Expert opinion · Merchanting trade

Merchanting trade: buying abroad, selling abroad, reporting in India

In a merchanting trade the goods never touch Indian soil, but both payments pass through your Indian bank account. That makes the transaction simple to ship and demanding to document.

FxLayer compliance deskFEMA, RBI reporting and cross-border tax 7 min read Updated
Goods
  1. SupplierGoods shippedFrom the supplier's country
  2. In transitDirect to the buyerNot entering India
  3. BuyerGoods receivedIn the third country
Money
  1. Import legYou pay the supplierPurpose code S0108
  2. Export legThe buyer pays youPurpose code P0108
  3. MarginProfit retainedBoth legs at one AD bank
Goods and Money

Key points

  • Both legs of a merchanting trade must be routed through the same AD bank.
  • The goods must be permitted for import into India under the Foreign Trade Policy in force.
  • Foreign exchange outlay, the time your money is out before the buyer pays, is capped at four months.
  • The import leg is reported under S0108 and the export leg under P0108.

What counts as merchanting trade

A merchanting trade transaction (MTT) is one where an Indian resident buys goods from a supplier outside India and sells the same goods to a buyer outside India, with the goods shipped from the supplier's country to the buyer's country without entering India's domestic tariff area. The Indian business earns its margin on the difference between the two legs.

Goods may pass through an Indian port only in transit, under customs supervision. If they are cleared into India, the transaction becomes an ordinary import followed by an export.

The conditions your bank applies

  • The goods must be ones that can be imported into India under the Foreign Trade Policy in force on the date of shipment, and the transaction must follow its rules.
  • Both the import leg and the export leg must be handled by the same AD bank, which checks the documents for each leg.
  • The bank will want to see a genuine trade: contracts or orders for both legs, shipping documents that link the supplier's shipment to the buyer's delivery, and payments that agree with them.
  • Any advance paid to the supplier above the limit RBI sets is normally covered by a letter of credit or a bank guarantee.

Timelines: outlay and completion

The foreign exchange outlay, the period between paying the supplier and receiving payment from the buyer, should not exceed four months. Your bank will watch it from the date of the import payment.

The older rules also required the entire transaction to be completed within nine months. Under the FEMA regulations that apply to trades starting from 1 October 2026, that completion period is no longer the test it once was, while the outlay limit and same-bank routing continue. Confirm the position for each trade with your AD bank.

Reporting and documentation

The payment to the supplier is made under purpose code S0108 and the receipt from the buyer under P0108, so the bank can pair the two legs. Banks generally ask for an application in Form A2 for the import leg, along with the request letter and the documents for the trade. Because the payment is not for an import into India, the tax position of the import leg has to be considered, and Form 145 is generally filed, usually under Part D where the supplier has no permanent establishment in India.

Where merchanting trades go wrong

  • The two legs are paid or received through different banks.
  • The buyer pays late and the outlay passes four months without the bank being told.
  • The shipping documents do not show that the goods went from the supplier to the buyer.
  • The margin looks unusual and the bank asks for an explanation that is not on file.

FxLayer keeps both legs on one merchant-trade record, counts the outlay from the day you pay the supplier and prepares the bank papers for each leg.

Questions

No. Merchanting trade covers goods. Buying and reselling services is handled as a services import and a services export, each with its own rules.
Yes. The Indian party needs an Importer-Exporter Code, and the trade should be reflected in its books like any other import and export.
The export leg becomes an overdue receivable and the bank will follow up as it would for any unrealised export. Talk to your bank early, because the outlay limit is also running.

This article is general information on Indian foreign exchange and tax rules as they stood on the date shown. It is not legal or tax advice. Rules and limits change; confirm the current position with your AD bank, the relevant RBI Master Direction or your adviser before acting.

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