Lect 6 Materials Management - Import Purchase


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Part of Materials Management as taught to MBA students specialising in Operations.

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Lect 6 Materials Management - Import Purchase

  1. 1. Materials Management Lecture 6: International Purchase Udit Chaudhuri
  2. 2. Main Activities 1. Sourcing 2. Procurement 3. Documentation
  3. 3. Main Steps 1. 2. 3. 4. 5. 6. 7. Sourcing Negotiation Import Clearance / License Purchase Order / Contract Banking, Payment Shipment, Clearing & Forwarding Inland transport & receipt of goods
  4. 4. International Purchase - Impact 1. Laws of both countries, International Law 2. Changing regulations & tariffs 3. Severe commercial-legal liabilities 4. Impact on costs – Duties, Forex, Shipment 5. Needs research & planning with utmost care
  5. 5. India Regulatory Framework 1. Trade Policy - Ministry of Commerce 2. Banking, finance – RBI, World Bank 3. Duty, Tariffs, Taxes – Central Board of Excise & Customs, Ministry of Finance
  6. 6. Trade Policy – Why? 1. 2. 3. 4. 5. 6. 7. 8. To appreciate trade with other nations. To protect domestic market prevailing in the country. To increase the export of particular product which will help in expanding domestic market. To prevent the imports of particular goods for giving protection to infant industries or developing key industry or saving foreign exchange, etc. To encourage the imports of capital goods for speeding up the economic development of the country. To restrict the imports of goods which create unfavourable balance of payments. To assist or prevent the export or import of goods and services for achieving the desired rate of exchange. To enter into trade agreements with foreign nations for stabilizing the foreign trade.
  7. 7. Trade Policy – Points to explore 1. 2. Permissible, Restricted, Prohibited goods – ITC No., Compendium Local industry to be protected a. b. 3. 4. 5. Specific Indian industry sector to be encouraged – e.g. handicrafts, toys… local market Specific export sector to be encouraged – garments, leather, pharmaceuticals Trade agreements a. b. 6. Bilateral – India-US, India-EU, India-China … General – GATT-WTO, UNCTAD, UNIDO, GSP Industry Policy a. b. 7. Strategic – Nuclear, Defence, Petroleum… Economic – Petrochemicals, Fertiliser, Steel, Cement SSI, Export Promotion, Product-specific - Ministry of Industry / Others Any assistance, subsidies, Duty Drawback, concessions… Standards & Specifications
  8. 8. Banking & Finance 1. Foreign Exchange markets a. b. Over-valued and under-valued currencies Stable and unstable currencies 2. Forex Control Regulations a. b. Permissible sources of funds Permissible means of transfer – direct, via banks, on-line 3. Sources & Choices of Finance a. b. c. d. e. Buyer’s & Sellers Credit IFIs - World Bank, IMF, ADB, IDA, IBRD… International banks – Forex loans, Soft loans, Lines of Credit RBI and Commercial Banks, e.g. Exim bank, ICICI, IDBI, SIDBI… Various payment instruments available – L/C, IBR, International Drafts, Lease, Credit, Bill Discounting, Payment Gateway & Internet options
  9. 9. Customs 1. Law a. b. c. d. e. Customs Act, 1962 Foreign Trade (Development and Regulation) Act, 1992 Foreign Trade (Regulation) Rules, 1993 Foreign Trade (Exemption from application of Rules in certain cases) Order, 1993 Customs Tariff Act, 1975 2. Customs Tariff a. b. Basic Duty, CVD, Auxilliary, Cess… Draw-back, set-off, concession… 3. Procedures – Customs Manual
  10. 10. Other Sources of Info 1. Foreign Consulates & Embassies 2. Indian Consulates in other countries 3. Business & Industry Associations, Federations, Chambers of Commerce… 4. Trade Development organisations, UNCTAD, UNIDO, e.g. STC, MMTC… 5. Websites/portals as applicable
  11. 11. Other Matters 1. Logistic services 2. Clearing & Forwarding 3. Overseas transport & trans-shipment 4. Inland Transportation 5. Insurance
  12. 12. Common Terms of Import 1. Consignment Purchase – Importer makes payment to the overseas supplier only after sales to end user is made and payment received. – High risk to supplier. – Usually when supplier is trying to enter a new market. 2. Cash-in-Advance (Pre-Payment) – Importer must send payment to the supplier prior to shipment of goods. the goods will be as advertised. – Entire risk to importer. – Usually when buyer has poor credit rating / when goods are in short supply. 3. Down Payment – Importer pays the supplier a portion of the cost of the goods "in advance" when the contract is signed or shortly thereafter. – Induces supplier to start performance. – Risk: Supplier may not complete the execution.
  13. 13. Common Terms of Import 6. Open Account – Allows importer to pay at some specific date in the future and without issuing any negotiable instrument evidencing importer’s legal commitment. – When the importer/buyer has a strong credit history and is well-known to the seller. – When there are several sources for supply or when open account is the norm in the buyer's market. – No protection to exporter in case of non-payment. 7. Documentary Collections / Bank Draft – Transaction is settled by the bank through an exchange of documents, thus enabling simultaneous payment and transfer of title. – Cash Against Documents • Document against acceptance - Term Draft or against presentation Sight Draft • Remitting bank and Collecting bank are usually involved. – Importer is not obliged to pay for goods prior to shipment and the exporter retains title to the goods until the importer either pays for the value of the draft upon presentation (sight draft) or accept to pay at a later date and time (term draft) – Principal obligations are set out in the guidelines of the "Uniform Rules for Collection" (URC) drafted by the Parisbased International Chamber of Commerce.
  14. 14. Common Terms of Import Flow of a Documentary Collection Transaction 1. Exporter/drawer and Importer/drawee agree on a sales contract, including payment to be made under a Documentary Collection. 2. The Exporter ships the merchandise to the foreign buyer and receives in exchange the shipping documents. 3. Immediately thereafter, the Exporter presents the shipping documents with detailed instructions for obtaining payment to his bank (Remitting bank). 4. The Remitting bank sends the documents along with the Exporter's instructions to a designated bank in the importing country (Collecting Bank). 5. Depending on the terms of the sales contract, the Collecting Bank would release the documents to the importer only upon receipt of payment or acceptance of draft from the buyer. (The importer will then present the shipping documents to the carrier in exchange for the goods). 6. Having received payment, the collecting bank forwards proceeds to the Remitting Bank for the exporter's account. 7. Once payment is received, the Remitting bank credits the Exporter's account, less its charges.
  15. 15. Common Terms of Import Bank-to-bank transactions are suitable when: 1. When the exporter and importer have a well established relationship 2. When there is little or no threat of a total loss resulting from the buyer's inability or refusal to pay 3. When the foreign political and economic situation is stable 4. When a letter of credit is too expensive or not allowed
  16. 16. Common Terms of Import 6. Letter of Credit – Formal bank letter, issued for a bank's customer, which authorizes an individual or company to draw drafts on the bank under certain conditions. – Instrument through which a bank furnishes its credit in place of its customer's credit. – The bank plays an intermediary role to help complete the trade transaction. – The bank deals only in documents and does not inspect the goods themselves. – The banks provide additional security for both parties in a trade transaction by playing the role of intermediaries. The issuing bank works for the importer and the advising bank works for the exporter. – The banks assure the seller that he would be paid if he provides the necessary documents to the issuing bank through the advising bank. – The banks also assure the buyer that his money would not be released unless the shipping documents evidencing proper and accurate shipment of goods are presented. 1. A letter of credit can not prevent an importer from being taken in by an unscrupulous exporter. 2. Compared to other payment forms, the role of banks is substantial in documentary Letter of Credit transactions. 3. A letter of credit may be Revocable or Irrevocable, Confirmed or Unconfirmed
  17. 17. Letter of Credit • • • Preferable – An L/C should be confirmable by a first class banker, for assurance to exporter Under 1993 revision of Uniform Customs & Practices, L/C is irrevocable unless specifically contracted otherwise An L/C contains: 1. Name of issuing bank – must be acceptable to exporter 2. Name and full address of beneficiary 3. Amount of credit – Collecting bank may accept exact amount by the quantity of goods shipped – for flexibility, “about ___” may be mentioned. 4. Name of importer – may be of little consequence to exporter if the issuing bank is sound 5. Tenor of the Draft or Drafts to be drawn under the L/C 6. List of accompanying documents – Transfer, Insurance, Commercial, others 7. Expiry date – by which the transaction will be completed 8. Type of credit – revocable or irrevocable 9. Any other conditions stated by the importer
  18. 18. Letter of Credit
  19. 19. Import Documentation 1. 2. 3. 4. 5. 6. 7. Bill of Lading Commercial Invoice Certificate of Origin Weight Certificate Packing List Insurance Policy Markings on packages
  20. 20. Import Documentation Bill of Lading 1. 2. 3. Evidence of despatch by exporter Most important document accompanying Bill of Exchange while carrying out L/C transaction Combines – 1. 2. 3. 4. 5. Carrier’s goods receipt, Contract between shipper & carrier, to transport the goods and deliver to consignee or order Document giving the holder title to the goods mentioned in it Signed by ship Master / Owner / Agent – set of 3 or 4 copies Mentions - Number, date & place of shipment, names of vessel, consigner & consignee, port of destination, contents, quantity and amount of freight to pay or paid; No. of packages and their identifying marks.
  21. 21. Import Documentation Negotiability of B/L • Delivery is subject to the consignment not being affected by any fraud or malpractice, hence quasi-negotiable Clean & Foul B/L • Clean – if goods are in good condition, with no qualifications • Foul – if B/L carries remarks of damage, defective packing etc at the time of receiving by the shipper • Foul B/Ls are not acceptable but protect shipper from claims arising due to defect/damage/deficiency of packing
  22. 22. Import Documentation Commercial Invoice • Describes merchandise, price, transaction details: – Names of buyer, seller, vessel, port of discharge, Shipping, export and import permit nos, No. of contract, invoice… – Financial terms of sale, e.g. if under L/C, if sight drafts given… – No. of packages, their identifying marks and numbers – Itemised list of goods and prices, total net value after deducting trade discount or commission – Other charges - packing, freight, insurance… • Double check: actual goods Vs invoice, invoice Vs order • Non-negotiable, not document of title • Checked by buyer, banker, shipper and agents involved
  23. 23. Import Documentation Certificate of Origin • A printed form, completed by the exporter or its agent and certified by an issuing body, attesting that the goods in a particular export shipment have been wholly produced, manufactured or processed in a particular country. • To be produced for Customs examination • Usually required where goods from certain countries receive special preference, quota, entitlement or embargo • “Certified Invoice” - where Certificate of Origin is endorsed at the back of an invoice
  24. 24. Import Documentation Packing List • Nature of contents, quantity and quality of goods in each package of a shipment • Helps importer to identify the goods and check against Purchase Order • Required by banks if they have any interest in the goods • Facilitates Customs clearance
  25. 25. Import Documentation Marine Insurance Policy • Contract between insurer & insured – to indemnify insured against losses incurred from “perils of the sea” or other risks as covered • Insurable interest – Insurer gains by existence of goods and stands to lose if damaged or lost • Insurer – insurance company or underwriter firm • Covers the risk from origin to delivery of consignment
  26. 26. Import Documentation Markings on packages • Identification of each package in Packing List • Address, dimensions, weight, other particulars • Buyer may issue specific instructions
  27. 27. Price & Transfer Terms • • • • • "Ex works" means the seller's only responsibility is to make the goods available at the seller's premises, i.e., the works or factory. The buyer bears the full costs and risk involved in bringing the goods from there to the desired destination. Ex works represents the minimum obligation of the seller. "F.O.R." and "F.O.T." mean "free on rail," “free on road” or "free on truck." The risk of loss or damage is transferred when the goods are loaded onto the train or truck. "F.A.S." or "free alongside ship" requires the seller to deliver the goods alongside the ship on the quay. From that point on, the buyer bears all costs and risks of loss and damage to the goods. "F.O.B." or "free on board." The goods are placed on board the ship by the seller at a port of shipment named in the sales agreement. The risk of loss of or damage to the goods is transferred to the buyer when the goods pass the ship's rail (i.e., off the dock and placed on the ship). The seller pays the cost of loading the goods. “FOB Airport” The seller fulfills its obligation by delivering the goods to the air carrier at the airport of departure. The risk of loss is transferred from the seller to the buyer at such time.
  28. 28. Price & Transfer Terms • • • “FCA or Free Carrier” Applies to multimodal transport, such as container or rollon, roll-off traffic by trailers and ferries. It is based on the same name principle as F.O.B. (free on board), except the seller fulfills its obligations when the goods are delivered to the custody of the carrier at the named point. "C. & F." or "cost and freight" (also abbreviated CFR) requires the seller to pay the costs and freight necessary to bring goods to the named destination, but the risk of loss or damage to the goods, as well as any cost increases, are transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment. Insurance is the buyer's responsibility. "C.I.F” or "cost, insurance, and freight"--is C. & F. with the additional requirement that the seller procure transport insurance against the risk of loss or damage to goods. The seller must contract with the insurer and pay the insurance premium. Insurance is generally more important in international shipping than domestic shipping.
  29. 29. Price & Transfer Terms • • • • • • • “CPT” or "freight/carriage paid to" can be used for all modes of transportation, including container or roll-on roll-off traffic by trailers and ferries. “CIP” or “Freight/Carriage and Insurance Paid To” - same as "freight/carriage paid to" but with the additional requirement that the seller has to procure transport insurance against the risk of loss or damage to the goods during the carriage. “DES Ex Ship” - seller shall make the goods available to buyer on board the ship at the destination named in the sales contract. The cost of unloading the goods and any customs duties must be paid by the buyer. “DEQ Ex Quay” - seller agrees to make the goods available to the buyer on the quay or the wharf at the destination named in the sales contract. “DAF” or Delivered at Frontier” - seller's obligations are fulfilled when the goods have arrived at the frontier but before the customs border of the buyer’s country. “DDU” or “Delivery Duty Unpaid” - seller fulfills his obligation to deliver when the goods have been available to the buyer uncleared for import at the point or place of the named destination. There is no obligation for import clearance. “DDP” or “Delivery/Duty Paid” - seller's maximum obligation. The term "DDP." is generally followed by words indicating the buyer's premises.
  30. 30. Customs Tariff 1. Part – I – – 2. Customs Tariff Act 1975 and General Rules Interpretation Notifications, e.g. NCCD, Edu Cess… Exemptions, etc Part – II – – 3. First Schedule - Import Tariff – Product-wise Chapters 1 to 98 (2012-13) General Exemptions Part – III – 4. Second Schedule – Export Tariff & Appendix – 1 Part – IV – – Anti-dumping Duty – Chapter-wise Notifications Alphabetic listing
  31. 31. Customs Tariff
  32. 32. Specimen Duty Calculation Calculation of customs duty payable is as follows, w.e.f. 17-3-2012 Seq. (A) (B) Duty Description Assessable Value Rs Basic Customs Duty Duty % (C) Sub-Total for calculating CVD ‘(A+B)’ (D) (E) (F) (G) CVD ‘C’ x excise duty rate Sub-total for edu cess on customs ‘B+D Edu Cess of Customs – 2% of ‘E’ SAH Education Cess of Customs – 1% of ‘E’ (H) Sub-total for Spl CVD ‘C+D+F+G (I) (J) (M) Special CVD u/s 3(5) – 4% of ‘H’ Total Duty Total duty rounded to - Notes – Buyer who is manufacturer, is eligible to avail Cenvat Credit of D and I above. A buyer, who is service provider, is eligible to avail Cenvat Credit of D above. . A trader who sells imported goods in India after charging Vat/sales tax can get refund of Special CVD of 4% i.e. ‘I’ above Rs. AmountTotal Duty 1,000 10 100.00 100.00 1,100.0 0 12 132.00 132.00 232.00 2 4.64 4.64 1 2.32 2.32 1,238.9 6 4 49.56 49.56 288.52 289
  33. 33. Customs Clearance 1. 2. 3. 4. 5. 6. 7. Landing – Customs Notified Ports Import-Export Code – by importer Manifest – IGM to be filed by carrier EDI System to facilitate, Risk Management System – to strike balance between facilitation and enforcement First Check by importer Bill of Entry – Home Consumption / Warehousing (auto-generated if EDI System) Documents to accompany Bill of Entry: (Declarations in electronic format in EDI) (a) Signed invoice (b) Packing list (c) Bill of Lading or Delivery Order/Airway Bill (d) GATT valuation declaration form (e) Importers/CHA’s declaration (f) Letter of Credit, wherever necessary (g) Insurance document (h) Import license, where necessary (j) Industrial License, if required (k) Test report in case of items like chemicals (l) DEEC Book or DEPB in original, where relevant (m) Catalogue, technical write up, literature for machineries, spares or chemicals, as applicable (n) Separately split up value of spares, components, machinery (o) Certificate of Origin, if preferential rate of duty is claimed
  34. 34. Customs Clearance 7. Noting B/E Vs IGM, forwards to concerned Appraising Group in Customs House – Shed Appraiser to examine the consignment 8. Filing of Declaration – as required by importer 9. Self Assessment u/s 17 of Finance Act, 2011 10. First Check & Second Check 11. Payment of Duty 12. Execution of Bond – Bonded Clearance 13. Order of Clearance, Gate Pass 14. Inland transportation, despatch to Container Depot / Freight Station / Customs Warehouse / Importer’s location
  35. 35. Materials Management Lecture 6: International Purchase Thank you