What is Shipment?
Shipment implies the act of shipping goods. In other words, shipment is the cargo transported from one destination to another. Shipment is also called as consignment.
Once an order is confirmed, an exporter has to book a shipping company to deliver the goods. The exporter must contact shipping companies that are bound for the port of destination of the goods. Exporters prefer shipping over airways for dispatching goods. A shipment depends upon the physical size of the products.
Table of Content
The word ‘shipment’ is extensive and covers all the procedural aspects from the time a product leaves an export warehouse till it is loaded in a ship. An exporter’s clearing-and-forwarding agent is responsible for forwarding the consignment/shipment. The agent establishes a constant network with the shipping companies and helps the exporter in managing the shipment of the ordered goods. When a shipping agency receives an exporter’s application for booking space, the agency evaluates the available space and accepts the application if there is space for allotment.
There are two types of acceptance: shipping advice and shipping order. A shipping advice informs an exporter that the goods are accepted on the ship. But in case of a shipping order, a shipping company is liable to accept the cargo, and in case of failure, the shipping agency can be sued for loss or damages. The commanding officer of a ship is instructed about receiving the exporter’s goods. The original copy of the acceptance is given to the exporter, while the duplicate copy is sent to the commanding officer.
When the goods are ready for dispatch, they are marked according to the instructions provided by the buyer, if any. The consignment should follow the shipping marks of the consignee, the port of destination, measurements, the country of origin and other instructions given by the buyer.
The International Trade Forum has issued the following important rules in this respect:
- An exporter should follow the markings and they should appear in a specific order. The important information should be displayed in oblong frames, with lines 1.5 centimetres thick. The subsidiary data must be put in a different kind of frame.
- On a large package, the declaration must be placed on two contiguous sides, and for consignments bound together, on a pallet on the top. The handling instructions are needed to be placed on all four sides.
- The letters should be at least 7.5 centimetres high for essential data and at least 3.5 centimetres for subsidiary data.
- The size of the symbols should be proportionate.
- All important data are written in black and secondary data in a less prominent colour. Red and orange-coloured letterings are used for hazardous objects. Food packets are marked with nontoxic dyes.
- Labels should only be used on individual packages or parcels.
- The markings must be made by a stencil or by branding or by pencil or brush without a stencil.
- The surface to be marked should be smooth and clean.
- The figures should indicate the total number of packages in the consignment.
- The name of the ship and the number of the Bill of Lading should be shown whenever possible.
Most exporters deploy services of the international freight forwarders to accomplish the task of shipment in an impeccable manner. Freight forwarder agents are intermediary experts that help to move the products across different countries and cities. They are quite familiar with the import rules and regulations of the foreign countries. Freight forwarders prepare, reviews and process customs and other documentation such as commercial invoice, shipper’s export declaration, bill of lading.
When the order is confirmed, the freight forwarder takes extra care to ensure that the documents are ready especially in cases when the letter of credit is involved. Packaging is a crucial aspect of shipping as exporters should understand that packaged goods have to be transferred safely over long distances. During the journey, there may be transit damages due to shocks, jerks, loading , unloading and mishandling. Cargo is carried in containers and break bulk depending on the volume and size of cargo.
With regard to packaging, buyers impose the following requirements on sellers:
- The packaging should be done in strong containers so that there are no problems in the long run.
- The weight needs to be properly distributed in the container without any hassles.
- All the packaging must be done with the help of moisture resistant material.
- In order to prevent theft or pilferage, one should not write the brand name on the packages. Straps, seals, or shrink wrapping are some of the steps that can be taken to protect the products from losses.
Weather conditions, careless handling by carriers and other hazards create lots of problems for the exporters. Consignments must be insured either by the importer or by exporter to protect the losses due to damages, theft, pilferage etc. All the shipments by sea are covered under the marine cargo insurance. Carrier liability is controlled by the international agreement between various countries. Apart from that, insurance arrangement is the responsibility of the buyer or seller based on the Incoterms agreed.
Quality Control and Preshipment Inspection
World Trade Organisation (WTO) came into being in the year 1995, which provided a framework for negotiation and formulation of trade agreements. As per the provision of WTO, all the countries should impose strict quality regulations as far as the imported food was concerned. Under Section 3 of the Export Act (Quality and Inspection), 1963, Government of India established Export Inspection Council of India (EIC), which was an apex body.
It was set up to facilitate the rapid development of the export trade by stressing on quality control and pre-shipment inspection. This act gives authority to Central Government for reporting the commodities and their minimum standards for exports, which are generally international standards of importing country for quality country.
EIC works in the following sectors:
- Fish & fishery products
- Egg products & honey
- Milk products
- Raw (chilled/frozen) Meat, Processed Meat and Animal Casings
Prominent functions of the EIC are as follows:
- Suggest remedies to the Central Government so that quality control and inspection can be strictly enforced.
- Draw an advance programs for quality control, for inspection of the commodities for exports.
Export Inspection Council of India (EIC)
The functions of the Export Inspection Council of India (EIC) are as follows:
- The functions of the Council shall generally be to advise the Central Government regarding measures for the enforcement of quality control and inspection in relation to commodities intended for export and to draw up programmes therefor, to make, with the concurrence of the Central Government, grantsin-aid to the agencies established or recognised under section 7 and to perform such other functions as may be assigned to it by or under this Act.
- For the purpose of performing its functions, the Council may co-opt as members such number of persons as it thinks fit who have special knowledge and practical experience in matters relating to any commodity or trade therein and any such person shall have the right to take part in the discussions of the Council but shall not have the right to vote and shall not be a member for any other purpose.
- The Council may also constitute specialist committees for conducting investigations on special problems connected with its functions.
- In the performance of its functions under this Act, the Council shall be bounded by such directions as the Central Government may give to it in writing from time to time.
Powers of the Central Government in Regard to Quality Control and Inspection
If the Central Government, after consulting the Council, is of opinion that it is necessary or expedient so to do for the development of the export trade of India, it may, by order published in the Official Gazette –
- notify commodities which shall be subject to quality control or inspection or both prior to export;
- specify the type of quality control or inspection which will be applied to a notified commodity;
- establish, adopt or recognise one or more standard specifications for a notified commodity;
- prohibit the export in the course of international trade of a notified commodity unless it is accompanied by a certificate issued under section 7 that the commodity satisfies the conditions relating to quality control or inspection, or it has affixed or applied to it a mark or seal recognised by the Central Government as indicating that it conforms to the standard specifications applicable to it under clause(c).
Following are the systems that are followed by EIC:
- Consignment wise inspection (CWI)
- In-process quality control (IPQC)
- Self-certification (SC)
- Food Safety Management Systems based Certification (FSMSC)
These systems are applied in the areas of fish & fishery products, egg products, milk products, poultry products and honey. In CWI, a sample is drawn and inspected against the set standards. On the other hand, the other three schemes IPQC, SC and FSMSC follow a systems approach, which involves approval of the items followed by periodic surveillance.
Custom Formalities
India has liberalised its export and import regime and with the advent of e-commerce, any bill or file can be applied electronically so that the tasks are accomplished quickly and effectively. Various custom formalities include the following:
Applying for the Shipping Bill
Shipping bill is prepared by the exporter to move to the shipment for export. This can be prepared online through customs website or manually as the case may be. The shipping bill number is issued by the customs. The goods are moved to airport, sea port, etc. where the export custom procedure and formalities are completed with custom officials. The three copies of shipping bill are printed namely Exporter’s copy, Exchange control copy submitted to the Reserve Bank of India (RBI) and shipping carrier to transfer the cargo to the intended destination. These copies are signed by the custom officials.
Filing Export General Manifest (EGM)
After the movement of goods from the country, Export General Manifest, a legal document is filed by carrier of goods with customs department. This document is used by government authorities as proof of export and help exporters to claim export benefits based on such document, along with other documents like bill of lading as proof of exports.
For obtaining customs clearance, an exporter or clearing (or forwarding) agent has to produce the following documents:
- Invoice
- Packing list
- Contract with the overseas buyer
- Copy of the letter of credit, if required
- Export Inspection Certificate, if any
- AR-4/AR-4A form
- Gr-1/EP form
- Shipping Bill with the necessary documents
- In case of deferred payment scheme, a copy of approval from the Reserve Bank of India
- Other such documents of declaration as may be required by the concerned authorities.
The customs authorities review and cross-check the shipping bill and other documents. The consignment is passed after thorough examination by the officer at the dock or the air staff. Next,the shipping bill is presented to the cargo supervisor for permission to export.
Factory Stuffing Permission
Customers can opt for Factory Stuffing permission for full container loads. A prescribed application will be submitted to the customs through which the export is carried out. The customs will give necessary permission and the local Central Excise Department will carry out the inspection and certify the documents for factory stuffing. The customs will check the seal of the containers once they reach the customs port and permit the export.
Exchange Control Formalities
The foreign exchange market is controlled in India by FEMA, 1999 (managed by RBI). This act replaced the old act, the Foreign Exchange Regulation Act (FERA), which was introduced in 1972. FERA was amended in 1993. However, this act was not successful, and therefore, was replaced by FEMA, which became operational in 2000.
The main objective of FEMA is to promote the development and maintenance of the FOREX market in India. It also endeavours to promote external trade and payments. FEMA is applicable to the whole of India. This act is also applicable to individuals and their offices that are outside India.
There are various facets of exchange control formalities and they are as follows:
- Office of the Directorate General of Foreign Trade (DGFT) plays a very important role in the regulation of physical export of commodities. Export of certain commodities might be subjected to certain restrictions from the RBI. The exporter should comply with the law, according to the requirements and specifications of the concerned department.
- Foreign Exchange Rules of 1974 provide range of export declaration forms called VP/COD forms. The GR form is suitable for the export to all the countries except the ones by post.
- PP form has to be filled in the company when goods are exported to other countries by the parcel post. The only exception is when export is marked as value payable or Cash on Delivery (COD).
- For exporting in different countries, COD forms are considered very important. It can be posted with the help of parcel post for generating revenues through the postal modes that are value payable basis or cash and delivery basis.
Foreign Exchange (FOREX) Control in India
The regulation and management of FOREX involve the following:
- Dealing in Forex: Any FOREX deal has to be done with the general or the special permission of RBI. This means that no person can make any payment outside India, or receive any payment from outside India, or acquire any asset outside India.
- Holdings in Forex: These are the restriction that no person shall hold, own, possess or transfer FOREX. A person shall also not own any immovable property outside India without the prior permission of RBI.
- Dealings in export-import: Exporters and importers are bound to provide the fair details of the export or import.
- Contravention: In case of any contravention amounting up to ₹2 lakhs, a penalty of three times the amount involved in the transaction is applicable. A penalty of ₹500 is applicable if the contravention continues. If the penalty is not deposited within 90 days, the person is liable for civil imprisonment of six months in case the amount is less than ₹1 crore. If the amount is more than ₹1 crore, then imprisonment can be for up to 3 years.
Negotiation of Documents
When the seller has conducted the shipping of cargo in the buyer’s country, it is important to consolidate all the documents under the Letter of Credit (LC) scheme. After this, the seller submits the documents to the bank that analyses them and claims benefits including advance or discounts in the transaction. With the help of export LC negotiation , export enterprises speed up their capital turnover and expand export volume There are three principles that help to create the LC:
- Banks deal with the documents and not with the export of the goods.
- Rules have to be strictly complied with while issuing LC.
- LC is exclusive of the sales of contract or other agreements between different parties.
The negotiable documents are the following:
- Letter of Credit
- Commercial Invoice
- GR-1 Form
- Certificate of Origin
- Marine Insurance Policy
- Bill of Lading
According to the foreign exchange rules, an exporter has to submit the negotiated shipping documents to the bank within 20 days from the date of shipment of goods. Then, the bank forwards the documents to the buyer bank for further action.
Following discrepancies may occur in case of document negotiation, which leads to delay in payment:
- Presenting documents after LC expiry date
- Presenting documents after specified time period
- Drawing bill of exchange on the wrong party
- Giving wrong information of goods and shipping term in LC
- Presenting incomplete documents
An exporter before presenting the documents should check the terms and conditions, description of goods, amount stated in the LC correspond to the agreed sales contract.
What is Insurance?
Insurance is a mechanism to reduce the effect of loss caused by a variety of risks. The underlying principle of insurance is pooling funds from a large number of people and compensating for losses incurred by some people within the pool. Insurance does not guarantee prevention of a loss but it is a method to compensate for that loss. Exported goods are exposed to many risks. To nullify these risks, a consignment is covered under various types of insurance.
The risk cover depends on the cost of goods being exported, cost of insurance and terms of sale. The insurance coverage is done either by the importer or exporter based on the INCOTERMS (international commercial terms) agreed between the buyer and seller. There are three types of insurances namely marine insurance, cargo insurance and export credit insurance, which are explained in detail in the next sections.
Marine Insurance
Marine insurance is a contract or an agreement between the insurer and the assured wherein the insurer undertakes in writing to indemnify the assured against the losses incidental to marine adventure. It covers the loss or damage of ships, cargo, terminals, and any transport or cargo used for transferring, or keeping products between the points of origin and final destination.
There are four types of marine insurance as shown in Figure:
Hull Insurance
It includes insurance of the vessel and all its equipment such as furniture and fittings, machinery, tools, fuel, etc. The owner of the ship has a huge responsibility in hull insurance and is under immense impact.
Cargo Insurance
It includes the insurance of the cargo or goods that are loaded in the ship and also include the personal belongings of the crew and passengers. (This will be discussed in detail in the next sub section)
Freight Insurance
It is protection against the loss of freight. In most cases, under the terms of the contract, it is the owner of goods who is bound to pay freight once the goods are safely delivered at the port of destination. The shipping company loses the freight when the ship is lost on the way or the cargo is damaged or stolen.
Liability Insurance
It refers to the marine insurance wherein the insurer undertakes to indemnify against the loss which the insured may suffer on account of liability to a third party caused by collision of the ship and other similar hazards.
Cargo Insurance
The cargo insurance is taken as a risk cover to protect cargos from any unforeseen dangers. Insurance cover provided under cargo insurance depends on various conditions, such as basic conditions and full conditions. Basic conditions during transportation are fire, explosion, traffic accident, washing overboard, and losses. Sometimes, basic conditions also comprise other loss events, such as breakage, theft and wetting. Full conditions insurance, on the other hand, covers abrupt external and unforeseeable losses.
Following are the perils that can be covered under cargo insurance:
- Maritime Perils: These perils are the creation of god or man. For example, events earthquake, collision, storm, lightning, and entry of sea water into the vessel, volcanic eruption, rain water damage and washing overboard of cargo can be termed as god’ created peril. On the other hand events such as fire, smoke, piracy, fraud,sabotage, vandalism etc. are man-made perils.
- Extraneous Perils: These can be termed as incidental perils as they are caused due to faults in loading, carrying and unloading. For example rough handling, leakage, breakage, and pilferage are extraneous perils.
- War Perils: These perils are associated to losses that may occur due to events like civil war, revolution, rebellion and detainment of the carrier, etc.
- Strike Perils: These perils occur as a result of damage or loss due to lockouts, strikes, labour disturbances, riots, civil commotion and by any terrorist acting from a political motive.
Export Credit Insurance
Export credit insurance protects the exporters of products and services against the risk of non – payment by importers. These are provided by the private commercial risk insurance companies, Export-Import Bank of the United States and the government agency.
There are many advantages that an exporter accrues after purchasing the insurance that are as follows:
- Lowering the risk: The bank offering insurance is responsible for covering the risk of the sellers in the case of bankruptcy of the buyers or political risk, such as war.
- Providing credit to the buyers: It helps to provide a list of international buyers with line of credit assisting them to make outstanding payments. By using the open account feature, it is possible to increase the sales effectively.
- Accessing the working capital: Insurance is used to improve the quality of the balance sheet by converting the export related accounts into the receivables that are insured by the government. Lenders can provide money against the guarantee to enhance the flow of the working capital.
- Support for environmentally beneficial exports: Support is provided to exports that are environmentally beneficial and use green technologies. For instance, exports of renewable energy sources are encouraged by the export important banks. Short term and long term credits are provided to the industries.
Export Incentive
Indian exporters enjoy various export incentives. These make exports more attractive for an individual or organisation. Export incentives are the concessions provided to the exporters because they help to earn valuable foreign exchange. Nevertheless, the companies face bottlenecks in realising them to a greater extent. There are multiple organisations from which an exporter has to take permissions before qualifying for the incentives. Although incentives are available after shipment, the company should provide accurate documentation of the materials being exported.
Cash Compensatory Support
The Government of India runs a scheme of cash compensatory support for certain products to help exporters meet the global competition in the export market. It is calculated on a specified product on the basis of the percentage of the FOB value.The amount of cash compensation applicable to various products is declared through the respective export promotion council or commodity board. As per this scheme, 95% of the amount claimed is payable on initial scrutiny of the application by the licensing authority and the rest 5% is payable after thorough scrutiny.
Import Replenishment
As per this scheme, the quantum of import is calculated on the basis of a percentage of the net Free On Board (FOB) value of export. The exporter has to submit an application for replenishment along with the Certified Customs Specialist(CCS) application or separately in the prescribed proforma on the basis of quality to the export licensing authority.
To simplify this procedure, the government now allows the processing of application for import replenishment license against export. An exporter registered under this scheme is issued a license for 100% of the amount claimed. Any deficit or excess amount is adjusted in the next application. The scheme is available for import of components, packing and raw materials and consumables.
The application for cash assistance and import replenishment should be submitted along with the following documents:
- A copy of the shipping bill duly stamped and endorsed on the reverse and signed by the customs authorities
- A commercial invoice duly certified by the negotiating bank
- Form 1/bank certificate in original
- A statement of export for which an import replenishment licence is claimed, as well as the statement of export for the period for which cash compensation is claimed
All these documents need to be checked and verified by a professional chartered accountant (CA). The CA should check the particulars given in the statement of export regarding cash compensatory assistance and Import Replenishment Concession. The CA must issue a separate certificate for both types of assistance.
Duty Drawback/Excess Duty Refund
Duty drawback is the rebate on custom duty and central excise duty that is payable on all raw materials, components and consumable items used in manufacturing goods (as per Custom Act,1962). To avail duty drawback, an exporter should submit an application to the Assistant Controller of Drawbacks for an examination of the goods under drawback.
The goods are inspected by the customs at the factory on payment of extra charges or at the dock, as the case may be. An application with the full details of shipment needs to be submitted for this purpose. Exporters are entitled to a refund of drawback of excise duty on the products they export.
