Merchant Trading
Export directly from your Indian factory and avoid paying double import duties
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India is becoming a popular manufacturing location for global companies because of obvious reasons: a large talent pool of highly educated workers, low costs, excellent knowledge of the latest technology and a strategic location. This makes India not only a great manufacturing hub, but also the perfect home base from which to export into the region.
If you use India as a regional production hub, you will naturally want to be able to export your products directly from the factory, instead of having to send them to your European headquarters first. This direct way of exporting is called merchant trading. In this article, we will explain how merchant trading from India works and how to obtain the right permits.
Merchant Trading as a European Company
Merchant Trading means that a shipment of goods takes place from one foreign country to another foreign country via an “intermediary” or “trader” in a third country and without entering or leaving the country of the trader. Merchant trading helps companies avoid paying double import duties.
Let’s simplify this with an example. A Dutch company has a subsidiary in India that manufactures its products. The Dutch company has found a Singaporean customer who wants to buy the products produced in India. Instead of importing the products to the Netherlands and then exporting them to Singapore, the Dutch company asks the Indian subsidiary to deliver the products directly to the buyer in Singapore. This means that the products never enter or leave the Netherlands.
In this case, we speak of merchant trading because:
– the supplier of the goods to be exported is the subsidiary in India;
– the buyer of the goods to be exported is the customer in Singapore;
– the trader or intermediary is the parent company in the Netherlands.
However, we do not only speak of merchant trading when a subsidiary is involved, but also when a company purchases the products it is going to ship to the customer from a third party.
For example, the Dutch company receives an order from a customer in the US for a specific product that it does not produce itself from a customer in the US. The Dutch company places an order with a supplier in India who produces 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 the Netherlands again, so in this example too, the Dutch company is the merchant trader.
In this example, the Indian supplier sends its invoice to the Dutch company, which then sends its 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 Dutch parent company.
Paying GST (VAT) on a Merchant Trade
Under the IGST Act, the supply to a location outside India by an Indian supplier is treated as a supply of goods between two Indian states. The CGST Act states that activities or transactions are not treated as a supply of goods if the goods are supplied from a place in a non-taxable area to another place in a non-taxable area without the goods entering India.
This means that in our examples, where the goods are supplied from India, the IGST Act applies and GST is payable. In the case where the trader is the Indian company, the CGST Act applies and no GST is payable.
Documents Required for Merchant Trading from India
The documents required to ship the goods from the supplier to the customer depend on the specific products being sold and whether the Indian company is the supplier or the merchant in the deal. If the latter is the case, at least 13 documents need to be submitted to enable the Merchant Trade. It is therefore highly recommended to work with a local expert in this field, who can advise you on how to best set up the merchant trade and support you in obtaining all the necessary documentation.
