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 is an intermediary transaction where an Indian trader buys goods from one foreign country and sells them to a buyer in another, with the goods shipped directly between the two without entering India. It is governed by RBI guidelines under FEMA, with a time limit (typically nine months) to complete the transaction.
Overview
Merchanting trade — also called intermediary trade — lets an Indian entity earn a trading margin on goods that never touch Indian soil. The trader arranges to buy from a supplier in country A and sell to a buyer in country B, and the goods move directly from A to B. Because it is essentially a foreign-exchange transaction, it is regulated by the Reserve Bank of India rather than customs.
Legal Basis
Merchanting trade is governed by the Foreign Exchange Management Act, 1999 (FEMA) and the RBI's Master Direction on Merchanting Trade Transactions. Since the goods do not enter Indian customs territory, the Customs Act, 1962 does not apply to the goods themselves; the eligibility of the goods, however, is tested against the Foreign Trade Policy 2023 — only goods freely importable and exportable may be routed through merchanting trade.
How a Merchanting Transaction Works
- The Indian trader (merchant) contracts to buy goods from an overseas supplier (import leg).
- The trader simultaneously contracts to sell the same goods to an overseas buyer (export leg).
- The goods are shipped directly from the supplier's country to the buyer's country, bypassing India.
- The Indian bank (an AD Category-I bank) handles the payment for the import leg and the receipt for the export leg, monitoring the transaction under the RBI rules.
Key RBI Conditions
| Condition | Requirement |
|---|---|
| Goods eligibility | Freely importable/exportable under FTP; not prohibited/restricted. |
| Direct shipment | Goods move directly A → B; must not enter India. |
| Completion window | Entire transaction to be completed within the prescribed period (typically nine months). |
| Outlay of forex | Import leg outlay should not remain outstanding beyond the permitted period. |
| AD bank oversight | Routed through a single AD Category-I bank that monitors both legs. |
Verify the exact time periods and thresholds against the current RBI Master Direction, as these are periodically updated.
Payment and Financing
The RBI guidelines expect the export leg to be realised so that the foreign-exchange outlay on the import leg is recouped within the overall window. Advance payment for the import leg is permitted subject to conditions, and short-term financing of the outlay is allowed within limits, but a prolonged unfunded outlay is discouraged. The AD bank must be satisfied about the genuineness of the transaction and the bona fides of the parties.
Illustration
An Indian trading company buys machinery from Germany for US$500,000 and sells it to a buyer in Kenya for US$560,000. The machinery is shipped directly from Hamburg to Mombasa. The Indian company's AD bank remits US$500,000 for the import leg and receives US$560,000 for the export leg within the permitted window, and the company retains the US$60,000 margin — all without the goods ever reaching India, and without Indian customs duty on the goods.
Common Pitfalls
- Routing prohibited or restricted goods through merchanting trade.
- Letting the transaction exceed the RBI completion window, breaching FEMA.
- Allowing the import leg outlay to remain outstanding beyond the permitted period.
- Splitting the two legs across different AD banks, defeating oversight.
Related Guides
Key Facts About Merchanting Trade
- Applies in: All states across India, under the relevant central law.
- Mode: Mostly online via the official government portal.
- Typical timeline: Ranges from a few days to a few weeks depending on the case.
- Non-compliance: May attract penalties, interest or late fees.
- Expert help: TaxClue completes the entire process end to end for you.
What is merchanting trade?
Merchanting trade (also called intermediary trade) is a transaction where an Indian trader buys goods from one foreign country and sells them to a buyer in another foreign country, with the goods moving directly between the two foreign countries without entering India. It is governed by RBI guidelines under FEMA.
Do the goods enter India in a merchanting trade transaction?
No. In a genuine merchanting trade transaction the goods are shipped directly from the supplier's country to the ultimate buyer's country and do not cross into Indian customs territory. The Indian party only handles the commercial and financial legs.
Over 90% of compliance penalties in India arise from missed due dates — timely handling can save businesses thousands of rupees each year.
Merchanting Trade: a key compliance topic in Indian tax and corporate law that businesses and individuals must understand to remain compliant.