Sales to Merchant Exporters under GST: Detailed Guide on Notifications 40/2017 & 41/2017
1. Introduction
Under the GST regime in India, the standard rule is that a supplier must charge GST at the applicable rate on the supply of goods to any recipient. However, special concessional provisions were introduced in Notification No. 40/2017-Central Tax (Rate) and Notification No. 41/2017-Integrated Tax (Rate) dated 23 October 2017 to facilitate exports made through merchant exporters. These notifications allow suppliers to invoice domestic sales to merchant exporters at a nominal GST rate—subject to strict conditions—thus improving export competitiveness and cash flows.
2. Who is a Merchant Exporter?
In the context of GST:
A merchant exporter is a registered person (domestic supplier) who procures goods from manufacturers or suppliers and exports those goods without manufacturing them.
Unlike a manufacturer-cum-exporter, a merchant exporter does not own a production facility but trades and exports goods on its own account.
Merchant exporters are typically registered with an Export Promotion Council (EPC) or a Commodity Board recognized by the Department of Commerce, Ministry of Commerce & Industry.
3. Why Concessional Rate Notifications?
Under Section 16 of the Integrated Goods and Services Tax Act, 2017, exports are treated as zero-rated supplies. However, zero-rating normally applies only at the export stage itself—not for the domestic purchase leg of the export chain.
To bridge this gap, the Government of India introduced concessional tax rates so that merchant exporters could procure goods from domestic suppliers at 0.1 % IGST (for inter-state supplies) or 0.05 % CGST + 0.05 % SGST/UTGST (for intra-state supplies), instead of the full applicable GST rate. This helps in:
Reducing working capital blockage
Increasing export competitiveness
Minimizing GST refund and tax chain delays
Lowering overall tax cost on the procurement leg of export transactions
4. Key Notifications and Their Legal Effect
4.1 Notification No. 40/2017-CT (Rate)
This notification (Central Tax) provides that:
Supplies made by a registered supplier to a registered recipient (merchant exporter) for export shall be taxable at a concessional rate of 0.05 % CGST instead of the full CGST rate.
The supplier can charge GST at this concessional rate only if all the conditions laid down in the notification are met.
4.2 Notification No. 41/2017-IT (Rate)
This notification (Integrated Tax) similarly provides that:
Supplies to merchant exporters shall attract 0.1 % IGST in the case of inter-state supplies instead of the full IGST rate.
It mirrors the concessional structure allowed under Notification 40/2017 but for IGST applicable to inter-state transactions.
In effect, both notifications allow concessional tax treatment (not a full exemption)—meaning the supplier is not charging normal GST but concessional tax linked to export performance and compliance.
5. Conditions to Avail Concessional GST
The concessional tax benefit is conditional and not automatic. The following must be complied with strictly:
5.1 GST Registration and Documentary Requirements
Both supplier and merchant exporter must be GST registered.
Supply must be made on a tax invoice showing the concessional rate and correct GSTIN details.
Shipping bill or export documents must contain:
GSTIN of the supplier
Tax invoice number issued by the supplier This linkage is crucial for connecting the domestic sale with the export shipment.
5.2 Export Timeline and Conditions
The merchant exporter must export the goods within 90 days from the date of the tax invoice. Failure to export within this time frame may lead to denial of concession to the supplier.
The supplier’s eligibility for concessional tax also depends on this export timeline.
5.3 Placement of Purchase Orders
The merchant exporter must place a procurement order at concessional GST and provide the supplier with a copy of this order.
This order should indicate that the purchase is under Notification 40/2017 / 41/2017.
5.4 Movement of Goods
Goods must be dispatched directly either:
From the place of the manufacturer/supplier to the export port, Inland Container Depot (ICD), Airport, or Land Customs Station (LCS) from where they are exported; or
Via a registered warehouse, subject to proper documentation and acknowledgements.
5.5 Merchant Exporter Registration Criteria
Merchant exporters must maintain a valid Registration-Cum-Membership Certificate (RCMC) issued by an EPC or commodity board. This registration shows recognition for export purposes.
6. Refunds and GST Input Tax Credit (ITC)
Merchant exporters can claim refund of Input Tax Credit (ITC) under Rule 89(4B) of the CGST Rules, 2017 on transactions where they have paid concessional GST.
Export of goods is a zero-rated supply under GST (IGST Act, Section 16) and exporters have an option to export under bond/LUT without payment of IGST and claim refund of unutilised ITC.
7. Risks and Practical Compliance Issues
7.1 90-Day Condition
The 90-day export condition is very important. If exports are delayed beyond this period:
The supplier could lose the concessional tax benefit.
The supplier may be liable for differential tax at the normal rate plus interest and penalties.
7.2 Documentation
Proper documentation is vital:
Tax invoice must match the export shipping bill.
GSTIN and invoice numbers must be accurately quoted.
Records of dispatch and export proof must be maintained diligently.
8. Example Illustration (Simplified)
Suppose:
Supplier A supplies goods worth ₹10,00,000 to Merchant Exporter B under Notification 40/2017.
Normal GST on goods is 18%.
Under the notification, Supplier A can invoice at 0.05 % CGST + 0.05 % SGST (₹10,000 total) instead of ₹1,80,000.
Merchant Exporter B exports the goods within 90 days and ensures shipping bill details are linked to Supplier A’s GSTIN and invoice number.
In this case, Supplier A enjoys the concessional tax route and B gets export benefits (zero-rated export). Both parties benefit if conditions are met.
9. Conclusion
The concessional GST framework under Notifications 40/2017 and 41/2017 is a useful and targeted facility for promoting exports via merchant exporters. However, it is not automatic and depends on strict compliance with conditions that link domestic supply to overseas shipment.
While the concessional rate helps ease tax burden and working capital, both suppliers and exporters must carefully manage documentation, export timelines, and compliance to avoid denial of benefits or subsequent tax demands.
10. References
Notification 40/2017-CT (Rate) — concessional intra-state GST rate provisions.
Notification 41/2017-IT (Rate) — concessional IGST rate provisions.
CBIC Circular No. 37/11/2018-GST — clarifications on merchant exporter ITC and conditions.
GST zero-rated supply framework — IGST Act Section 16.