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In regular trade, goods are imported into India, cleared through customs, and then either consumed locally or exported again to a foreign market. This traditional import-export formula differs significantly from Merchanting Trade Transactions or MTT transactions.
As per the RBI, MTT is a legitimate form of trade, allowing Indian companies to facilitate transactions without the goods entering India. This reflects a broader acceptance of innovative trade practices in the country.
In this article, we explain how MTT transactions work, what the latest RBI guidelines are, and how best to take advantage of them.
Merchanting Trade Transactions (MTT) involve a special kind of global trade where goods go straight from one foreign country to another without entering India. An Indian company works like a middleman by buying goods from a supplier in one country, for example in China, and selling them to a buyer in another country, for example in the United States. The crucial aspect here is that the goods do not physically pass through Indian customs, but the Indian entity manages the financial transactions and documentation through its bank account in India.
For Indian companies, MTT offers a lucrative opportunity to engage in global trade while minimizing operational hurdles. It helps them explore international markets, earn from price differences, and expand trade options. RBI rules changed in recent years making MTT easier pushing Indian traders to work in the worldwide supply chain.
MTT transactions take place when goods and payments move across international borders, even though the items never come into Indian land. Here’s a clear explanation of each step
The process begins when an Indian business finds a seller in another country with profitable margins. The Indian company negotiates and enters into a purchase agreement with the seller for the required goods. This deal talks about things like the number of goods, price, how and when they’ll get delivered, and payment details. One important part - goods go straight from one foreign country to a buyer in another country, skipping India.
Example: An Indian company decides to buy 1,000 electronics from a factory in China for $50,000, with a promise that China sends them straight to a buyer in Europe.
In the next step, the Indian company also strikes a deal with a buyer in another country. This deal sells the same goods that were bought. Usually, the selling price is more than the buying price. That’s how the Indian company earns. Think of it like international arbitrage, buying goods for cheap in one country and selling to another, without the goods ever entering India.
Example: The Indian company sells those 1,000 electronics to a buyer in Germany for $60,000 and agrees that the goods will be sent straight from China to Germany.
The Indian company needs to set up shipping so the goods go from the seller in Country A straight to the buyer in Country B. This is very important because the goods never come into India, which helps avoid paying Indian import taxes.
Once the goods are shipped, the financial transactions are managed through the Company bank in India. Here’s how it works:
Payment to the Seller: The Indian company sends $50,000 to the seller in China using its Indian bank account. This sum goes in foreign money, like dollars or euros.
Receipt from the Buyer: The Indian company gets $60,000 from the buyer in Germany in the Indian bank account. This amount needs to arrive on time as per RBI rules (explained below).
After taking out costs like bank fees or currency exchange charges, the remaining $10,000 stays as profit for the Indian company.
Example: The Indian bank handles both the payment to the Chinese seller and the money coming from the German buyer, following RBI rules and handling foreign currencies properly.
Merchanting Trade Transactions (MTT) follow rules from the Reserve Bank of India (RBI). These rules help keep MTTs clear and safe, lowering risks like money laundering. Here’s a simple guide to the main RBI rules for MTT
MTT transactions must be conducted in freely convertible foreign currencies. This means that payments for both the purchase and sale of goods must be made in currencies such as USD, EUR, or other major currencies recognized in international trade.
Goods sold to buyers in Country B should reach them within nine months from the date of buying from Country A.
Money from the price difference must follow RBI rules by having the Indian company receive it in their bank account within six months of the date of shipment.
Proper documentation matters a lot in MTT. Important ones include:
Buying Agreement or Purchase Contract: A signed deal between the Indian company and a foreign seller.
Selling Agreement or Sale Contract: Another deal between the Indian company and a foreign buyer.
Receipts & Invoices: Payment records from both sides showing what goods were traded who took part and how much everything cost.
Shipping Papers: Essential documents such as the Bill of Lading, packing list, and any certificates of origin or compliance.
Bank Statements: Transaction records from the Indian company’s bank, showing the inflow and outflow of payments related to the MTT.
Compliance is crucial for conducting MTT. Important aspects include:
Anti-Money Laundering (AML) Rules: The RBI requires that all international financial transactions be checked to stop illegal money movements. Indian firms should keep clean records of their dealings and tell the authorities if they notice anything unusual. This requires tracking all MTT transactions and checking that the money comes from legal sources.
Know Your Customer (KYC) Rules: Following KYC rules is important. Indian businesses must confirm who their buyers and sellers are. This includes assessing their business activities to confirm legitimacy. Doing so helps mitigate risks tied to fraud and illegal transactions.
Reporting Requirements: Companies and their banks must report their MTT transactions to the RBI and maintain comprehensive records for audits. This involves submitting periodic returns and ensuring all necessary documentation is available for inspection.
By following these RBI guidelines and compliance requirements, Indian companies can engage in Merchanting Trade Transactions effectively. This minimizes risks and facilitates smooth operations in the global marketplace. Compliance safeguards transaction integrity and enhances the reputation of companies involved in international trade.
Goods that can be traded under MTT are the same as the goods permitted for import/export in India. This is based on the current Foreign Trade Policy (FTP) of the RBI.
Penalties for non-compliance can include fines, restrictions on future transactions, and legal action. Additionally, companies may face reputational damage that could affect their ability to engage in international trade.
MTT transactions can only be handled by an Authorized Dealer (AD) Bank. They play a crucial role by handling all the international transactions and also performing their own due diligence. One thing to note is that only one bank needs to manage the entire MTT transaction, meaning you cannot switch banks once the MTT has begun.
There are no limits in MTT transactions but payments above USD 200,000 must be backed by a bank guarantee by a reputed international bank.
MTT provides SMEs with opportunities to access global markets without the logistical burdens of traditional import-export processes.
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