What Is Merchanting Trade?

In a merchanting trade the Indian trader sits between a foreign seller and a foreign buyer. The trader pays the seller and receives money from the buyer, and the goods go from one foreign country to the other. The goods do not come into India. The trader earns the margin between the buying and selling price. Because money goes out and comes in, the AD bank looks at both legs together. Regulation 16 sets a time limit between the outward and inward remittance. Traders usually discuss the structure with their AD bank before the first deal.

For example, an Indian trader buys 500 units from a seller in Vietnam and sells them to a buyer in Germany, with the goods shipped directly from Vietnam to Germany. The trader pays Vietnam, receives payment from Germany, and keeps the difference.

• Bank compliance: Regulation 16(1) says merchanting trade is undertaken in accordance with the Foreign Trade Policy, and the gap between the outward and inward remittance should not exceed six months.
• Extension: The proviso to Regulation 16(1)(a) lets the AD bank allow more time if it is satisfied. Discuss delays early.
• Income tax: Trading profit from merchanting is business income. Ask a tax adviser how it is reported and whether foreign tax credit applies.
• GST: GST treatment depends on the facts, since the goods do not enter India. Confirm with a GST professional before filing.

A merchanting trade runs as two linked payments. The Indian trader pays the overseas supplier and collects from the overseas buyer within the allowed window.

1. The trader agrees terms with the overseas supplier and the overseas buyer.
2. The goods are shipped from the supplier's country to the buyer's country.
3. The trader pays the supplier through the AD bank, or receives the buyer's payment first.
4. The remaining leg follows, with both inside the six month window in Regulation 16(1)(a).
5. The AD bank matches the two remittances and the trader keeps the margin.
6. If the window is likely to be missed, the trader asks the bank for an extension.

Work out the margin from the buying and selling values, then check the days between the two remittances against the six month limit in Regulation 16(1)(a). The figures below are hypothetical.

1. Buying value paid to the supplier: USD 40,000.
2. Selling value received from the buyer: USD 46,000.
3. Gross margin is USD 6,000, which is 15 percent of the buying value.
4. If the outward payment is on 1 March, the inward payment should arrive by 1 September.
5. If it will arrive later, ask the AD bank for an extension before the limit.
6. Keep both sets of invoices and shipping documents for the bank.

• Goods enter India: In merchanting trade the goods move between two foreign countries, so they are not imported into India.
• No time limit: Regulation 16(1)(a) sets a six month period between the two remittances, subject to bank extension.
• Any bank can handle it: Handling depends on the AD bank, so confirm its process before the first deal.
• Same as re-export: Re-export involves goods that first came into India, while merchanting does not.

• Export realisation: Receipt of export payment through an AD bank.
• Inward remittance: Money received in India from abroad.
• Advance remittance: Payment received or sent before goods or services are delivered.
• Letter of credit: A bank undertaking to pay the seller on conditions.

Every rule and definition on this page is linked to its official source, checked on the dates below.

1. FEMA (Export and Import of Goods and Services) Regulations, 2026, Notification FEMA 23(R)/2026-RB, Regulation 16(1), 16(1)(a) and proviso (checked 9 Oct 2026)