GST on Merchant Trade Transactions

What Are Merchant Trade Transactions?

Merchant trade transactions, also known as third-country sales, occur when an Indian business purchases goods from one foreign country and sells them directly to another foreign country — without the goods ever entering India.

Example: An Indian business buys goods from China and sells them to a customer in Germany. Since the goods never enter India, it qualifies as merchant trade.

Does GST Apply to Merchant Trade?

GST in India is a destination-based tax. It applies only when goods or services are supplied within India, imported into India, or consumed in India.

Since merchant trade transactions do not involve Indian territory and goods never enter Indian customs, GST does not apply.

CGST Rules for Merchant Trade

As per Schedule III of the CGST Act, 2017, supply of goods from a non-taxable territory to another non-taxable territory without entering India is not considered a supply under GST.

Therefore, merchant trade transactions fall outside GST scope.

Can Zero-Rated GST Be Claimed?

Zero-rated supply under Section 16 of the IGST Act applies only to exports from India or supplies to SEZ units.

Since merchant trade is neither export from India nor SEZ supply, zero-rated GST benefits cannot be claimed.

What Records Must Be Maintained?

• Purchase invoices from foreign supplier
• Sales invoices to foreign customer
• Shipping documents showing foreign-to-foreign delivery
• Bill of lading / airway bill
• Foreign currency receipt documents

Compliance & Best Practices

Even though GST is not applicable, maintaining proper documentation is mandatory. Businesses must retain complete records under Section 35 of the CGST Act.

Using reliable accounting software helps classify merchant trade separately and avoid reporting errors.

Legal Framework & Relevant Sections

The treatment of merchant trade transactions under GST is primarily guided by:

• Schedule III of CGST Act, 2017 – Activities not treated as supply
• Section 7 of CGST Act – Scope of supply
• Section 16 of IGST Act – Zero-rated supply provisions

Since merchant trade falls under Schedule III, it is neither treated as supply of goods nor services under GST law.

Merchant Trade vs Export from India

Many businesses confuse merchant trade with exports. However, there is a significant legal difference.

• Export: Goods physically move from India to another country.
• Merchant Trade: Goods move from one foreign country to another without entering India.

Exports qualify for zero-rated benefits under GST, while merchant trade does not.

Accounting Treatment in Tally

Merchant trade transactions should be recorded separately to avoid GST misclassification.

• Create a separate ledger for merchant trade purchases.
• Create a separate sales ledger tagged as non-GST supply.
• Ensure tax rate is marked as Not Applicable.
• Do not include these transactions in GST return reports.

Proper classification ensures GST returns remain clean and audit-ready.

Common Mistakes Businesses Make

• Reporting merchant trade under export sales
• Claiming zero-rated GST benefits incorrectly
• Failing to maintain shipping documentation
• Incorrect ledger classification in accounting software

Such mistakes may trigger notices or compliance scrutiny from tax authorities.

Risk & Compliance Considerations

Although GST is not applicable, authorities may demand proof that goods never entered India. Failure to produce documentation can result in transaction reclassification.

• Maintain shipping documents carefully
• Preserve foreign currency inward remittance proof
• Maintain supplier and buyer agreements
• Retain transaction records for statutory period

Benefits of Merchant Trade

• No GST liability
• No customs clearance in India
• Flexible international trade model
• Opportunity for higher margin trading

Practical Example for Better Understanding

An Indian trader buys electronic components from Singapore for resale in Dubai. The goods are shipped directly from Singapore to Dubai. Since the goods never enter India, GST is not levied. However, the trader must maintain invoices and shipping proof.

Expert Recommendation

While merchant trade transactions are outside GST scope, classification must be accurate. Using structured accounting processes and proper ledger configuration ensures error-free compliance.

Businesses engaged in frequent international trading should maintain a dedicated merchant trade accounting structure to avoid reporting mistakes.

Final Conclusion

Merchant trade transactions are outside the scope of GST, provided goods never enter India. However, documentation must be preserved carefully to prove transaction nature during audits.