This website requires JavaScript.
E-Commerce

Contraband in gift clothing: Govt look out for Chinese e-tailers sneaking in goods

To keep the prices competitive, the companies came up with workarounds to avoid import duties and taxes including goods and services tax.

Jan 7, 2019 by Moulishree Srivastava
Contraband in gift clothing: Govt look out for Chinese e-tailers sneaking in goods

In the wake of intel on misdeclaration and smuggling of goods through Mumbai courier terminal, Hitesh Shah, Commissioner of Customs, Airport Special Cargo, issued a standing order on 28 December to put the officials concerned on notice. The courier services were found sneaking in commercial goods disguised as gifts and samples to evade customs duties and taxes.

Couple of weeks back, Indian media had reported on Chinese e-commerce businesses including Club Factory, Shein and Aliexpress avoiding customs duties and taxes by exploiting the gift route, keeping the prices at a minimum. Indian government doesn’t slap import duties on gifts up to Rs 5000. The provision was put in place to let NRIs (Non-Resident Indians) send goods and chattels back home without the burden of the tax.

At present, Chinese e-commerce firms are doing about 200,000 orders a day in India, as per industry estimates. The firms, which fall under the cross-border e-commerce category, accounts for 5% of Indian online fashion market valued at USD 1 billion (as of mid-2018), according to research consulting firm Redseer. Club Factory and Shein supposedly do around 85000 and 25000 orders respectively per day—nearly 10% of the combined 1-1.5 million orders dealt on a daily basis by e-commerce players including Amazon, Flipkart and Shopclues in the country.

The Commerce Ministry has sought suggestions from the industry on the cross-border e-commerce policy to shield domestic traders from price wars, people involved in the process told The Passage. While the policy is being worked out, the Customs department is keeping their eyes peeled for contrabands at the terminal.

Something’s rotten

It all started as a discussion thread in an online consumer forum of LocalCircles last July. Scores of consumers claimed they did not receive invoices for deliveries from Chinese e-commerce platforms. The absence of MRP labels on products also raised a few eyebrows.

LocalCircles acts as an interface between consumers and government departments including the Department of Consumer Affairs, Railways and Department of Urban Development.

“When we came to know about the discussion, we did some research,” said Sachin Taparia, founder, chairman and chief executive officer of LocalCircles.

When a consumer orders a product from a Chinese e-commerce app, it is generally delivered at his/her doorsteps via China post and India Post or sent with the consolidated shipment through a courier logistics company and an importer on record in India, said a report by LocalCircles.

https://cdn.thepassage.cc/filters:quality(70)/public/image/2019/01/07/MyPost(3).jpg

Taparia sent a letter along with the findings to the Ministry of Commerce & Industry in early September 2018. Three months later, in early December, Rashtriya Swayamsevak Sangh (RSS)-affiliated Swadeshi Jagaran Manch (SJM), picked up the cue and sent missives to Prime minister Narendra Modi, Minister of Commerce and Industry Suresh Prabhu and Minister of Communication Manoj Sinha urging action on the matter.

Suggestion made by SJM and members of LocalCircles to ensure Indian business have a level playing field: Graphics
Suggestion made by SJM and members of LocalCircles to ensure Indian business have a level playing field: Graphics

Suresh Prabhu ordered an investigation into the matter after holding meetings with SJM and Taparia.

“After we raised the issue with DIPP (Department of Industrial Policy and Promotion) and Ministry of Commerce, they said while we address this issue through policy, enforcement must begin,” said Taparia. “They had later convened a meeting of all the departments including Customs and India Post.”

The standing order was the first proactive response from the government’s side.

Chinese Trojans

Chinese e-commerce firms gained the upper hand in India through predatory pricing and a wide product lineup. To keep the prices competitive, the companies came up with workarounds to avoid import duties and taxes including goods and services tax (GST), multiple industry sources said.

“The Chinese companies selling products online in India either have to register in the country or trade through an Indian merchant partner, declaring they are sourcing products from China,” said an industry veteran on condition of anonymity. “But they don’t do it as it would make the product expensive attracting imports duties up to 30% plus an extra 10-15% on other taxes.”

Industry insiders said companies including Club Factory and Shein have entities in India.

“Ideally, the Chinese e-commerce apps should have registered entities in India, and they should transact and make sales through that,” said Taparia, Unfortunately, that is not the case right now.”

“If they were transacting through Indian entities or registered Indian partners, they would have to pay customs duties and GST. Invoices would have come to the consumers, mentioning the MRP of the items,” he said.

Aliexpress, on the other hand, does not have an Indian entity. “When people purchased from Aliexpress, products were shipped directly from China to India,” said the industry veteran. “Most of the times, the consignments would get stuck in customs and Aliexpress would have to pay duties and a tax for clearance making the actual cost of the product far above the price mentioned on the website.”

“That is why Aliexpress never got past 5000 orders a day (in India). But Shein and Club Factory solved the pain point by importing items using a person’s name (as gifts) and then delivering through a merchant on record (MOR) using last mile logistic services, skirting duties and taxes completely,” he added. “Here MOR would be an Indian company which lends its name for the documentation and does nothing else.”

Gaming the system

At present, India doesn’t have a restriction on the number of gifts that can be sent to one person. Apart from bonafide gifts upto Rs 5000, personal belongings and commercial samples worth Rs 10000 are also exempted from customs duties.

“Multiple consignments of goods to the same consignee, of dutiable goods imported for trading, in the guise of gifts and samples have been noticed. In most such cases, the declared consignee or their address or both are fictitious,” the standing order noted, adding the courier facility is being abused to import commercial goods “with the collusion of the staff of courier services”.

The courier services, the order stated, do not mention mandatory insurance and freight charges while declaring the value of a shipment to keep the total value below Rs 5000.

“The items which are declared as gifts have a weight between 15-20 kg, at least. And, much more in many cases. Yet, the value is conveniently declared as under Rs 5000,” the order read.

Gifts, commercial samples and low-value dutiable consignments (commercial shipments upto worth Rs 100000 and liable to be charged duty) are cleared faster through an express route.

It is very much possible, said industry insiders, the Chinese companies could be importing large consignments to India, undervaluing and passing them as low-value dutiable goods.

“These classifications are only made on a trust-based system assuming that people would be declaring correct values,” said an Indian Customs official on condition of anonymity. “Now if a person misuses the facility by importing a high-value consignment as a low-value consignment and a high-value or low-value consignment as a gift or sample, the whole system goes for a toss.”

Post clearance at Mumbai or Delhi airport cargo terminal, the consignments are sorted and sent to individual customers as if shipped from India through a merchant on record, explained the industry veteran cited above.

Apart from that, some retailers, which include Chinese e-tailers, also send people from India to Shenzen on daily flights, who ferries up to 20 kg of products passing it off as personal belongings without paying duties and taxes, he said, adding a 20kg bag can accommodate up to USD 20,000 worth of goods.

System strikes back

“The whole idea is that the gift channel needs to stop. Today Customs can’t track any shipment that comes through the Indian postal channel. A new system is going to come up in the next three to six months to address the issue,” said Taparia.

“If it takes more than 3-6 months, our request would be to shut down the gift channel temporarily till the traceability system is up and running,” he added.

With the Lok Sabha elections just round the corner, the trade bodies have been pushing their demands with vehemence. Much to the chagrin of companies like Amazon and Flipkart, the government put out an order last month barring e-commerce marketplaces from selling brands in which they have stakes and also entering into exclusive deals for merchandise.

Now, Chinese e-commerce firms are waiting for the other shoe to drop.

“Chinese companies have been doing it (avoiding taxes) for ages. They would undervalue the products and send it via countries like Sri Lanka with which India has Free Trade Agreement to avail nil or low customs duties,” said Ashwani Mahajan, national co-convener, SJM. “If cheaper goods are coming with subsidies from China, how can our industry survive and compete with them?”

The second version of the e-commerce policy may bring a massive change for cross-border e-commerce in India.

“We expect that the new draft policy would address the malpractices prevalent in the cross-border e-commerce and legalise the process,” said Shayak Mazumder, CEO and co-founder of cross-border e-commerce services provider Eunimart. His firm enables foreign retailers to sell (online) in India and allows Indian traders to access global markets. Eunimart counts Amazon, eBay and Wish as partners.

“On the face of it, it looks like it would be much more difficult to expand, but when it is legalised and right processes are followed, it would be easier to scale up in India,” he said.

“But at the end of the day, India will become a locked market a little more. It’s bad for the consumers, but it is good for Indian traders as they will become more competitive.”

The move, ahead of 2019 general elections, would appease trader communities including CAIT (The Confederation of All India Traders) and ECAI (E-commerce Association of India), which have 40,000-50,000 members across India and generate 10 million jobs between them, as per industry experts.

The standing order is a sign of due diligence the Customs department wants to instill. But going by the high placed official’s comment, the authority still seems to trust the process raising concerns over as to how tenable that position is.

Club Factory, Shein and Aliexpress did not respond to the emails sent by The Passage.

Moulishree Srivastava

Moulishree Srivastava is a Bangalore-based tech journalist. She focuses on emerging Indian startups and unicorns. She can be reached at moulishree@thepassage.cc.

Follow Moulishree Srivastava