Over the last decade, the number of Indian businesses engaging in merchant trade transactions has increased rapidly. With that, the common query ‘Will GST be applicable on merchant trade transactions?’ has become more prominent than ever. Though these transactions are pretty common in international trade, businessmen remain concerned about the nuances in the GST laws in India.
Navigating the intricate GST regulations often seems difficult for them, and they end up paying a lot for basic GST software. If you’re one of them, unaware of whether GST is applicable to merchant trade transactions, this blog will answer your question elaborately.
What are merchant trade transactions?
Before determining whether GST is applicable to merchant trade transactions, it’s relevant to discuss what these transactions are. Simply put, merchant trade transactions or third-country sales are transactions where the goods never enter India.
In these transactions, Indian businesses purchase goods from a foreign country and sell them to another foreign country. So, these are international trade transactions without involving the Indian territory at all. These transactions are also termed out-and-out sales.
For example, as an Indian businessman, you purchase products from China and sell them to customers in Germany. In this case, your business transactions qualify as merchant trade transactions.
How does GST work in India, and the CGST rules for merchant trade?
Now that you’ve understood which transactions can be considered merchant trade transactions, let’s revise how GST works in India. Since GST in India is a location-based tax, only the transactions involving the Indian territory are subject to GST regulations. That means GST is levied on goods supplied within India, goods imported into India, and services provided in India. This rule of thumb is specified by the Central Board of Indirect Taxes and Customs, the governing body of GST in India.
There’s also a specific act related to merchant trade, which is Schedule III of the CGST Act, 2017. This act clearly specified which transactions will be considered a supply of goods or services. It states that the supply of goods from a non-taxable territory to another place in another non-taxable territory without entering into India won’t be treated as a supply of goods or services. So, merchant trade transactions don’t qualify as a supply of goods or services at all.
Does GST apply to merchant trade transactions?
GST applies to taxable supply in India, and merchant trade transactions don’t qualify as taxable supply. Merchant trade is all about international transactions. The goods never come to India or are not cleared through Indian customs. Moreover, the consumption of the goods never happens in India. So, these transactions are clearly outside the scope of GST itself.
Reliable GST software like TallyPrime reflects zero payables when you calculate payable GST for your merchant trade transactions for the same reason.
Can zero-rated GST be claimed for merchant trade transactions?
As per Section 16 of the IGST Act, zero-rated GST can only be claimed in the cases of exports of goods and services from India or supplies for special economic zones.
Since merchant trade is neither considered an export nor a supply to special economic zones, zero-rated GST benefits can’t be claimed for these transactions.
What merchant trade transaction records must you maintain?
Though GST doesn’t apply to merchant trade transactions, you are supposed to maintain the records of these transactions. Section 35 of the CGST Act emphasises the relevance of the maintenance of transaction records. Maintaining these records lets you prove the nature of your transactions as and when required.
Now, what are the records you need to keep? Let’s check them out:
- You must keep purchase invoices from the foreign suppliers you buy goods from. This is the proof that you’ve purchased the goods outside India.
- Sales invoices to foreign customers are equally important to show that you’ve sold the goods outside India.
- Shipping documents reflecting direct delivery from one foreign place to another foreign place are also crucial.
- Bills of landing or airway bills are also great supporting documents.
- Besides these documents, foreign currency receipt documents also need to be maintained.
As long as you maintain these records, you can prove that your transactions were made outside India and they’re not subject to GST at all. So, make sure to collect these important documents and maintain them properly.
Final words
Merchant trade transactions are clearly outside the scope of GST, as long as the goods move directly between two foreign locations and never enter India. Since these transactions are not treated as a supply under GST, they do not attract tax, do not qualify for zero-rated benefits, and are not required to be reported in GST returns.
That said, maintaining proper documentation is non-negotiable. Purchase invoices, sales invoices, shipping documents, and foreign currency receipts play a crucial role in establishing the nature of merchant trade transactions and ensuring compliance when questioned by authorities.
Given the complexity of GST laws and the need for accurate classification, using a reliable accounting and GST solution like TallyPrime can help businesses track merchant trade transactions separately, maintain clean records, and avoid unintended compliance errors.
