Goods smuggled tax-free through foreign e-commerce platforms into one of India’s busiest ports of entry have dropped sharply after a recent crackdown, prompting business groups to urge the government to expand such efforts nationwide.

The crackdown is aimed at vendors on e-commerce sites like Alibaba that label their goods “gifts” and “samples” to avoid paying taxes.

Courier shipments worth 100,000 rupees ($1,439) or less coming to Mumbai airport fell 55% in the first quarter of 2019, according to customs department documents seen by Bloomberg Tax. Mumbai received 50,713 shipments in March, down from 113,101 in December.

Packages labeled as gifts or samples have almost stopped in Mumbai. Officials saw only two such shipments in March, compared with 201 in December and about 72,000 in April last year.

There are signs that some vendors are already trying to redirect their shipments through other Indian ports to avoid paying taxes.

The restrictive policies in Mumbai could yield a short-term blow to foreign e-commerce sites like Alibaba Group Holding Ltd.’s AliExpress platform, technology industry analysts said. While these sites are growing in India and elsewhere, critics allege they aren’t doing enough to stop vendors avoiding sales tax on products they sell through the platforms.

Alibaba told Bloomberg Tax in January that it had blacklisted 200,000 vendors globally on its site since September for not complying with tax laws.

The company didn’t respond to a request for comment.

Increased Scrutiny

The drop shows that efforts by Mumbai tax authorities, increased scrutiny of accompanying paperwork, and enforcement of stricter standards on courier companies have shown early results amid a global push to get tough on tax avoidance online, according to LocalCircles, an advocacy group representing Indian businesses, and Jayanth Kolla, founder and partner of technology consultancy Convergence Catalyst.

Sachin Taparia, founder of LocalCircles, is among those calling for the government to implement a nationwide policy to clamp down on vendors on e-commerce sites. Among the measures it should implement, he said, is requiring Indian payment gateways like Paytm to collect tax and customs duties directly when vendors use them to sell their goods on foreign sites.

The government in February released a draft e-commerce policy that included a series of tough measures that would force foreign e-commerce companies to play a larger role in policing vendors. The draft proposed requiring all e-commerce sites to register as business entities in India, stopping vendors from mislabeling their goods to avoid taxes, and potentially blocking noncompliant sites. A final policy is due after national elections wrap up in late May.

Vendors Rerouting Shipments

Kolla and others say vendors may be finding new ways to get products into India.

Some are rerouting their shipments through other Indian ports where standards are less strict, according to a customs officer who wasn’t authorized to speak to the media, and LocalCircles, which works with domestic vendors lobbying for stricter rules.

Even if there is a temporary dip in shipments, Indian consumers will continue to flock to foreign e-commerce sites, thanks to competitive prices and the ability to source goods that aren’t available elsewhere, Kolla said.

Stopping online tax fraud long term will likely prove a monumental task, Kolla said. India’s current approach won’t be able to stop the deluge, he said, adding that scrutinizing shipments of large goods like cars is easier than the thousands of small packages arriving daily through e-commerce sites.

“The problem is that it’s very fragmented. The sizes are small, and the tickets are small, and the number of people ordering will be that much more,” he said.

Harpreet Singh, a partner at KPMG India, said that indirect tax fraud is becoming a bigger issue for Indian authorities, not just on e-commerce sites. He said domestic companies are increasingly issuing fake invoices to claim tax credits. This “needs to be tackled quickly” to protect goods and services tax revenue, he said.

Border Patrol

The customs officer told Bloomberg Tax that officials in Mumbai have taken a number of steps in response to the increase in smuggled e-commerce goods. The officer said they are finding more packages with invoices that understate the value of products—allowing them to pay lower duties.

“We found that people were misdeclaring the category and the value of the cargo,” the officer said. “There is a different invoicing pattern for India. The invoice is delivered for lower value, but payment is made for higher value.”

Among its efforts to stem the flow, the department is denying registration to new, small courier companies that the officer said are often fronts for smuggling.

Exporters to India are seeing the effects. Anish Narang, whose consulting firm Karavan Advisory Enterprises LLP works with foreign vendors that sell to India through e-commerce, said that shipping goods through Mumbai has become tougher in recent months as authorities increased scrutiny of consignments. He said one shipment of food products had recently been delayed at the port.

“You have to have all the documents, all the licenses, registrations,” he said. “If not, getting the products through is difficult.”