International Payments and VAT: Facts behind

International Payment and Characteristics

When Jenny in the United States of America sends money to Riya sitting in India, this process is called international payment. International payments occur due to businesses (business/countries), service transactions, giving loans, paying debt, etc.

The characteristics of international payments are as follows:

1. Monetary transactions between importers and exporters could be between nations or businesses.
2. Value transfer happens during cross-border transactions. It works along the line of value transfer because the currency type differs. Here, value transfer is to be done through an exchange bank.
3. Processing - In local business transactions that occur within the same country tend to have smoother processing as compared to international money transfer. In international payments, you have different currency, taxes, exchange laws, banking systems, fluctuating variations in exchange rates, etc.

What are the methods of international payment?

Be it in domestic or international transactions, you as an individual or business are always exposed to countless risks. Therefore, you must be thorough with different methods of international payments and use the best as per your requirement that is safe, confidential, and buffer-free.

Talking in terms of the e-commerce industry, the digital India movement has embraced the digital presence and has made Indians take a leap from cash on delivery to online payment. According to Statista, the $84 billion industry of e-commerce is set to grow further and reach $200 billion by 2027 worldwide.

Adding momentum and creating the need of the hour, COVID19 has also pushed us to opt for no-contact delivery, wherein you ought to settle the payment via online mode. Let's look down at the different modes of international payments for e-commerce merchants, freelancers, service providers, importers, and exporters.

The various methods of international payments are as follows:

Cash in Advance

As the name suggests, in this method cash is paid in advance to avoid credit risks as the exporter receives the payment before import. When dealing with international payments, the preferred tools for cash in advance mode are credit cards and wire transfers.

It might be a delight for the seller, but it isn't a soothing business for the buyer, as they are at risk. It generates unnecessary cash flow, it's risky when you are working with a new client (lack of trust), it's a situation of a dilemma for the buyer because they aren't aware of the quality of products they'll receive in bulk.

Open Account

In this method, the goods are shipped and delivered before the payment due date. This again happens in import and export. The duration of payment ranges from 30-90 days as per international sales. This method is a haven for the buyer because the payment is not obligatory until the goods have been received.

It is undoubtedly a trusted tool between two parties who trust each other, but for the unknown, it might be a threat in disguise. Therefore, when exporters offer open account terms, they can use export credit insurance for extra protection.

Consignment

This is again another form of an open account, where the payment is done after the goods are sold by the distributor to the buyer. Consignment payment is built over a contract where the foreign distributor acts as the middle man. Here the foreign distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they are sold.

One of the biggest risks of nodding a yes for consignment is lack of guarantee. The exporter may or may not receive the payment, as the goods are in a foreign country handled by an independent distributor or agent.

Whereas doing business based on consignment helps exporters to reduce the direct costs of storing and managing inventory. The entire game plan can be a success only when you have a practical and trustworthy foreign distributor who could efficiently juggle the duty as per shifting circumstances. Moreover, insurance is an integral part of the process. Insurance should be apt enough to cover consigned goods in transit or possession of a foreign distributor as well as to mitigate the risk of non-payment.

Credit/Debit Card Payment

It is one of the easiest payment options because all you have to do is provide the needed details and sit back. Apart from being an easy option, people also use a credit card for additional benefits such as - credit points, discounts, discounts, etc.

Entering the E-World

In the 1960s, Marshall McLuhan coined the term 'global village'. He explained how the world would be interconnected and would be accessible with a small device that fits in your pocket. He was right, with the boom in mobile and the internet, the world has transformed into a global village, wherein we are connected to people from every corner of the world.

Be it in terms of communication, business, information, entertainment, or cross-border transactions, we could perform all these activities with a few clicks or voice.

Fact Junction

As per Mordor Intelligence, the transaction value of the digital payments market was USD 5.44 trillion in 2020, and it said that the worth would climb to USD 11.29 trillion by 2026, registering a CAGR of 11.21% from 2021 to 2026.

Electronic Wallets

You shop from Myntra, Ajio, Amazon, and most of us have e-wallets to do the payment. These digital wallets are nothing less than a savior for the online shoppers that helps us to roam cash-free but pay the expense in a few clicks. E-wallets facilitate a smooth flow of transactions within seconds.

E-wallets are directly linked to your bank account and act as a secure pathway or mediator to transfer money from the bank to the seller. E-wallets are helpful because they eliminate the need to enter credit/debit card credentials over and over with every use. A few examples of E-wallets are Google Pay, Amazon Pay, etc.

Electronic Checks

E-check or Electronic Checks works the same as the actual paper checks but, the sole difference is it's digital and fast. The buffer and other manual challenges aren't there. Apart from being digitally secure and fast, they have extra-low transaction charges that make e-checks a preferable and affordable payment tool.

Now, the aforementioned points are the methods or modes of international payments. But, ever wondered how money travels across the globe meddling with taxes?

Yes, taxes play a very significant role in international payments. And VAT is one of them.

What is VAT?

Value-added tax is a type of tax that is levied incrementally at every stage. VAT is charged based on the price of the service or product at every stage of its production, distribution, and sale to the end buyer.

The Value Added Tax includes the charges for the shared service and infrastructure provided by a certain state/country.

For example, your business is India-based and, you aspire to sell your product/service in the US as you have a consumer base in the US too. First of all, you must be thorough about the working of banks, financial laws for businesses, taxes, etc. Because the VAT that you pay might be recoverable via refunds. However, the VAT that you charge from the consumers for your offering must be remitted to the government to comply as per the foreign taxation rules.

It implies that if you are doing cross-border business and take international payments, you must be literate with few questions such as:

1. Literate yourself through the intricacies of the VAT landscape in the respective country.
2. Registration and Compliance for VAT
3. Charge a feasible and justifiable VAT on your offering
4. Give the remittance to the government based upon the law
5. Keep the tax records (especially if you are not a native to the country) and always pay the dues.

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