What is Merchant Trade: Merchanting trade is one where shipment of goods takes place from one foreign country to another foreign country without touching DTA i.e. Customs. In Indian Context, the trade is called Merchanting Trade when,
– The supplier of goods will be resident in one foreign country
– The buyer of goods will be resident in another foreign country
– The merchant or the intermediary will be resident in India In simple terms, Merchanting transaction is one which involves shipment of goods from one foreign country to another foreign country involving an Indian Intermediary. Hence, It is also called Intermediary Trade
Goods involved in the merchanting trade transactions would be the ones that are permitted for exports (except Export Declaration Form)/imports (except Bill of Entry) under the prevailing Foreign Trade Policy (FTP) of India.
HOW IT WORKS:
There are two types of trade : one is internal(wholesale/retail) and other one is external (exports/imports/merchant trade). We are here talking about external trade more precisely about merchanting trade. The similarities and dissimilarities of three external trade are given under 21 (twenty one heads) in next slide to differentiate the nature of transactions involved and how all these are categorized.
|When a trader from home country sells goods to a trader in another country.||When a trader in home country purchases goods from a trader in another country.||The purchase of goods by a resident from a non-resident and subsequent resale of goods to another non-resident. During this process goods does not enter the territory of the resident.|
|The link is between exporter and buyer.||The link is between importer and seller.||The link is between trader, supplier and buyer.|
|The end user is buyer.||The end user is buyer.||The end user is buyer.|
|The originator is seller.||The originator is seller.||The originator is seller.|
|No intermediator.||No intermediator.||Trader is an intermediator.|
|Direct relationship between buyer and seller.||Direct relationship between buyer and seller.||Indirect relationship between buyer and seller.|
|No fund is earmarked.||No fund is earmarked.||Fund is earmarked.|
|Duty drawback schemes are applicable for customs duty paid goods.||Goods attract customs duty and no incentive scheme is available.||No customs duty and no duty drawback.
|Incoterm exists.||Incoterm exists.||No Incoterm.|
|Transport documents, shipping bill as an evidence of exports.||Transport documents, Bill of entry as an evidence of imports.||Transport documents as an evidence of merchant trade.|
|Transport risk, quality risk, delivery risk and exchange risk.||Transport risk, quality risk, delivery risk and exchange risk.||Transport risk, quality risk, delivery risk, exchange risk and higher risk of fraud and money laundering.|
|Third party exports (except Deemed Export) as defined in Chapter 9 shall be allowed under FTP.||Third party exports (except Deemed Export) as defined in Chapter 9 shall be allowed under FTP.||No third party payments are allowed either in the import leg or in the export leg of the Merchanting Trade Transaction.|
|Purpose code P0108 is required to be furnished for goods sold under exports.||Purpose code S0108 is required to be furnished for goods sold under exports.||Purpose code PO108 and SO108 both are required to be furnished for goods sold under export leg and goods acquired under import leg.|
|In case of advance received from customer , the exporter should ensure that shipment of goods should take place within 1 year from the date of receipt of fund. If exporter fails to make shipment within stipulated period no refund of unutilized fund is permissible without approval of RBI .||Advance remittance up to USD 200,000 is allowable. Beyond USD 200,000 bank guarantee from international bank is required. In cases where the importer is unable to obtain BG from overseas suppliers and AD is satisfied about the track record advance remittances up to USD 5,000,000 is permissible.||In case of Merchant trade advance is received and goods are supplied for full value, unrealized portion needs to be refunded as it fails to adhere one to one matching principle.
|The due date of settlement of export bill is 270 days from the date of shipment.||The due date of settlement of import bill is 180 days from the date of shipment of goods.||The due date of settlement of export bill is 270 days from the date of shipment.
|AD bank has the authority to extend the realisation period up to 6 months. If it exceeds beyond one year the total outstanding of the exporter does not exceed USD 1 million or 10 % of the average export realizations during the preceding 3 financial years, whichever is higher.||Remittances against imports should be completed not later than six months from the date of shipment, except where AD may permit settlement of import dues delayed due to disputes, financial difficulties, etc. for a period of less than three years from the date of shipment.||No such extension of beyond permissible period 270 days or 9 months from the date of shipment.|
|Export declaration to be made in SDF or EDF.||Import declaration is required to be provided under DECLARATION-CUM-UNDERTAKING.||Merchant trade transaction is required to be given in Merchant Trade Declaration.|
|Export transactions are recorded in EDPMS.||Import transactions are recorded in IDPMS.||No such platforms are available to record Merchant Trade Transaction.|
|AD can consider closure of shipping bill in EDPMS that involves write off to the extent of 5% of invoice value.||AD can consider closure of BoE in IDPMS that involves write off to the extent of 5% of invoice value.||AD can consider closure to the extent of 5% of invoice value.|
|The export of goods or services is considered as a zero-rated supply. GST will not be levied on export of any kind of goods or services.||So import of goods and services into India will attract IGST.
|Transactions which shall be treated neither as a Supply of Goods nor a Supply of Services if supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India. So there is no GST on Merchant trade.|
|No margin and entire fund is credited to seller.||No margin and entire fund is debited to buyer.||Only merchanting margin is credited to trader.|
GST ON MERCHANT TRADE
Section 7(5)(a) states that supply of goods or services or both when the supplier is located in India and the place of supply is outside India shall be treated to be a supply of goods or services or both in the course of inter-state trade or commerce.
Section 11 of IGST Act dealing with place of supply of goods imported into, or exported from India. The place of supply of goods-
a) Imported into India shall be the location of the importer
b) Exporter from India shall be the location outside India.
Section 7 schedule III of CGST Act, 2017-Activities or Transactions which shall be treated neither as a Supply of Goods nor a Supply of Services if supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India. So there is no GST on Merchant trade.
M/s Synthite Industries Ltd. (applicant) are in the business of trading in spices and spice products. They receives order from a customer in USA for supply of spices. They place a corresponding order to a supplier in China for supply of goods ordered by USA. The supplier in China ship the goods directly to customer in USA and goods do not come to India. The Chinese supplier issues invoice to the applicant, for which, payment will be made by the applicant in due course. Subsequently, the applicant will raise invoice on the customer in USA, and collect the proceeds.
Since both USA and China are in non-taxable territory and goods did not enter in Indian territory there would not be any GST liability.
GUIDELINES OF SETTLEMENT MECHANISM OF MERCHANT TRADE
Following end to end thirteen (13) documents are required to be submitted for clearance of merchant trade and import payment and export collection both are required to be routed same AD bank.
MERCHANT TRADE CYCLE:
The entire cycle of merchant trade should be completed within an overall period of 9 (nine) months/270 days from the date of commencement to completion date. The commencement date would be date of shipment, export leg receipt or import leg payment whichever is first. Similarly the completion date would be date of shipment , export leg receipt and import leg payment whichever is last. If export collection is received first import payment is required to be settled within four months.
|Date of shipment||Import leg payment||9 months|
|Export leg receipt||Import leg payment||4 months|
|Import leg payment||Export leg receipt||9 months|
ONE TO ONE MATCHING PRINCIPLE:
There are 18 (eighteen) check points identified as a standard practice to be followed to assess the authentication and bona fide of the transaction. In next five slides check points along with the parameters to be checked have been elaborated keeping in view “one to one matching principles”. There are 8(eight) documents should be in hand while verifying the content and 18(eighteen) match points to be considered as a full proof evidence. As an exception there are other aspects deviated from standards given in “Exception -one to one matching principles” slide needs to be considered based on facts of incidents.
|Import Invoice||Origin and Destination|
|Export Invoice||Consignee Name|
|Packing list||Bill to & Ship to|
|Airway Bill/Bill of Lading||Description of goods|
|Swift Message||Invoice Reference|
|Collection Order||Purchase Order|
|Despatch particulars||Due Date|
|Date of shipment||Amount Collected|
|Purpose Template||Payment Reference|
|Import Invoice||Export Invoice||Packing list||Import Manifest||Qty||Qty in all four documents should match except in special case.|
|Import Invoice||Export Invoice||Packing list||Description of goods||Description of goods in all three documents should match.|
|Import Invoice||Export Invoice||Import Manifest||Invoice Reference||Export Invoice and Import Manifest should contain Import Invoice No.|
|Import Invoice||Packing list||Import Manifest||Purchase Order No.||All three documents should carry same Purchase Order No.|
|Airway Bill||Import Manifest||Origin & Destination||Port of Loading and Port of Discharge should be same.|
|Import Invoice||Export Invoice||Packing list||Import Manifest||Airway Bill||Consignee Name||Same Consignee name should be reflected in all five documents.|
|Import Invoice||Export Invoice||Packing list||Import Manifest||Airway Bill||Bill to & Ship to||“Bill to” in export invoice should be in line with “Ship to” in Import Invoice. Further “Bill to” in export invoice should be same as compared with Packing list, Import Manifest and Airway Bill under the head Consignee.|
|Airway Bill||Import Manifest||Airway Bill No.||Same House Airway Bill Number should appear in Import Manifest.|
|Airway Bill||Import Manifest||Weight or Volume||Same weight should be shown in both documents.|
|Airway Bill||Import Manifest||Date of Despatch||The date of despatch shown in Import Manifest should be prior to actual date of despatch .|
|Airway Bill||Import Manifest||Shipper Name||Same shipper name should be in line with both documents.|
|Export Invoice||Swift Message||Import Manifest||Airway Bill||Import Invoice||Buyer-Remitter||The Buyer and remitter should be same in all five documents.|
|Export Invoice||Swift Message||Collection Order||Amount Remitted||The total amount received should match with Export invoice and Collection Order.|
|Swift Message||Payment Reference||he swift message should contain either proforma invoice no/Import Invoice No/Export Invoice No.|
|Swift Message||ACU Mechanism if it pertains to Asian Countries||The Swift message should contain message confirming ACU mechanism followed or Name of the Banker of India Origin.|
|Export Invoice||Import Invoice||Despatch Particulars||Inward Remittance||Purpose Template||Purpose template should mention purpose code PI008 under merchant trade and request for ear mark of fund should be mentioned.|
|Airway Bill||Due date of Shipment||Permissible settlement period is 270 days from the date of shipment. Breach in merchant trade cycle should be reported to RBI for approval for import payment. Fund will remain on hold until permission for import payment.|
|Airway Bill||Import Manifest||Import Invoice||Export Invoice||Export invoice date should be prior to date of all three documents.|
EXCEPTIONS- ONE TO ONE MATCHING PRINCIPLE:
The question of mismatch of weight of the consignment in comparison to weight displayed on commercial invoice always arise but following points to be considered before coming to the conclusion the material fact.
In case of FCL the exporter has goods to accommodate in one full container load even if he might not have fully loaded cargo . It may be half loaded or quarter loaded. In case of LCL shipper does not have enough goods to accommodate in one full container, he books cargo with a consolidator to console his goods along with goods of other shippers.
In respect of mode of shipment prevailing practice is to opt shipment by sea rather than air shipment just because of (1) more capacity can be loaded and (2) low cost of freight. Any shipment weighing more than 500 kg is expensive for Air freight.
Sometimes overseas buyer places order to multiple supplier and prefers shipment to be executed through their own arrangement. In that case buyer asks merchant trader to instruct their supplier accordingly and goods to be delivered from warehouse to shipper’s warehouse. After having received goods from multiple supplier , the shipper ships goods after consolidating all deliveries in one single shipment. So the weight displayed on commercial invoice raised by the supplier gets deviated from the weight displayed on import manifest.
Maximum allowable weight for sea shipment is 67,200 lbs (30240 kg) and for air shipment is 350lbs(158 kg.). Again maximum allowable weight depends on the size of the container – for 20’ container (62,150 lbs=28,000 kg) and for 40’ container (59,200lbs=26640 kg.).Maintaining Stability of the ship while loading containers plays an important role in safety of all cargo in a cargo ship.
Weight displayed on commercial invoice is taken at warehouse level of the supplier but customs have their own warehouse management system (WMS) . As the cargo moves down the conveyor, weight and dimensions are automatically captured and recorded in the WMS. So final weight to be considered is weight mentioned in Import manifest and airway bill. If there is a mismatch , that point needs to be addressed.
Mismatch in Buyer and remitter :
In ideal situation the buyer name displayed on export invoice under ”Bill to”, on import invoice under “Ship to”, on import manifest and airway bill under “consignee” and finally on the swift message should be same. Any deviation on any document should be treated as “Buyer-Remitter” mismatch. Sometimes company go for amalgamation or name change happens during the transition period and the same was not incorporated in transport documents , commercial invoice , export invoice and not reported to customs.
To validate the name change following documents are required to produced to come into final conclusion or accept the name change.
As per RBI guideline names of defaulting merchant trader where outstanding reach 5% of annual export earning would be caution listed.
Merchant trader is caution listed when Merchant trader fails to adhere the merchant trade guideline i.e. Breach in merchant trade :
a) Export proceeds crosses the permissible deadline -270 days from the date of shipment.
b) In case of advance payment foreign exchange outlay happens beyond 4 months from the date of receipt of fund
c) Merchant trader fails to produce clear evidence of shipment i.e. transport documents as per requirement.
d) Merchant trader executed transaction for restricted items falling negative list of import as per FTP Policy.
e) Merchant trader fails to achieve margin on merchant trade or lower margin after subtracting import payments and related expenses from export proceeds for the specific MTT.
f) Merchant trade import dues (excluding other import dues i.e. direct import, deemed import) reaches 5% of annual merchant export (excluding normal exports) earning .
g) Merchant trade declares export proceeds as normal exports without declaring it as towards merchant trade and avail the facility of direct credit of fund without ear marking of same.
WRITE OFF – MERCHANT EXPORT DUES :
For the Export Leg, the unrealized amount may be written off by the AD Bank if requested by the Merchanting Trader in the following cases:
MARGIN ON MERCHANT TRADE:
HOW EAR MARK OF FUND WORKS:
LETTER OF CREDIT UNDER MERCHANT TRADE:
As per RBI guidelines to open LC with supplier is that the Letter of credit to the supplier is permitted against confirmed export order keeping in view the outlay and completion of the transaction within nine months.
As per Rule 4 of Merchant Trade under FEDAI
CHANGE IN REGULATORY GUIDELINE IN MERCHANT TRADE:
The state of the goods should not undergo any transformation.
Considering that in some cases, the goods acquired may require certain specific processing/ value-addition, the state of goods so acquired may be allowed transformation subject to the AD bank being satisfied with the documentary evidence and bonafide of the transaction.
Comparing both guidelines we have noticed that in earlier guideline transformation was not allowed but basis on growth Govt. of India has amended earlier guidelines and allowed transformation except for certain products as per FTP.
Now the question is how this can be materialized keeping in view of following facts that
Second question automatically arise in next phase after getting clarified about clear guideline
Let us discuss each and every point with clarity but before that we need to understand why transformation is required. Transformation is required in those cases where the merchant trader doesn’t want to disclose the source of supply. But transformation won’t allow following amendments:
Do we need to keep goods in Customs Bonded warehouse for transformation
Central Board of Indirect Taxes and Customs (CBIC) has launched a revamped and streamlined program to attract investments into India and strengthen Make in India as per Section 65 of the Customs Act, 1962, which enables conduct of manufacture and other operations in a Customs bonded warehouse. The program has been introduced vide the Manufacture and Other Operations in Warehouse (MOOWR, 2019).
Under this program a unit can import goods including inputs under customs duty deferment with no interest liability. There is no investment threshold or export obligation. The duties are fully remitted if the goods resulting from such operations are exported. Import duty is payable only if the resulting goods or imported goods are cleared in the domestic market (ex-bonding). All these activities should be carried out in Licensed Bonded warehouse not in Public Bonded warehouse and Bill of entry is required for warehousing.
So whereas Merchant trade is concerned following activities are not allowed:
Is this allowed to change the point of origin in case of transformation
Is there any specific document required which will prove transformation is done without violating the norms
a. The name of the exporter needs to be disclosed. But the purpose of transformation would be defeated if the name of the original exporter is disclosed. The name of the exporter should display the name of the Merchant trader.
b. The invoice number and date should be the exporter’s invoice particulars
c. Buyer’s order number and date should be the order received by the Merchant trader from buyer.
d. Port of loading and discharge should be the same.
e. Description of goods should remain same.
The carrier should carry the commercial invoice raised by the Merchant Trader
Consignor name , port of shipment , port of discharge, place of delivery, qty, weight, description of
Goods should remain same as disclosed in packing list. So after despatch of goods from original supplier how the declaration can be changed in transport documents without disclosing the source of supply.
Yes this is possible if we opt for Switch Bill of lading BUT lot of restrictions to be followed that would be clarified in upcoming slide.
A switch Bill of Lading refers to a second set of Bill of Lading issued by the carrier (or its agent) to substitute the original bills of lading issued at the time of shipment.
Just like the original, the switch B/L serves as:
The reasons for requiring a switch B/L include:
CONTROL POINTS FOR ONE TO ONE MATCHING
In addition to control points mentioned in earlier slides “ONE TO ONE MATCHING PRINCIPLES” following additional points to be looked into to prove it as bonafide transaction