Merchanting Trade 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.
Merchanting trade ships goods from one foreign country to another without touching Indian ports, through an Indian intermediary — permitted by para 2.39 of FTP 2023 subject to RBI guidelines, to be completed within nine months, and classified as merchanting trade income, not export income. A high seas sale is the version that ends in India.
Two transactions that look alike and are taxed differently
The handbook treats high seas sales and merchanting trade in one chapter because they share a shape: an Indian party sells goods it has bought abroad, before those goods clear Indian customs. But the tax and regulatory consequences diverge entirely depending on where the second buyer sits. That divergence is the whole chapter.
High seas sales — the definition
A high seas sale (HSS) is "a legal trade practice where the original importer of goods sells those goods to another buyer when these are still in transit from the exporter and are on the high seas, i.e., sales take place before these goods pass through the Indian Customs." Put in shipping terms: the sale happens after dispatch from the port of loading and before arrival at the port of discharge.
The legal position under GST
Three provisions define the space:
- Article 286 of the Constitution — no State government has authority under any law relating to import of goods and services; that is the Union's, which is why the relevant expressions are incorporated in the IGST Act.
- Customs frontier area — under section 2(7) of the IGST Act, 2017 read with section 2(4) of the Customs Act, 1962, "customs area" means the area of a customs station or warehouse, and includes any area in which imported or export goods are ordinarily kept before clearance by customs authorities.
- Section 7(2) of the IGST Act — "Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce." Goods sold as part of an HSS before crossing Indian customs are therefore an inter-State supply, and IGST applies.
Example 1 — the domestic high seas sale
An importer in Kolkata places an import order on a Chinese manufacturer for electronic goods. While the goods are in transit and before crossing the Indian customs frontier, he sells them to a buyer in New Delhi. That is a high seas sale.
Under section 2(10) of the IGST Act, import of goods means bringing goods into India from a place outside India. The apparent problem is double taxation: the HSS is an inter-State supply attracting IGST, and the import itself attracts IGST at customs.
The answer is administrative. GST Council Circular No. 33/2017 dated 1 August 2017, para 4, clarifies that to avoid double taxation, GST shall be levied only at the time of importation — when the import declaration is filed before the customs authorities for customs clearance for the first time. One levy, on the person who files the bill of entry.
Example 2 — when the second buyer is abroad
Change one fact: the second buyer is in Dubai. The Indian importer now makes the sale in the international market rather than the domestic one, and the implications change completely.
The CGST Amendment Act, 2018 amended Schedule III, para 7, to provide that the supply of goods from a place in a non-taxable territory to another place in a non-taxable territory, without such goods entering into India, is not a supply under GST law. No GST is charged, because the goods never enter the taxable territory.
That is the doorway from high seas sales into merchanting trade.
Merchanting trade under the Foreign Trade Policy
Government of India, Ministry of Commerce and Industry, Notification No. 62/23 dated 29 February 2024 amended para 2.39 of the Foreign Trade Policy 2023 to define the transaction as merchanting trade:
"Merchanting Trade involving shipment of goods from one foreign country to another foreign country without touching Indian ports, or shipment of goods within one specific foreign country, involving an Indian intermediary is allowed subject to compliance with RBI guidelines except for the goods in CITES (Convention on International Trade in Endangered Species) or under SCOMET (Special Chemicals, Organisms, Materials, Equipment and Technologies)."
The handbook flags a placement most readers miss: para 2.39 is classified under "Other Provisions Relating to Imports" — and not under exports — in the Foreign Trade Policy.
That is not a filing quirk. It is the structural reason for the income-classification caution below, and it is why merchanting trade does not carry the export benefits an exporter might assume come with foreign-currency earnings.
The six cautions
The handbook sets out a list addressed directly to members advising on merchanting trade:
- MTT income is not export income. "Even though the earnings from the foreign buyer shall be in convertible foreign exchange and routed through the proper banking channels, our members should be cautious as MTT income is not to be classified as Export Income, but as Merchanting Trade Income."
- Goods must be permitted both ways. It is permitted only for goods permitted both under exports and imports.
- The AD bank must satisfy itself of bona fides, and the complete transaction must be routed through one AD bank.
- Anti-money-laundering aspects must be carefully watched.
- Nine months. "MTT should be completed within a period of 9 months."
- EEFC funding. Payment for the import leg is permitted from an EEFC account opened with the help of any advance payment received from the export leg.
The first of those is the one that changes tax positions. An assessee treating merchanting trade receipts as export turnover — for a deduction, for a scheme benefit, or in the export-turnover ratio of a refund claim — has mis-classified the income at source. The second is the one that gets missed on restricted goods. The fifth is a hard stop that has to be tracked from the date of the first leg.
Executing a high seas sale — documentation and logistics
The handbook is emphatic that execution "requires meticulous planning and adherence to logistical and regulatory requirements", across three dimensions:
Regulatory
The laws governing HSS vary from one country to another, "making it imperative for the parties involved to be well-versed with the legal requirements of the countries of origin, transit and destination."
Documentary
All documentation must be redrafted to reflect the latest sale transaction and the parties involved. The documents required are:
- Commercial invoice;
- Import invoice;
- Certificate of origin;
- Insurance;
- HSS agreement.
Critical trade documents — commercial invoice, packing list, bill of lading, inspection certificate — must be changed to the name of the new buyer. For the bill of lading specifically, this "may require issuance of a Switch Bill of Lading to reflect the new buyer, or ensure that the endorsements on the BL are validated."
Logistics
The carrier must be promptly informed about the change in party details, the port of destination, and the details of the HSS agreement.
The two transactions side by side
| High seas sale (buyer in India) | Merchanting trade (buyer abroad) | |
|---|---|---|
| Goods enter India? | Yes, after the sale | No — never touch Indian ports |
| GST | Inter-State supply under s.7(2); levied once, at importation (Circular 33/2017) | Not a supply — Schedule III para 7 as amended in 2018 |
| FTP treatment | Ordinary import | Para 2.39, under "Other Provisions Relating to Imports" |
| Excluded goods | — | CITES and SCOMET |
| Time limit | — | Nine months |
| Income character | Trading income | Merchanting trade income, not export income |
| Banking | Ordinary import payment | One AD bank for the whole transaction; import leg may be paid from EEFC |
Common mistakes
- Booking MTT receipts as export turnover — the handbook's central caution.
- Splitting the two legs across banks when the complete transaction must run through one AD bank.
- Letting the nine months run from the wrong date, or not tracking it at all.
- Dealing in CITES or SCOMET goods on the assumption that FTP 2023 opened merchanting trade generally.
- Leaving the bill of lading in the original buyer's name instead of arranging a switch BL or validated endorsements.
- Expecting IGST twice on a domestic HSS, or paying it at the wrong point in the chain.