Merchant Trade Transactions in India: Complete FEMA & GST Guide for Global Middlemen

1. Concept of Merchant Trade Transactions (MTT)

Imagine this commercial arrangement: An assessee based in Ahmedabad strikes a deal to procure electronic components from a supplier in South Korea and, on the strength of that purchase, finalises a sale to a buyer in Brazil. The goods move straight from Busan to Santos. At no point do they cross Indian customs borders.

Yet:

  • The import payment to the Korean supplier leaves from an Indian bank account, and
  • The sale proceeds from the Brazilian buyer are received into that same Indian banking channel.

The margin between the two legs is retained in India in foreign currency, and the entire structure is expressly permitted under FEMA, 1999 and RBI’s Master Directions. This is known as a Merchant Trade Transaction (MTT).

In substance, an MTT is a cross-border “buy–sell” arrangement where the assessee does not take physical possession of the goods in India. The assessee’s role is that of an international intermediary coordinating:

  • Sourcing
  • Pricing and negotiation
  • Shipment logistics between two foreign jurisdictions
  • Flow of funds through an Indian Authorised Dealer (AD) Category-I bank

Core idea: Goods move completely outside India’s customs territory; the money moves entirely through India’s authorised banking system.

1.1 Basic Definition

An MTT, as recognised under RBI regulations, typically involves:

  • A resident assessee in India acting as the merchanting trader
  • A foreign supplier located in Country A
  • A foreign buyer located in Country B

The defining characteristics are:

  1. The goods are purchased from a foreign supplier.
  2. The goods are sold to a foreign buyer.
  3. The goods never enter the Domestic Tariff Area (DTA) of India.
  4. Both the import-leg payment and export-leg receipt are routed through the same Indian AD Category-I bank.

2. Participants in an MTT Structure

Role Entity Primary Function
Indian intermediary Resident assessee (merchanting trader) Negotiates and executes import and export contracts, arranges logistics, manages documents, and ensures compliance with FEMA/RBI conditions
Foreign supplier Person in Country A Supplies goods and ships them directly to the foreign buyer
Foreign buyer Person in Country B Purchases goods and remits payment to the Indian intermediary through banking channels

The merchanting trader does not act as manufacturer or importer into India; instead, the assessee is a trade facilitator with commercial risk, not a mere commission agent.

3. Regulatory Timelines: 9 Months vs 6 Months

3.1 Earlier Framework under A.P. (DIR Series) Circular No. 20 dated 23 January 2020

For several years, MTTs were governed by two strict timelines:

  1. Overall completion period – 9 months

    • The entire MTT (both legs) had to start and finish within 9 months.

  2. Foreign exchange outlay window – 4 months

    • The gap between outward remittance (paying the supplier) and inward remittance (receiving funds from the buyer) could not exceed 4 months.

3.2 Change Introduced on 1 October 2025

With effect from 1 October 2025, through A.P. (DIR Series) Circular No. 11 (RBI/2025-26/88), the RBI amended the foreign exchange outlay condition:

  • The overall 9-month completion period remains unchanged.
  • The permitted forex outlay period was extended from 4 months to 6 months.

This extension is significant for working capital planning:

  • If an overseas buyer defers payment, or
  • If the supplier insists on early payment,

the assessee now has up to 6 months for the net foreign exchange exposure (funds blocked between the two legs) without breaching the MTT norms.

Important clarification:

  • The 9-month outer limit for completing the entire MTT still applies.
  • Only the forex outlay window has been relaxed from 4 to 6 months.
  • All other directions in A.P. (DIR Series) Circular No. 20 dated 23 January 2020 remain in force, as modified by the October 2025 circular.

3.3 When Do the Clocks Start and Stop?

RBI has clarified the reference points as follows:

  • Commencement date of MTT:

    • The earliest of:
      • date of shipment (export-leg shipment), or
      • date of import-leg payment or export-leg receipt,
        whichever occurs first.

  • Completion date of MTT:

    • The latest of:
      • date of shipment,
      • date of import-leg payment, or
      • date of export-leg receipt,
        whichever occurs last.

The 9-month and 6-month tests are applied with reference to these dates.

Note: Draft Export-Import Trade Regulations proposing removal of fixed timelines have been issued, but until formally notified, the 9-month completion and 6-month forex outlay rules continue to be operative law under FEMA, 1999 and the Master Direction – Import of Goods and Services (updated as on 1 October 2025).