A few tips to save cost on import

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 (Authors 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 (Authors 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

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 (Authors 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) (Authors 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.