Merchant trade and out and out supplies
Goods that never touch India, invoiced by an Indian company. Taxable, or outside the net?
Where goods are procured from a supplier outside India and supplied to a customer outside India without the goods entering India, Entry 7 of Schedule III provides that the supply is treated as neither a supply of goods nor a supply of services. The transaction is therefore outside GST. Credit on inputs and input services used for such a transaction requires analysis, because the transaction is outside supply rather than a zero rated supply.
The position
Entry 7 of Schedule III covers the supply of goods from a place in a non taxable territory to another place in a non taxable territory without the goods entering India. Such merchant trade is outside GST.
The transaction is not an export, so no refund of accumulated credit arises on it as a zero rated supply.
Because it is outside supply, its treatment in the turnover ratio for Rule 42 and 43 must be considered, and the credit attributable to it examined. Where credit is attributable exclusively to such transactions, the department contends it is not available.
The Reserve Bank of India's merchanting trade regulations govern the transaction commercially, and compliance with them is the evidence that the goods did not enter India.
The practical questions
Documentation: the two contracts, the invoices, the bills of lading showing origin and destination outside India, and the bank's merchanting trade documentation.
Credit: identify the credit attributable to these transactions, and take a documented position on its availability, rather than leaving it in a common pool.
Where the same entity also exports from India, the segregation between merchant trade and export turnover must be clean, because the refund computation depends on it.
Place of supply questions can arise where any service element is involved — inspection, certification, logistics coordination — and those services are analysed separately under Section 13.
What to do on Monday
Keep the two contracts, the bills of lading and the bank documentation for every merchant trade transaction.
Segregate merchant trade turnover from export turnover in the accounting system.
Take a documented position on credit attributable to these transactions.
Analyse any service element separately under Section 13.
This page states the general position. A reader with a specific question on their own facts may write to the GST practice at AMLEGALS.
Write to the GST practiceQuestions we are asked on this
Is out and out supply taxable?
No. Entry 7 of Schedule III places it outside supply.
Can we claim a refund of credit on such transactions?
It is not a zero rated supply, so the export refund route does not apply. The credit position must be analysed and documented.
Does it enter the Rule 42 turnover ratio?
It is outside supply rather than exempt. Compute and document the treatment rather than assuming.
What documentation proves the goods did not enter India?
The bills of lading, the two contracts and the bank's merchanting trade documentation.
Are related services also outside GST?
No. Any service element is analysed separately under Section 13 and may well be taxable.
In this cluster
- Place of supply under GST: the full decision tree
- Intermediary services: characterisation, exposure and structuring
- Export of services: the five conditions and where claims fail
- Dharmendra M. Jani: the constitutional attack on intermediary taxation, and where it stands
- Mohit Minerals: ocean freight, composite supply, and the sentence that changed GST federalism
- Import of services and reverse charge under Section 5(3) of the IGST Act
- OIDAR services: registration, compliance and the 2023 amendment
- Bill to ship to transactions and Section 10(1)(b)
- High seas sales, bonded warehouse transfers and Schedule III
- Goods transport agencies: reverse charge, the rate option and place of supply
GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.