/ Merchant Trading in India
India is becoming a very popular manufacturing location for European companies due to its big talent pool of highly skilled workers, low costs, excellent knowledge of the latest technology and its strategic location. This not only makes India a great manufacturing location, but also a great hub to supply the region from. More and more European companies are choosing India as a base to export their products to neighbouring countries.
When using India as your regional manufacturing base, you obviously want to be able to export your products straight from the factory instead of having to ship them to your European headquarters first. This direct way of exporting is called merchant trading or intermediate trading and can be done by companies with a manufacturing base in India who are in possession of the right documents. In this article we’ll explain to you how merchant trading from India works and how to get the right permissions.
Merchant Trading
Merchant trading means that a shipment of goods takes place from one foreign country to another foreign country through an ‘intermediate’ or ‘merchant’ in a third foreign country and without entering or leaving the country of the merchant.
Let’s simplify this explanation with an example. A German company owns a subsidiary in India that manufactures its products. The German company has found a Singaporean client that wants to buy the in India manufactured products. Instead of having to import the products to Germany and subsequently export them to Singapore, the German company requests from the Indian subsidiary to supply the products directly to the buyer in Singapore. This means the products never enter or leave Germany.
In this case we speak of merchant trading, because:
– The supplier of the goods that will be exported is the subsidiary in India;
– The buyer of the goods to be exported is the client in Singapore;
– The merchant or the intermediary is the parent company in Germany.
Further, we don’t only speak of merchant trading when there is a subsidiary involved, but also when a company buys the products and ships to the client from a third party. For example, the German company receives an order for a specific product that it does not manufacture itself from a client in the USA. The German company places a corresponding order to a supplier in India that does manufacture the product and asks the Indian supplier to ship the goods directly to the customer in the US. The goods do not enter or leave Germany, so again the German company is the merchant trader in the example.
In this example the Indian supplier will send its invoice to the German company, who will subsequently send their own invoice to the American customer. In the example where the goods are supplied by the Indian subsidiary, the international and local transfer pricing rules apply to the sale of the goods from the Indian subsidiary to the German parent company.
Paying GST on a Merchant Trade
According to the IGST Act the supply to a location outside of India by an Indian supplier shall be treated as the supply of goods in the course of inter-state trade or commerce. The export of goods or services is considered as a zero-rated supply, which means that GST won’t be levied on export of any kind of goods or services. The exporter shall apply for a letter of undertaking (LUT) in order to export the goods without GST.
Required Documents for Merchant Trading
The documents needed to ship the goods from the supplier to client depend on the specific products that are being sold and if the Indian company is the supplier or the merchant trader in the deal. In case it’s the latter, at least 13 documents need to be submitted to clear the merchant trade. It is therefore highly recommended to work with a local expert in this field that can advise you on how to best set up the merchant trade and support you in obtaining all the necessary documentation. Our experts are available to answer all your questions on this topic and to help you complete your first merchant trade successfully.