Merchanting trade is a goods transaction: an Indian business buys goods from one foreign country and sells them to a buyer in another, and the goods never enter India. Export of services is something else entirely — you deliver work, expertise or access from India to a client abroad. The two sit under different rules and different paperwork, so calling one the other can leave you with the wrong declaration, the wrong bank process and an unexplained gap in your records.
Key takeaways
- Merchanting trade involves physical goods moving between two foreign countries, with an Indian intermediary buying and selling.
- Export of services involves no goods: you supply a service from India to a recipient outside India.
- Services exports are declared on the EDF to your AD bank (SEZ units: to the Development Commissioner).
- Merchanting has its own RBI framework and bank process; confirm the current requirements with your AD bank.
- Commission for arranging a foreign sale is not merchanting — it is usually a service, with its own GST questions.
The two definitions side by side
| Feature | Merchanting trade | Export of services |
|---|---|---|
| What is sold | Goods | Services (consulting, software, design, support, etc.) |
| Do goods pass through India? | No — shipped from origin country to buyer's country | No goods involved |
| Role of the Indian business | Buys the goods and resells them; takes title | Performs the service itself |
| Money flows | Outward payment to the seller, inward receipt from the buyer | Inward receipt from the client |
| FEMA document | Bank's merchanting process under RBI rules | EDF (Annex to the 2026 Regulations) |
| GST angle | Specialised treatment — ask your CA | Zero-rated if Section 2(6) IGST conditions are met |
The key test is title to goods. In merchanting, your business owns the goods for a moment — you buy from the supplier and sell to the buyer. In a service, you never own anything you are selling; you're paid for what you do.
Three scenarios that confuse people
1. The sourcing agent
Riya Exim Services Pvt Ltd in Surat finds textile suppliers in Vietnam for a buyer in Spain. The Spanish buyer contracts directly with the Vietnamese mill and pays it. Riya earns a 4% commission from the Spanish buyer — say EUR 6,000, about ₹5,40,000.
This is not merchanting. Riya never buys or sells the goods. It is paid for a service — arranging the deal. Whether that service counts as an "export of services" for GST is a separate question, because intermediary services have their own place-of-supply rules (see our piece on intermediary services and GST). For FEMA purposes, ask your AD bank whether it expects the commission on an EDF.
2. The genuine merchant
Kavach Trading LLP buys 2,000 units of electronic components from a supplier in Taiwan and sells them to a buyer in the UAE. The goods ship from Taipei to Jebel Ali. Kavach pays the Taiwanese supplier and collects from the UAE buyer, keeping the margin.
This is merchanting trade. Kavach takes title, pays out and receives money for goods that never touch India. It needs its AD bank's merchanting process — not a services EDF.
3. The software reseller
Northpeak Solutions Pvt Ltd buys licences from a US software publisher and resells them to a client in Kenya, with Northpeak also doing implementation work from Bengaluru.
Here the implementation is a service exported from India. The licence resale is trickier: software licences are not physical goods, and how a resale is treated depends on the contracts and the current rules. Separate the two elements on your invoices and ask your CA and bank how each should be reported.
Why misclassification matters
Calling merchanting a service export — or the reverse — creates practical problems, not just labels:
- Wrong declaration. A merchanting deal doesn't belong on a services EDF. Putting it there gives your bank an EDPMS entry it can't match to a services remittance pattern.
- Outward payment questions. Merchanting involves paying a foreign supplier. If your bank thinks you're a pure services exporter, an outward payment for goods will draw questions.
- GST mismatch. Service exports reported in GSTR-1 as zero-rated must meet the Section 2(6) conditions. A goods trade misreported as a service will not reconcile.
- Realisation tracking. Services must be realised within 9 months from the invoice date. Merchanting has its own timelines in the RBI framework — don't assume they are the same.
This is general information, not legal or tax advice. The rules for merchanting are not part of the EDF fact set we work from, so get the current position from your AD bank and the RBI text.
How to tell which one you're doing
Ask these four questions about the transaction:
- Is there a physical product being sold? No → likely a service.
- Does your business buy and resell it, taking title? Yes → likely merchanting.
- Does the product enter India? Yes → it's an import followed by an export of goods, not merchanting.
- Are you paid only for your effort or expertise? Yes → a service (possibly an intermediary service).
If two answers point in different directions, the deal is probably a mix — and mixed deals should be split into clearly separate invoices so each part can be declared correctly.
Where the EDF fits
For the services part of your business, the EDF is due within 30 days from the end of the month in which you raised the invoice, and one form can cover all of that month's service invoices. Each invoice is one row in Part 2B, with SAC code and description of services. Part 2A, which is for goods, stays blank for services.
If you're unsure whether a given invoice belongs on your services EDF, leave it off until your bank confirms — then add it. Our EDF guide explains each part of the form, and the merchanting trade glossary entry has a one-line definition for quick reference.
Frequently asked questions
What is merchanting trade in simple words?
It is when an Indian business buys goods from a seller in one foreign country and sells them to a buyer in another foreign country, without the goods ever coming into India. The Indian business takes title and earns a margin.
Is commission from a foreign buyer a merchanting transaction?
Usually not. If you never buy or sell the goods and are paid only for arranging the deal, you are providing a service. GST treatment of such intermediary services is specialised, so check with your CA.
Do merchanting trade transactions go on the EDF for services?
No. The services EDF is for services exports, with Part 2B listing each service invoice. Merchanting is a goods-related transaction with its own bank process; ask your AD bank what it needs.
Can a software company be involved in merchanting trade?
Pure software services are exports of services, not merchanting. Reselling third-party licences is more complex and depends on the contracts and current rules. Separate service work from resale on your invoices and take advice.
Who decides how a transaction is classified?
You classify it in your invoices and declarations, but your AD bank must be satisfied with the documents, and your CA must be comfortable with the GST treatment. When in doubt, ask both before raising the invoice.
Bottom line
Merchanting means owning and reselling goods that never touch India; export of services means being paid for work you deliver from India. Keep them on separate invoices, put only genuine services on the free EDF form generator, and confirm anything goods-related with your bank.
This guide is general information for Indian businesses, not legal or tax advice. Rules and bank processes change — confirm specifics with your AD bank or chartered accountant.