GST on Merchant Trade Transactions Outside India

Indian businesses increasingly participate in international trade without physically importing goods into India. An Indian trader may purchase products from a supplier in one foreign country and sell them to a customer in another. These arrangements are known as merchanting trade transactions. Understanding GST on merchant trade transactions is essential for businesses seeking to structure overseas trading operations, manage tax exposure and comply with foreign exchange regulations.

Under Indian GST law, the supply of goods from a place outside India to another place outside India, without the goods entering India, is covered by Schedule III of the Central Goods and Services Tax Act, 2017. Such a transaction is treated neither as a supply of goods nor as a supply of services. However, commissions, brokerage, intermediary services and other associated activities may require a separate GST assessment. Businesses must therefore distinguish the underlying goods transaction from the services and financial arrangements supporting it.

What Is a Merchant Trade Transaction?

A merchant trade transaction involves an Indian business purchasing goods from a supplier located outside India and reselling them to a buyer in another country. The goods move directly between the two foreign countries and do not enter the Indian customs territory. For example, an Indian company may purchase electronic components from Japan and resell them to a customer in Germany. The Japanese supplier ships the goods directly to Germany, while the Indian company manages the purchase, sale and payment arrangements.

The Indian company earns a commercial margin from the difference between its purchase and sale prices. Since the goods remain outside India throughout the transaction, the GST treatment differs from a conventional import followed by a domestic sale or an export from India. Merchanting trade must also be distinguished from agency arrangements. A trader buying and reselling goods on its own account occupies a different commercial position from an intermediary who merely arranges a transaction between two overseas parties for a commission.

GST Provisions Applicable to Merchant Trade Transactions

The principal legal provision is paragraph 7 of Schedule III to the CGST Act, read with Section 7. Paragraph 7 covers the supply of goods from a place in the non taxable territory to another place in the non taxable territory without the goods entering the taxable territory. The provision treats the transaction as neither a supply of goods nor a supply of services. Consequently, GST is not charged on the underlying purchase and resale merely because an Indian business participates in the transaction.

This treatment was introduced to exclude qualifying overseas goods transactions from the GST supply framework. It is important to distinguish this statutory exclusion from a zero rated supply. A transaction covered by Schedule III is not automatically an export under GST, and the trader should not describe the transaction as an export of goods from India merely because the seller is an Indian business. The relevant legislation can be reviewed in the official CGST Act and Schedule III published by CBIC.

Is GST Payable on Goods Bought and Sold Outside India?

Generally, no GST is payable on the underlying goods transaction when the facts satisfy paragraph 7 of Schedule III. The goods must move from one place outside India to another place outside India without entering India. Consider an Indian trading company purchasing machinery components from South Korea for resale to a buyer in France. The supplier ships the goods directly to France. The Indian company issues its commercial sale invoice to the French buyer and receives payment through the banking system.

The purchase and resale of the goods fall within the Schedule III exclusion, provided the statutory conditions are met. The Indian trader does not charge GST on the resale simply because it earns a margin from the transaction. The result may differ if the goods enter India, are imported for domestic use, or are sold through a different supply arrangement. Businesses must examine the actual movement of goods and contractual responsibilities rather than relying only on the invoice description.

GST Treatment of Commissions and Intermediary Services

Although the goods transaction may fall outside the scope of supply, services connected with merchanting trade can have a different GST treatment. For instance, an Indian business may act as an agent for an overseas supplier and receive a commission for arranging a sale to a foreign buyer. The commission represents consideration for a service, rather than profit from buying and reselling goods on the business's own account. The classification of the service is important. Under Section 2(13) of the Integrated Goods and Services Tax Act, 2017, an intermediary generally arranges or facilitates a supply between two or more persons, subject to the statutory definition and exclusions. An intermediary does not ordinarily provide the underlying goods or services on its own account.

Section 13(8)(b) of the IGST Act generally places the place of supply of intermediary services at the supplier's location where Section 13 applies. Consequently, an Indian intermediary providing services to an overseas client may be unable to treat the commission as an export of services, even where the client is outside India. By contrast, an Indian business purchasing and reselling goods on its own account is not automatically an intermediary. The contracts, transfer of title, commercial risks, invoicing and actual conduct of the parties should be examined to establish the correct classification.

Can Merchant Trade Transactions Qualify as Exports of Services?

The underlying goods transaction covered by Schedule III is not an export of goods from India. It is a transaction expressly treated as neither a supply of goods nor a supply of services. A separate service supplied by an Indian business to a foreign customer may qualify as an export of services if all conditions under Section 2(6) of the IGST Act are satisfied. These generally include the supplier being located in India, the recipient being located outside India, the place of supply being outside India, receipt of payment in convertible foreign exchange or Indian rupees wherever permitted by the Reserve Bank of India, and the supplier and recipient not being merely establishments of the same person.

The place of supply test is particularly important. An intermediary service may fail this test because Section 13(8)(b) places its supply in India. Other services may qualify, depending on their nature and the applicable place of supply provision. Businesses should not assume every service associated with overseas trading is an export. Each service must be assessed independently.

GST Registration, Invoicing and Return Compliance

A business undertaking merchanting trade should assess its registration position under the normal GST provisions. The Schedule III treatment of the goods transaction does not, by itself, make every activity of the business taxable or create a universal registration exemption. If the business supplies other taxable goods or services in India, or provides services connected with merchanting trade, those activities may affect its registration and compliance obligations. The applicable registration threshold, compulsory registration provisions and nature of the business's supplies must be examined.

For the overseas goods transaction, the trader should maintain purchase and sale invoices, contracts, shipping documents, proof of delivery, payment records and evidence establishing the location of the goods throughout the transaction. These documents help demonstrate why paragraph 7 of Schedule III applies. Where a separate taxable service is supplied, the business should issue the appropriate tax invoice, determine the applicable tax treatment and report the supply in its GST returns as required. Accounting records should clearly distinguish the trading margin from any separately charged commission or service fee. Businesses seeking GST advice for international trade should review their commercial contracts and documentation together. A consistent record of the movement of goods, transfer of title and nature of services can help avoid disputes over classification.

FEMA and RBI Compliance for Merchanting Trade

GST treatment is only one part of merchanting trade compliance. Indian businesses must also consider the Foreign Exchange Management Act, 1999, the applicable RBI directions and the requirements administered through authorised dealer banks. The RBI framework regulates merchanting trade transactions, including the handling of the import and export legs, supporting documents, permitted goods, payment flows and time limits. The authorised dealer bank may require purchase and sale invoices, transport documents, insurance records and evidence of the commercial purpose of the transaction.

Businesses should confirm the current RBI requirements with their authorised dealer bank before entering into a transaction. The applicable conditions may depend on the nature of the goods, the payment structure and the directions in force at the relevant time. The Reserve Bank of India’s merchanting trade directions provide an official reference point for understanding the regulatory framework. Compliance with FEMA and RBI rules does not replace the GST analysis, and GST treatment does not remove foreign exchange obligations.

Common GST Risks in Merchant Trade Transactions

One common risk is treating an agency commission as a trading margin. If an Indian business merely arranges a sale between foreign parties, the service may fall within the intermediary provisions. Describing the amount as a commission, trading fee or facilitation charge does not determine its legal character. Another risk arises when the goods enter India temporarily or permanently. The Schedule III exclusion depends on the prescribed movement of goods. If the goods enter the taxable territory, the transaction must be reassessed under the relevant import, supply and customs provisions.

Incomplete documentation can also create difficulties. Businesses should preserve evidence of the foreign supplier, overseas customer, shipping route, transfer of ownership, payment flows and any separate services. Inconsistent contracts and invoices may make it harder to establish the intended tax treatment. Where multiple entities participate in a transaction, each party's role should be documented clearly. Cross border tax lawyers in India can help assess complex arrangements involving overseas principals, commission structures, related parties and disputed intermediary classifications.

Conclusion

GST on merchant trade transactions outside India depends primarily on the movement of goods and the scope of paragraph 7 of Schedule III to the CGST Act. Where goods move between two foreign locations without entering India, the underlying transaction is generally treated neither as a supply of goods nor as a supply of services. However, commission arrangements, intermediary services and other related activities require separate analysis under the IGST Act. Businesses should maintain clear commercial and shipping documentation, distinguish trading income from service fees and comply with applicable RBI and FEMA requirements. A transaction specific review can help establish the correct tax position and reduce the risk of avoidable disputes.

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