Introduction

In the current scenario of globalization, many organizations take recourse to import of equipments and spares for their day to day operations and further diversification, expansion etc. Generally, the equipment is purchased on a competitive basis whereas the spares are purchased on Single Tender basis from the Original Equipment Manufacturers. At the time of processing the purchase, reasonableness of the price of the spares is examined with reference to available data and orders are placed on FOB basis. By placing import order on FOB basis the organization can save foreign currency involved by way of freight and insurance. Hence, always the import orders will be on FOB basis and the export orders will be on CIF basis. While importing the consignments, apart from the basic cost of the item, the other components like freight, insurance and customs duty are also involved. I have come across certain important points that impact the savings on freight, insurance and customs duty for the imported consignments. The following paragraphs highlight my practical experience.

Insurance Charges 

For imported consignments, the insurance premium should cover the value of the order including the customs duty. It is important to include the customs duty also in the insurance premium since in the event of any damage noticed in the imported consignment after clearance, we will be in a position to claim full value of the consignment including the element of customs duty paid. For this purpose there are two ways of arranging insurance:

1) In the first method, we can go in for single premium i.e. immediately after the placement of order, the insurance premium is paid for the FOB value, freight charges, insurance and assessed customs duty. Here the personnel in charge of these responsibilities must have a clear exposure to and understanding of the customs tariff rates and procedures so that the assessed customs duty in most cases is very near to the actual customs duty.

2) In the alternate method, the premium is arranged with the insurance company in three stages. As soon as orders are released, the insurance premium can be arranged for the FOB value of the consignment only at the initial stage. When the materials are dispatched the second cover has to be arranged for freight charges and insurance charges at actuals and the customs duty (Author’s Query). The customs duty will be for the assessed value. So insurance for an initial agreed value of to be customs duty can be paid. Finally after clearance of the consignment, the actual value of customs duty to be paid can be declared to the insurance company and the difference if any, over and above the amount already paid has to be paid to the insurance company. If the premium paid is in excess, action is to be taken for getting necessary refund from the insurance company. However, insurance companies do not generally entertain claims for refund of any excess premium received by them. This working requires an understanding and agreement from the insurance company.

In case the insurance premium is not paid and insurance bill is not produced along with the bill of entry, the Customs will take the insurance charges as 1.125% of FOB value as per Section 14 of Customs Valuation Rules, 1988, of the Customs Act. It is therefore, imperative that consignments are invariably insured before the shipment of the materials, to reduce costs.

It is better to have a single insurance company, preferably on a regular basis due to inherent advantages and convenience. It should also be a permanent arrangement, as far as possible. Financial managers may insist that insurance companies should be selected on the basis of competitive quotations. This is, however, not advisable since by selecting the single source of insurance company they may offer discount in the premium rate based on the earlier claim rate (Author’s Query). For example, Chennai Port Trust was paying the premium rate of 0.4% less 5% earlier but it has been reduced in various stages as detailed below:

Before After After
May 1996 May 1996 15.2 2000 Sea 0.40% less 5% 0.25% less 5% 0.21% less 5%
(0.449152%) (0.28072%) (0.23416%)
Air 0.30% less 5% 0.20% less 5% 0.16%less 5% (0.229175%) (0.21945%) (0.17955%)
Hence it is advantageous, if insurance is arranged continuously with the same insurance company, by way of obtaining insurance premium as stated above, which will bring in a considerable amount of savings in the long run, which may be in the range of a few lakhs of rupees.

Freight Charges

There is a general perception that airfreight charges are higher than the freight charges by sea. However, in actual practice this is not always true since freight is determined in relation to the weight, volume and value of the consignment to be carried. For instance, if the weight of the consignment is less than 500 kgs but the volume of the consignment is not considerable, the freight charges by air will be more economical. By airlifting the consignment, the delivery is faster apart from minimizing breakage, loss of consignment etc. Even in airfreight, if we utilize the services of a consolidated freight forwarder, the airfreight charges will be considerably less. One such airfreight consolidator in India is M/s. Balmer Lawrie & Co. Ltd., a Government of India undertaking. A statement showing the airfreight charges of M/s. Air India and M/s. Balmer Lawrie & Co. Ltd. is enclosed (Annexure-I). From the statement, it may be seen that by utilizing the services of the consolidated freight forwarder, the airfreight charges will be more economical.

Further, if the consignment value is more than US $17,000, the shipping companies will charge freight charges as 3% advalorem on the consignments arriving from European countries. Hence if the weight and volume of the consignment are comparatively less, but the value of the consignment is considerably high, it will be more advantageous to book the consignment by air. A few such cases are illustrated in the statement at Annexure-II. From the statement, it may be observed that booking the consignment through air instead of sea and vice versa can save a considerable amount of freight charges. The saving in the freight charges will also enable corresponding saving in the customs duty as well.

In view of the above, whenever quotations are invited from the foreign suppliers, we should obtain from them the details of approximate weight and volume of the consignment for determining the right and advantageous mode of dispatch of the consignment.

It is possible that sometimes, consolidated freight forwarders and shipping companies may charge higher freight charges than actuals (Author’s Query). Therefore, the freight charges claimed by the airlines/ consolidated freight forwarder and the shipping lines are to be examined critically and the freight charges are to be paid only after comparing the tariff for freight charges. The details of such efforts taken by Chennai Port Trust are available in the enclosed statement (Annexure-III).

It is important that freight charges should be paid and documentary proof enclosed along with the bill of entry, failing which, the freight charges will be taken as 20% on FOB value as per the Customs Act Section 14 of Customs Valuation Rules 1988 (7.1.8) (Author’s Query). Usually, freight charges are lesser than 20% of the FOB value, hence we should ensure that the freight charges are paid immediately on receipt of the freight bill and such documentary evidence should be attached to the bill of entry. Even in cases where the actual freight charges are more than 20% of the FOB value, the freight charges will be taken as 20% of the FOB value by the Customs for assessment purpose. We may also follow the same principle while declaring the freight charges to the Customs at the time of filing the bill of entry.

Customs Duty

Customs duty is levied based on the customs tariff. However, by interpreting the material classification with reference to the heading of the customs tariff, considerable amount of customs duty can be saved for which, the personnel dealing with the clearance of consignment should have a thorough knowledge of customs tariff and procedures etc. A statement of such savings effected in Chennai Port Trust is detailed in Annexure-IV.

In this connection, it is informed that the work of clearance of imported consignments is entrusted to the authorized customs clearing agents. Even though the agents will file the bill of entry and indicate the customs tariff heading, pay the customs duty and clear the consignments, it is the prime responsibility of the Materials Management or Commercial Department of the organizations to check whether the customs duty levied is based on the relevant customs tariff heading. Even if it is noticed that any excess customs duty is paid, the claim can be preferred with Customs for the refund of the excess customs duty paid, within six months from the date of bill of entry.

Conclusion

From the above, it is concluded that there is wide scope for minimizing the charges on insurance, freight and customs duty on imported consignments by adopting the methods mentioned above.

ANNEXURE – I
AIR INDIA – TARIFF (CONSOLIDATION RATES)
Minimum – 45 +45
1. Singapore to Sing. $ 75 8.5/Kg 6.3/Kg
Chennai
Minimum Less than More than More than
2. Berlin to 100 Kgs +100 Kgs + 300Kgs
Chennai EURO 76.6 4.35/Kg 2.81/Kg 2.56/Kg
3. Frankfurt to EURO 76.6 4.35/Kg 2.81/Kg 2.56/Kg
Chennai
4. Malmo (Sweden) SW.KR.600 59.46/Kg 24.00/Kg 21.80/Kg
to Chennai
5. London UK £ 50 6.01/Kg 3.53/Kg 3.07/Kg
to Chennai
6. Tokyo (Japan) J.YEN
to Chennai ¥ 11500 1610/Kg 1200/Kg 1046/Kg
Air India does not undertake consolidation from individual parties/ organisations.

                                                    ANNEXURE – II
SHIPPING CONSIGNMENTS FROM JANUARY – 1997 TO DECEMBER – 1999

NB: Air – Airfreight charges based on volume/weight whichever is higher. FCL Cargo cannot be airlifted in view of huge volume of consignment. Ship– If value of cargo exceeds USD 17,000/- (FOB value) 3% advalorem is charged for freight for European based consignments.