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Maritime Law

Understanding Customs Clearance Process in Shipping

Airports, seaports, and land ports of a country are its entry and exit points—people and cargo move in and out of a country through these gateways. Typically, while the Immigration department of a government keeps track of passenger movement through these entry-exit points, the Customs department monitors goods coming in and going out of these ports.

From a buyer’s perspective, goods brought in from another country are called imports, while those sold to an overseas customer are called exports. Imports and exports are essentially the transfer of goods between different countries.

Customs Department

Imports and exports are monitored by laws enforced by a country’s Customs department, following government policies. Different countries have organizations that formulate guidelines and rules for imports and exports. For example, it is the DGFT (Directorate General of Foreign Trade)in India. At the same time, in the US, it is the US Department of Commerce through the BIS (Bureau of Industry and Security).

A country’s customs department, a government-appointed body, will have its intelligence system, investigation methods, infrastructure for patrolling, enforcement, and other preventive measures. The customs department collects duties and tariffs on imports as well as exports. Generally, all a country’s ports connected to international destinations will have customs offices to carry out these functions.  A country’s customs department is empowered to confiscate goods, dispose of them as necessary, or make arrests.

Import and Export

Different countries may have a different set of rules when it comes to imports and exports. Some countries allow for the unfettered import of goods legally allowed into the country, while restrictions for bringing in or sending out certain types of goods may apply in other countries.

All the goods that are imported or exported have to be declared to the customs. To import goods, the specified customs duty has to be paid to the customs department to obtain the release of the goods. Until this payment is made and the customs release goods, it is held in storage by the customs department. This storage area is known as the Customs Bonded area.

Goods can be exported only after making related payments to the customs department. The importer or exporter may carry out all these formalities or appoint a government-licensed clearing agent or a freight forwarder (also known as a Customs Broker).

A clearing agent represents the party importing the goods and acts on its behalf. He takes care of all the ports and customs-related work for clearing the goods and getting them delivered to the importer. Similarly, the freight forwarder acts on behalf of the exporter to ensure that goods are exported on time, following government rules and regulations.

Customs Clearance

The customs clearance process may be common globally. However, depending on the nature of goods, some may have special requirements. Typically, customs clearance is getting the imported goods customs-cleared for delivery to the importer’s premises for sale or reprocessing.

It involves preparing and submitting documents required for customs clearance, arranging an inspection, paying customs duty, and collating all the documents to show that the goods have been cleared correctly following customs rules and regulations. Once these steps are followed, the imported goods can be cleared from the port or customs bonded warehouse to the customer’s premises.

Harmonized System Classification (HS)

Goods traded globally are classified by the World Customs Organization (WCO). This globally recognized classification, the HS Classification (Harmonized System Classification), is used to levy customs duties and other taxes.

HS codes consisting of a minimum of six digits is a unique numbering system that references sections, chapters, headings, and sub-headings of the harmonized coding system. It is common to find another two to four digits added to this number that are country-specific.

 An importer of goods or his clearing agent has to ensure that the goods are shown under the correct classification and duties, and taxes are calculated accurately. Wrong classification of goods can result in overpayment or underpayment of duties and taxes.

Besides, correcting incorrect classifications or miscalculations may be time-consuming, often leading to delays in clearance. Customs departments of most countries have special software that can be accessed by licensed clearance agents and freight forwarders for processing documents and payment of customs duties and taxes.

Documents Required for Customs Clearance

Typically, the following documents are required to clear a sea freight consignment:

  • Purchase order of the buyer
  • Commercial invoice issued by the seller
  • Packing list
  • Bill of lading or seaway bill issued by the shipping line transporting cargo or its representative
  • Certificate of Origin issued by the Chamber of Commerce of a country or a body authorized by the government
  • Insurance certificate
  • Bill of Entry prepared by the clearing agent or the buyer
  • Importer’s license of the buyer

Most of the above documents are commonly used in trading – exports, and imports and exchanged between the buyer and seller. It may be mandated by the relevant authorities, too. While the above list is self-explanatory, let us look at some specific documents used in imports and exports.

Bill of Lading or Seaway Bill

This is the contract of carriage between the exporter of goods (or the seller) and the shipping company transporting the goods. Most bills of lading are negotiable contracts. However, seaway bills are non-negotiable and deliverable only to a specific party. These legal documents are proof of ownership of the cargo.

Certificate of Origin

As the name implies, this document certifies the country where the goods meant for export are made. A Certificate of Origin is usually issued by the Chamber of Commerce or other government-appointed bodies such as the Trade Council.

Bill of Entry

A bill of entry of an import consignment will contain all the information about the goods. It is prepared by the clearing agent or the importer and has essential details of the import, such as:

  • Name and address of the importer
  • Import license number
  • The clearing agent’s registration code
  • Country of origin of the goods
  • Details of the vessel carrying the consignment
  • Customs duty and other taxes paid by the clearing agent etc.

The bill of entry may be submitted before the arrival of goods at the port or within 30 days of arrival. A customs officer will verify and confirm it, after which the clearing agent pays all applicable duties and taxes. Any corrections or changes that may be required will have to be made at this stage. Once it is all found to be in order, the customs officer will permit the movement of goods out of the customs storage area.

Some of the documents mentioned above may be common for exports and imports. Besides, other documents may be required for importing a particular special classification of goods. Examples of such documents are technical details reports, test reports, etc.

In India, the customs department comes under the Department of Revenue, Ministry of Finance. The Indian Custom’s Compliance Information Portal (CIP) provides details of customs procedures and compliance requirements for imports and exports. Some of the vital information that can be found in this portal are:

  • Contact details of regulatory bodies, their websites
  • Item-wise customs tariffs
  • Commodity-wise customs duties and taxes
  • List of customs offices, seaports, airports, and land ports serviced by it.

Source: Marine Insight

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Maritime Law

What is a Logistics Cycle?

What is a logistics cycle? We know that logistics is all about the efficient coordination of activities involved in the procurement and redistribution of goods and materials.

Logistics mainly comprises of but is not limited to procuring goods or materials, storing them, and redistributing to customers.

Trading activities of most business organizations across the world go through the logistics cycle. It may include various other ancillary activities such as transporting, packaging, packing, labelling, etc., to name a few.

Manufacturers, distributors, and their customers may have different logistics requirements.

The logistics cycle should be viewed as a complete list of activities from procurement of goods or materials to their final delivery to customers.

The following main activities form a logistics cycle:

  • Procurement
  • Transport and delivery
  • Warehousing – receipt and storage
  • Redistribution and reverse logistics
  • Customer service

These activities have to be coordinated and handled with utmost care for the seamless transfer of goods between the seller and buyer.

Logistics organizations have to ensure that costs are kept at a minimum without sacrificing the quality of their service.

Increasing the customer base is the primary goal of any logistics organization. This is achieved by providing exceptional services at a reasonable cost while maintaining the profitability of the organization.

Let us look at the main components of a logistics cycle.

Components of a logistics cycle

Procurement

Securing or sourcing materials required to meet the demands of a business is called procurement. It could be raw materials for production or redistribution or finished goods for redistribution.

Procurement is sometimes treated as a separate function from logistics. But logistics experts have pointed out that it can often lead to supply chain disruptions in the form of resource shortages or wastage.

This results in higher costs to the organization. Running short of stocks as well as being overstocked are both harmful to an organization’s health.

Forecasting

Seasonality, economic fluctuations, or the activities of a competitor can be dealt with to a large extent through an effective forecasting system. Forecasting helps predict future sales or demand trends. The key parties to an effective forecasting system are the forecaster, the sales, and the market analysis teams.

Typically, forecasting involves the gathering of historical data and trends and also the current data. After careful analysis and planning, the appropriate numbers that are required to meet the future demands of the intended market are arrived at.

Several methods of forecasting tailored to meet the demands of the various business activities, using sophisticated software, are used today.

Purchase Order Processing

Generating a valid purchase order based on approved purchase order quantities taken from a forecast is called purchase order processing. This is normally done by the purchasing department of an organization.

Though purchase orders and related communication are sent online to a pre-approved seller these days, a printed and approved hard copy is usually kept for record by the purchasing organization.

What does a purchase order contain?

At the least, any purchase order should have the following details on it:

  • Name and address of the buyer
  • Name and address of the seller
  • Description of goods being ordered
  • Quantities of goods
  • The agreed price of each
  • Delivery details
  • Payment terms

The purchase order number that is generated is used for the tracking of the goods until delivery and receipt.

Transport and Delivery

Once the above steps are complete and confirmed by the stakeholders, the next step is to arrange for the transport of the goods. It may be arranged either by the seller or the buyer depending on the pre-agreed trading terms.

Goods are sometimes consolidated.

Consolidation is the process of collecting small consignments from different suppliers spread over a specific region or area.

These small consignments are then packed in the appropriate number of shipping containers as full container loads (FCL) for shipping to the buyer’s destination. A consolidator may sometimes undertake consolidation for several buyers from the same location.

The mode of transport, packing and labelling instructions, and other such clauses have to be followed strictly by the party that arranges the transport. Selecting the right mode of transport and the right transporter is equally important.

Customs Clearance and Delivery

This is the stage when goods have arrived at the port of destination and are ready to be cleared by the customs. All the shipping documents have to be in place and they must be accurate to pass customs clearance. Once cleared, goods are moved from the port to the buyer’s warehouse or premises as agreed between the parties, using the appropriate transport.

Warehousing – Receipt and storage

Warehouses may be dry or temperature-controlled to suit the requirements of goods that are to be stored.

Typically, dry warehouses are used for the storage of goods and raw materials that do not deteriorate even in extreme temperatures or humidity conditions.

On the other hand, temperature-controlled warehouses are increasingly used to store perishable items, pharmaceutical drugs, and even certain types of electronics.

Inbound goods to the warehouse have to be received, identified accurately, and stored as inventory of the buyer.

They have to be accounted for in the receiving organization’s inventory systems and be made available for redistribution to customers.

Damages have to be correctly identified and put forth for claim from the seller or the insurance company.

Redistribution and Reverse Logistics

Purchase orders placed by customers of the logistics organization have to be processed and delivered to them. This includes picking the order quantities correctly, invoicing these items, and delivering by the agreed mode of transport, in the agreed time slot.

Typically, stored goods are picked following the FIFO (First-In, First-Out), FEFO (First-expiry, First-Out), or LIFO (Last-In, First-Out) methods.

Whether to pick FIFO, FEFO, or LIFO is a decision of the customer.

There may be other extra or value-added services involved here before delivery, such as labelling, special packing, etc.

Warehouses also provide the service of moving back any goods or packing materials from the buyer’s premises after delivery. This is known as reverse logistics.

It is normally done for the purpose of recycling these materials or, as in the case of goods returns.

Examples of reverse logistics are when empty beer kegs or used pallets and other packing materials are picked up from the customer by the dispatching logistics organization.

Goods may be returned by the customer when wrong items are delivered or in the case of damaged goods.

Customer Service

Customer service involves all those value-added services that are provided to the customer as part of an exceptional business experience. This mainly involves providing timely information and reporting on the movement of goods, addressing the customer’s concerns on quality, and other such details pertaining to the goods and services. In certain cases, reverse logistics, as mentioned above is treated as a part of customer service.

Government trade policies and regulations, technological developments in the field of energy and transportation, and environmental policies affect logistics activities to a large extent.

An organization’s logistics systems should be designed for the optimized movement of goods and the flow of information. Any deficits or drawbacks here should be addressed through strategic audits and redesign of the system.

These days, logistics companies invest in the latest software as well as hardware technologies to gain a competitive edge in the market. Besides, this often helps to reduce costs that can be passed on to the customer by way of cost reduction.

Enterprise Resource Planning (ERP) software help logistics organizations integrate their different departments and operations such as procurement, inventory, finance, etc.

Setting the right benchmarks and working towards reaching these levels further help in achieving the goals of the organization.

Proactive management that pays attention to these factors while employing best practices comes out as the winner in the competitive world of logistics.

Source: Marine Insight

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