P0108 Purpose Code Guide: Mastering Merchanting Trade Receipts

Indian traders who buy and sell goods globally without the cargo touching Indian soil face unique regulatory challenges. In merchanting trade, an Indian trader purchases goods from Germany and sells them to Brazil, with the shipment moving directly between these countries. This triangular trade model creates a regulatory hurdle: since goods never enter Indian customs, standard export codes like P0101 do not apply.

The solution lies in the P0108 purpose code, the specific RBI-mandated classifier for receiving these ‘export leg’ proceeds. Without proper compliance, traders risk frozen funds and lengthy investigations. The ‘One-Bank’ rule mandates routing both payments and receipts through the same authorised dealer, while the mandatory profitability requirement ensures that every transaction generates net profit.

What Is the P0108 Purpose Code?

The regulatory framework for merchanting trade begins with understanding its specific purpose code. P0108 purpose code is the RBI-designated code for “Goods sold under merchanting/receipt against export leg of merchanting trade”. This classification applies exclusively to inward remittances in merchanting transactions.

• P0108 applies only when an Indian entity acts as an intermediary between two foreign parties.
• The code is specifically for inward remittances (money coming in), while the corresponding outward payment uses S0108.
• Goods must never cross the Indian Customs Frontier for the transaction to qualify.

What Qualifies as a Merchanting Trade Transaction (MTT)?

Understanding P0108’s application requires clarity on what constitutes merchanting trade. The RBI defines this as transactions where an Indian resident enters into back-to-back contracts, purchasing goods from a foreign seller and selling them to a foreign buyer without the goods entering India. Let’s examine the specific requirements.

The ‘Foreign-to-Foreign’ Shipment Rule

• Goods must move from the supplier country directly to the buyer country.
• If goods enter India (even for warehousing in a DTA), it ceases to be merchanting.
• Documentation must prove that the port of loading and discharge is both outside India.

The Role of the Indian Intermediary

• The Indian entity acts as the principal in the contract, not an agent.
• There must be two distinct back-to-back contracts: one for purchase, one for sale.
• The entity earns a trading margin (profit), not a commission.

What Are the Key RBI Guidelines for P0108 Compliance?

With merchanting trade clearly defined, traders must navigate specific RBI compliance requirements. The Master Direction on Export/Import of Goods & Services outlines strict guidelines for P0108 transactions. Failure to meet these limits can result in the RBI caution-listing.

The 15-Month Transaction Timeline

• The export proceeds must be realised and repatriated within fifteen months, as per the November 2025 FEMA amendment.
• This extension from the previous nine-month period provides significant relief for traders managing longer credit cycles.

The Export Proceeds Realisation Rule

• All export-leg receipts must be repatriated to India within the prescribed timeline.
• AD banks must report the transaction through FETERS/ORFS systems with proper documentation.
• Extensions beyond fifteen months require specific AD bank approval.

Mandatory Profitability and One-Bank Rule

• Every specific MTT must show a net profit; losses are generally not permitted.
• Both the Import Leg (S0108) and Export Leg (P0108) must be routed through the same AD Bank.
• Banks must perform ‘one-to-one matching’ of the outflow and inflow.

P0108 vs. P0101: Which Code Should You Choose?

The RBI’s strict compliance framework necessitates choosing the correct purpose code. Using P0101 for merchanting triggers a demand for a Shipping Bill, which doesn’t exist for merchanting. Conversely, using P0108 for standard exports is illegal as it bypasses customs reporting.

When to Use Purpose Code P0101

• Use when goods physically originate from India
• Requires a Shipping Bill and Customs clearance
• Subject to standard GST zero-rated supply rules

When to Use Purpose Code P0108

• Use when goods move directly between two foreign countries
• No Shipping Bill or Bill of Entry is generated
• Requires back-to-back contracts instead of customs docs

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Which Documents Does Your Bank Need for P0108?

Choosing the correct code is only the beginning; proper documentation ensures smooth processing. Banks require stricter documentation for P0108 transactions because there is no government customs data to cross-verify. The requirements differ for each leg of the transaction.

Proof of Trade (Contracts & Invoices)

• Confirmed Purchase Order or Contract with the Overseas Supplier
• Confirmed Sales Order or Contract with the Overseas Buyer
• Commercial Invoices for both legs showing value difference (profit)

Proof of Shipment (Transport Docs)

• Full set of Bill of Lading (BL) or Airway Bill (AWB)
• Docs must show Port of Loading and Port of Discharge are outside India
• Bank may accept non-negotiable copies if authenticated

Does GST Apply to P0108 Transactions?

Documentation requirements extend beyond RBI compliance to tax considerations. Merchanting trade falls under Schedule III of the CGST Act, which classifies it as “neither supply of goods nor services”. This unique classification creates specific tax implications for traders.

• IGST does not apply to merchanting trade transactions
• The turnover may still need reporting in GST returns as ‘Non-GST Supply’
• No input tax credit implications arise from merchanting activities

How to Streamline Your International Payment Receipts

Tax clarity allows traders to focus on operational efficiency. Using a payment partner that understands purpose codes eliminates the friction of traditional banks, which often require manual FIRC requests and branch visits. Modern solutions automate compliance for smoother operations.

Using Traditional Banks (AD Category I)

• Necessary for the core merchanting approval
• Often involves manual submission of paper documents
• Can lead to delays in crediting funds due to compliance checks

Razorpay MoneySaver Export Account

• Offers international accounts (USA, UK, Canada) for easy collection.
• Provides automated digital FIRC for standard export compliance.
• Reduces forex markups significantly compared to traditional SWIFT transfers.
• Simplifies the receipt leg of your global trade operations.

How Razorpay MoneySaver Simplifies P0108 Receipts

Building on streamlined processes, specific features address the complexities of merchanting trade. 

• Global Collections enables opening virtual accounts in key currencies (USD, GBP, EUR) to collect payments from foreign buyers as if you were a local entity, simplifying the P0108 receipt leg. 
• Automated compliance provides digital FIRCs for every transaction, essential documents your AD Bank needs to verify and close the merchanting trade loop. 
• Cost Efficiency saves significantly on forex markups compared to traditional SWIFT transfers, directly improving the mandatory net profit margin required for P0108 compliance.

Conclusion

The P0108 purpose code serves as the specialised classifier for export-leg receipts in merchanting trade, where goods move directly between foreign countries without entering India. Traders must navigate the fifteen-month realisation timeline, mandatory profitability requirements, and strict one-bank discipline to avoid RBI compliance issues.

Success in the merchanting trade requires meticulous documentation, proper use of purpose codes, and efficient payment processing. Modern payment tools like Razorpay’s platform automate compliance documentation and reduce forex costs, addressing the core challenges of P0108 transactions.

FAQs

Q1. What is the primary function of the P0108 purpose code?

The P0108 purpose code classifies inward remittances received for the export leg of a merchanting trade transaction, where goods are shipped directly from a foreign supplier to a foreign buyer. It ensures accurate RBI reporting for transactions in which goods never enter Indian customs territory.

Q2. What is the new export proceeds realisation timeline for 2025?

Effective November 2025, the RBI has extended the export proceeds realisation period from nine months to fifteen months. This change gives traders additional time to repatriate funds while remaining fully compliant with FEMA regulations.

Q3. Is a Shipping Bill required for P0108 transactions?

No. Since the goods do not cross the Indian Customs Frontier, no Shipping Bill or Bill of Entry is generated. Banks verify such transactions using back-to-back contracts and transport documents that demonstrate foreign-to-foreign movement of goods.

Q4. Can different banks be used for the import and export legs?

No. RBI guidelines require that both the import leg (S0108 payment) and the export leg (P0108 receipt) be routed through the same Authorised Dealer bank. This ensures proper reconciliation and one-to-one matching of merchanting trade transactions.

Q5. Is GST applicable to merchanting trade transactions?

No. Under Schedule III of the CGST Act, merchanting trade is treated as neither a supply of goods nor a supply of services. GST is not applicable; however, the turnover must be disclosed as a Non-GST Supply in GST returns.

Q6. Is it mandatory to make a profit on every merchanting trade?

Yes. RBI regulations require each individual merchanting trade transaction to result in a net profit for the Indian entity. Losses from one transaction cannot be offset against profits from another.

Q7. What happens if the goods inadvertently enter India?

If the goods enter India’s Domestic Tariff Area, the transaction no longer qualifies as merchanting trade and is treated as a regular import–export transaction. In such cases, different purpose codes, such as P0101, apply along with full customs compliance requirements.