Starting an Export Business in India

As the global economy shows signs of revival there exists an immense potential for staring an Export business in India. India ranks as the nineteenth largest exporter in this world with an estimated total export of USD 900 million in 2019. India exports a myriad of products and services from its strong and vibrant manufacturing and service sector. In this article, let's look at financial and regulatory issues for starting of export business in India.

Types of Export Business

Export businesses can mainly be classified into three categories:

Manufacturing - Export Units,
Export Traders and
Service Export Units.

Manufacturing export units involve in manufacturing good and products for foreign sales. Export traders act as merchants and export the domestically manufactured goods to foreign countries. Service export units operate to provide services for foreign clients. Manufacturing - Export Units typically enjoy significant thrust from the Government and Banking sector through various schemes and subsidies. As a result, these units produce more quantity of products as well as generates a lot of employment.

Manufacturing units involved in export enjoy a number of schemes from the Government. Schemes such as the Export Promotion Capital Goods (EPCG) Scheme, Export Packing Credit Facilities, Credit Guarantee Scheme for MSMEs etc. Similarly, the government also provides other schemes and subsidies for exporters to increase quality and productivity. Therefore, before starting an export business, the entrepreneur should understand the nuances of each type of export business. The entrepreneur shall also choose the one right category of export business based on the experience, circumstances and requirements.

Type of Business Entity

Export businesses typically generate substantial sales volumes. These businesses are exposed to various risks. Risks such as currency fluctuation, foreign credit, foreign suits/legal proceedings as well as other foreign liabilities. Therefore, it is advisable to have a Limited Liability Structure with an independent existence that is recognized worldwide. One of the best structure for the export business shall include Private Limited Company and Limited Liability Partnership. Private Limited Company or Limited Liability Partnerships project a strong brand image to foreign customers. The value of the brand image increases in addition to providing Limited Liability protection for the stakeholders. Mostly, many foreign buyers insist its vendors as Private Limited Company or Limited Liability Partnerships. Hence it is best suitable for export businesses to start as a Private Limited Company, Limited Liability Partnership or One Person Company.

Tax Registrations

Export of goods from India rates at zero. Hence, the requirement to pay Value Added Tax (VAT) or Sales tax does not apply. Nil VAT or sales tax applies to goods sold from India to foreign customers. However, state laws mandate that the entity shall register for VAT if it exceeds beyond the threshold. In addition, exporters enjoy tax exemptions for the export of goods from India. Therefore, businesses involved in the export of goods must obtain VAT Registration, even though VAT payment does not apply.

Export of service has been exempted from Service Tax to increase export of goods. Therefore, the requirement to pay service tax for service exporters stands nil. However, for future developments, service exporters shall obtain Service Tax Registration to claim a refund on input credit, if applicable.

Import Export Code (IE Code)

All importers and exporters in India should register with Directorate General of Foreign Trade (DGFT) for Import Export Code or IE Code. An IE Code allotted to an applicant is valid for all its entire business. The validity of the IE Code does not expire however, it can be cancelled by the authorities. Therefore, anyone proposing to do an export business must obtain an IE Code from DGFT.

Export Promotion Council

In addition to the above, exporters can register with the respective Export Promotion Council as applicable for their industry. Export Promotion Council acts an official body for exporters in India. It provides invaluable assistance to Indian exporters. Further, it extends its support to importers/international buyers who choose to buy from India.

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Frequently Asked Questions

Common questions about Starting an Export Business in India.

The main types of export businesses in India are Manufacturing - Export Units, Export Traders, and Service Export Units. Manufacturing - Export Units are involved in manufacturing goods and products for foreign sales. Export Traders act as merchants and export domestically manufactured goods to foreign countries. Service Export Units operate to provide services for foreign clients.

For export businesses in India, it is advisable to have a Limited Liability Structure with an independent existence that is recognized worldwide. One of the best structures for an export business shall include Private Limited Company and Limited Liability Partnership. These structures project a strong brand image to foreign customers and provide limited liability protection for stakeholders.

Export of goods from India rates at zero, and hence, the requirement to pay Value Added Tax (VAT) or Sales tax does not apply. However, state laws mandate that the entity shall register for VAT if it exceeds beyond the threshold, even though VAT payment does not apply for exports.

Export of services has been exempted from Service Tax in India to increase the export of goods. Therefore, the requirement to pay service tax for service exporters stands nil. However, service exporters are advised to obtain Service Tax Registration to claim refunds on input credit, if applicable.

An Import Export Code (IE Code) is a code allotted by the Directorate General of Foreign Trade (DGFT) to importers and exporters in India. It is mandatory for anyone proposing to do an export business to obtain an IE Code from DGFT. The IE Code is valid for the entire business and does not expire.

Export Promotion Councils act as official bodies for exporters in India. They provide invaluable assistance to Indian exporters and extend support to importers/international buyers who choose to buy from India. Exporters can register with the respective Export Promotion Council applicable for their industry.

Manufacturing - Export Units in India typically enjoy significant thrust from the Government and Banking sector through various schemes and subsidies. They can benefit from schemes like the Export Promotion Capital Goods (EPCG) Scheme, Export Packing Credit Facilities, Credit Guarantee Scheme for MSMEs, and others aimed at increasing quality and productivity.

The entrepreneur should understand the nuances of each type of export business and choose the right category based on their experience, circumstances, and requirements. This decision can impact the availability of government schemes, subsidies, and other benefits specific to each category.

Yes, exporters in India enjoy tax exemptions for the export of goods. The article mentions that export of goods from India rates at zero, implying exemptions from Value Added Tax (VAT) or Sales tax.

An individual can start an export business in India by first understanding the nuances of each type of export business and choosing the right category based on their experience and requirements. They should then register for an Import Export Code (IE Code) with the Directorate General of Foreign Trade (DGFT) and obtain necessary tax registrations like VAT and Service Tax. Setting up a Private Limited Company or Limited Liability Partnership is recommended for export businesses.