Purpose Code P0108 - Merchanting trade export leg

The P0108 purpose code is for money an Indian trader receives from a foreign buyer on the export leg of a merchanting trade, where goods move between two foreign countries. Check when it applies, the documents banks ask for, and the GST and FEMA points for this inward remittance.

The P0108 purpose code is used when an Indian trader receives payment from a foreign buyer for goods bought abroad and sold abroad, without the goods ever entering India. This is called merchanting trade. The RBI description is "goods sold under merchanting / receipt against export leg of merchanting trade". Every merchanting deal has two legs. The payment to your foreign supplier goes out under S0108, the import leg. The money from your foreign buyer comes in under P0108, the export leg. Banks report both legs in full (gross basis), not just your margin. It is a current account transaction. Older lists used P1001 for net merchanting receipts; the revised RBI purpose code list uses P0108.

This Purpose Code should be used only where the transaction fits its defined regulatory scope. Here's when you should and shouldn't use this code:

You should use this code when:

• Third-country goods sales - A buyer in the UAE pays you for steel you bought from a supplier in China and shipped straight to Dubai.
• Drop-shipped commodity deals - Sale proceeds for metals, chemicals, textiles or farm goods shipped directly from a foreign seller to your foreign buyer.
• Advance from the foreign buyer - An advance received on a merchanting contract, within the terms your bank allows for that deal.
• Payment under a letter of credit - Proceeds under an LC opened by the foreign buyer for a merchanting shipment.

Do not use this code when:

• Goods are shipped from India or pass through Indian customs (use P0101, P0102 or P0103 instead, based on how the export is paid).
• You only earn a commission for linking a buyer and a seller and never own the goods (use P1002 instead).
• Goods are exported from India to Nepal or Bhutan (use P0109 instead).
• The receipt is for a service, such as freight or inspection, not the goods (use the matching service code instead).

RBI purpose codes are mandatory under FEMA to classify the nature of cross-border transactions entering or leaving India. They allow banks and regulators to accurately track foreign exchange flows and apply the correct regulatory, tax, and reporting treatment.

For individuals, businesses and institutions, correct purpose code usage:

• Ensures transactions are classified correctly under FEMA.
• Enables accurate reporting to the RBI and other regulators.
• Reduces delays caused by compliance checks or misclassification.
• Supports clean audit trails and tax reconciliation.

Bottom-line:

Using the correct purpose code helps ensure smooth processing, regulatory compliance, and faster credit of funds.

1. Select "P0108 – Goods sold under merchanting" when your bank asks for the purpose of the inward remittance.
2. Share the sales contract and invoice for the foreign buyer, plus the purchase contract with the foreign supplier.
3. Give the FEMA declaration your bank asks for, confirming the goods did not enter India.
4. The bank matches the receipt with the S0108 payment for the same deal and credits your account.

Additional Notes:

• Route both legs of the deal through the same AD bank (authorised dealer bank), which tracks each deal from payment to receipt.
• Finish the deal within the time limits RBI sets for merchanting trade, and do not deal in goods India bans for export or import.
• Transport documents, such as the bill of lading, should show the goods moving between the two foreign countries.

• Using a generic or incorrect purpose code instead of the exact RBI-prescribed purpose code can lead to misclassification of the transaction under FEMA and trigger additional compliance checks by the bank.
• Mismatch between purpose code, invoice, and remittance narration may place the transaction on hold until clarification is provided.
• Submitting unclear or incomplete supporting documents that do not clearly describe the nature of the transaction often result in delays, as banks rely on documentation to validate FEMA compliance.
• Missing mandatory PAN or incomplete KYC documentation can prevent banks from releasing funds until verification is completed.
• Using service-related purpose codes for non-service transactions like capital receipts, investments, gifts, or refunds can result in incorrect regulatory treatment and potential reporting issues.
• Assuming small or recurring transactions do not require accuracy and repeated misclassification can attract regulatory scrutiny over time.

Cross-border payments require accurate purpose code selection and complete compliance documentation. Xflow helps businesses and individuals receive international payments while staying aligned with RBI and FEMA requirements.

With Xflow, you can:

• Select the correct purpose code with clarity
• Organize and maintain supporting documents
• Reduce compliance back-and-forth with banks
• Support FEMA compliant inward remittances