cross-border trade is planning the additional expenses    involved in the long term and short term. This includes cross-border services, including hiring someone with appropriate knowledge of the regulations and registrations. The additional costs include freight insurance, credit insurance, product liability and marketing, and promotion. As every market differs in its laws and regulations, there is a need to factor in costs like-  

a. Accreditations

b. Certifications

c. Licenses

d. Registrations

Some of the factors that hinder cross-border exports business include the high cost of finance set by banks, high value of collateral, complex and lengthy credit documentation processes, and the lack of information available to them.

   4. Setting up seamless cross-border payments mechanisms

It is important to understand the payment preferences as it varies from country to country. Businesses that do not foresee the challenges involved in cross-border payments will lose their customers in the long run.  The right infrastructure should be set up for digital transactions such as net banking, QR payments, and credit or debit cards. Businesses should evaluate and adopt the right payment method accordingly. For example, least developed and developing countries may prefer cash-based transactions.

The recent push from customers across the globe for transparency, speed, and lower transaction costs has led exporters to establish the need for partnering with the right payment processing partners.

This trend can be accurately measured when it comes to cross-border eCommerce transactions. Marketplace platforms like Amazon realized the need for integration of their gateways with a range of payment and settlement currencies to maximize their chance of reaching new markets. The ability provided to the customers to view the final cost of their product, including the cross-border taxation rates for shipping, is why there has been a decrease in the cart abandonment rates.

   5. Risk of using an incorrect HS code

The ITC-HS Codes were adopted in India to simplify the cross-border trade processes and prevent tax evasion on certain high-revenue products.  This code has mainly helped the Indian government implement cross-border sales tax seamlessly. The task of assigning the codes has been a challenge for corporations as it requires a deep understanding of the product description and a good knowledge of the classification process.

Difficulties faced by exporters while assigning the codes:

1)    Lack of available classification data.

2)    Not having the resources to hire a dedicated cross-border taxation expert.

3)    Inadequate information provided in the invoices.

Even post-pandemic, the biggest issue that MSMEs still face is the inability to access loans for their working capital and trade finance.

According to the Reserve Bank of India’s database, the loans to MSMEs are declining by 4.96% year-on-year. According to the reports, a shocking 80% of the MSMEs still cannot obtain formal credit and have to raise money through informal means. And if banks do agree to offer loans, then the complicated and lengthy documentation process deters most of the MSMEs.

The answer to this persistent problem is the arrival of Fintech companies. Fintech lenders utilize artificial intelligence and data analytics to perform automated checks on MSMEs' credit and collateral records. Their agile business model helps optimize the processing time and provides MSMEs access to funds at a faster rate.

According to Payoneer, Q2 and Q3 of 2020 saw a rise of 80% in the global eCommerce revenue. The report also defines that India is amongst the top 10 countries in cross-border eCommerce growth.COVID 19 has unlocked a huge opportunity for the Indian eCommerce industry.

It has provided equal space for D2C brands to compete with large eCommerce marketplaces. The evolving eCommerce ecosystem in India allows sellers to gain deep insights on what to sell to their customers. They can directly deal with the customers and customize their products according to the cultural differences across the globe.

The general perception that the eCommerce space is only for well-established retail brands has been proven wrong by local businesses that have successfully capitalized on the global audience by providing competitive pricing and quality products.

The 3 main elements that would help an Indian seller achieve success in cross-border trade would be digitizing export procedures for optimum delivery timelines, adopting low-cost logistic solutions, and favorable policies for Indian-centric categories such as jewelry and ethnic wear.

As an online retailer, it is important to provide the best customer experience. Customers expect a multi-channel experience with reliable and fast delivery options. According to DHL cross-border eCommerce will account for 22% of the global eCommerce market in 2022. A study conducted by Flow, across 11 global markets states that 67% of apparel shoppers have made cross-border transactions.

It is important for businesses to include different language options on their website and provide payment methods they are comfortable within the checkout process.The main cart abandonment reason for cross-border sellers is the ambiguity in cross-border tax calculations. Customers are more likely to check out if they can clearly view the custom duties and import tax additions without worrying about negative surprises during the delivery of the product.

Avalara provides an all-around cross-border tax service that helps simplify the cross-border compliance issues. The two products that will support your business compliance needs include Avalara Item Classification and AvaTax Cross-border.

Avalara Item Classification helps online retailers classify consumer products for shipment for over 150 jurisdictions. It helps retailers to

Prevent customs delays: The leveraging of the automated solution will prevent errors of classifying the product under the wrong code.

Reduce the risk of customs penalties: Efficiently calculates custom duties to help with the clearance processes.

Increases the efficiency of HS classification: The automation of the HS codes provides end-to-end compliance to prevent shipments from getting barred.

Leverage Avalara Item Classification and Avalara AvaTax as an integrated or stand-alone solution based on your business compliance goals.