Merchant Trade and Out explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
An Indian trader buys machinery from a supplier in Germany and sells it to a buyer in Kenya. The goods ship Hamburg to Mombasa. They never touch India. The invoice, the margin and the trader are all Indian.
Is that a supply liable to GST?
For the first nineteen months of GST the answer was genuinely unclear. It is not any more.
Schedule III paragraph 7, inserted by the CGST (Amendment) Act, 2018 with effect from 01.02.2019, provides that "supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India" is neither a supply of goods nor a supply of services. Paragraph 8 does the same for high seas sales and for supply of warehoused goods to any person before clearance for home consumption. The Explanation 2 to Schedule III, inserted retrospectively from 01.07.2017 by the Finance Act, 2023, confirms that paragraph 8(a) covers goods supplied while in a customs bonded warehouse.
The three transactions in paragraphs 7 and 8
Paragraph 7 — out-and-out supply. Goods move from one place outside India to another place outside India, without entering India. The Indian trader is a merchant trader taking title and margin without ever taking physical possession in India.
Paragraph 8(a) — supply of warehoused goods before clearance for home consumption. Goods imported and lodged in a customs bonded warehouse are sold to another person while still in bond. The buyer clears them and pays IGST at clearance under the Customs Tariff Act. The in-bond sale itself is outside GST.
Paragraph 8(b) — high seas sale. Goods are sold after despatch from the origin port and before clearance for home consumption in India. The final buyer files the bill of entry and pays IGST at import.
The common principle: India taxes the import once, at import. Transactions that occur before that point, or entirely outside India, are not separately taxed.
What this is not
It is not an export. An export under s.2(5) of the IGST Act requires goods to be taken out of India to a place outside India. Goods that never entered India are not taken out of it. So:
- there is no shipping bill;
- there is no zero-rating under s.16 of the IGST Act;
- there is no refund of unutilised ITC under the export route;
- no LUT is required, and filing one does not help.
This is the single most common error. A merchant trade transaction is not zero-rated — it is outside the levy, which is a different thing with different consequences.
It is not exempt either. Schedule III activities are neither goods nor services, so they are not "exempt supplies" in the ordinary sense.
The ITC question, and why it needs care
Here the analysis gets subtle.
Section 17(3) provides that the value of exempt supply for apportionment purposes includes transactions in securities, sale of land, and (subject to Schedule II paragraph 5(b)) sale of building. The Explanation to s.17(3), inserted with effect from 01.02.2019, then states that the value of exempt supply shall not include the value of activities or transactions specified in paragraph 8(a) of Schedule III — that is, in-bond sales.
Read that carefully. The exclusion names paragraph 8(a) only.
The consequence, as generally understood:
- In-bond sales (para 8(a)) are expressly kept out of exempt turnover — so common credit is not apportioned against them.
- Out-and-out supplies (para 7) and high seas sales (para 8(b)) are not given that express protection, and the more conservative reading is that their value enters exempt turnover for Rule 42 and 43 apportionment.
A merchant trading business with substantial Indian overheads — office rent, professional fees, software, salaries with input services — should therefore compute a Rule 42 reversal attributable to out-and-out turnover, or be prepared to defend not doing so. This is frequently missed and is an easy audit finding.
Documentation
Because the transaction is outside GST, the instinct is that no documentation is needed. The opposite is true — the burden of showing that the goods never entered India sits on the taxpayer.
Keep:
- the foreign supplier's invoice and the customer's purchase order;
- the bill of lading or airway bill showing origin and destination ports, both outside India;
- proof of no Indian customs entry — the absence of a bill of entry, evidenced by the shipping documents;
- FEMA and bank documentation — merchant trade transactions are regulated by RBI's merchant trading rules, with time limits between the outward and inward remittance legs;
- the disclosure in returns — the turnover is reported as a non-GST supply.
Where it appears in the returns
- GSTR-1: reported in the non-GST supplies field.
- GSTR-3B: Table 3.1(e), non-GST outward supplies.
- GSTR-9: Table 5F, non-GST supply (including no supply).
- GSTR-9C: Part II Table 7B, in the reconciliation of taxable turnover.
Omitting it entirely, on the reasoning that it is not a supply, produces a books-to-returns variance that has to be explained.
Key takeaways
- Schedule III paragraph 7 puts out-and-out supplies outside GST from 01.02.2019.
- Paragraph 8 covers in-bond sales and high seas sales.
- These are not exports — no shipping bill, no zero-rating, no export refund, no LUT.
- The Explanation to s.17(3) excludes only paragraph 8(a) from exempt turnover.
- Out-and-out and high seas turnover should generally be included in exempt turnover for Rule 42 apportionment.
- Report as non-GST supply in GSTR-1, 3B Table 3.1(e), GSTR-9 Table 5F and GSTR-9C Table 7B.
Read next
- Schedule III: Activities Neither Goods Nor Services
- High Seas Sales Under GST: Treatment and Documentation
- ITC Reversal Under Rules 42 and 43
- Zero-Rated Supply: Exports and SEZ Under IGST
Disclaimer: Positions stated as on 5 September 2026, based on ICAI Background Material on GST, Volume I and II (2026 edition). The ITC apportionment treatment of paragraph 7 turnover is not free from doubt; take a view on your own facts.