Imports cost is a major item of expenditure of foreign exchange for a country. There were various restrictions on imports transactions during and around 1991 in India and was subsequently diluted on strengthening the Foreign Exchange Reserves. However, restricting imports is not a good idea for the economy. Import of goods helps to boost the economy by providing capital good for infrastructure or industrial development, meeting shortages and improving quality of production. It also helps improving living standards by making available goods and products not produced in the country. With the rise in disposable incomes in India, the market for imported goods is growing. This section provides you details about Regulations relating to imports and related FAQs.
Import Financing refers to a loan given to the importer to provide liquidity for buying with sight payment or Usance payment to the exporter. Each loan must be related to one specific import transaction and the term of the financing can vary depending on the type of products imported and the requirements of the importer. There are various ways the importer may get finance for his imports. However, in India most prevalent methods are
1) Buyer’s credit and
2) Seller’s Credit
Since, these arrangements involve various parties around the world, are more complicated as compared to the regular loans financed by the Banks. Also, in India such facilities are regulated by RBI and can be availed only for stipulated purposes and in the prescribed manner. For details of such guidelines please refer to the “Trade Credits in India” section of the RBI Master Circular on external Commercial Borrowings.
A Buyer’s Credit is a loan facility extended to an importer by a bank or financial institution to finance the purchase of goods or services. Buyer’s credit is a very useful mode of financing in international trade, since foreign buyers seldom pay cash for large purchases, while few exporters have the capacity to extend substantial amounts of long-term credit to their buyers. A buyer’s credit facility involves a bank that can extend credit to the importer usually on the strength of a guarantee or letter of undertaking from the importer’s Bank. Buyer’s credit benefits both, the seller (exporter) and buyer (importer) in a trade transaction. The exporter is paid in accordance with the terms of the sale contract with the importer, without undue delays. The importer obtains the flexibility to pay for the purchases over a period of time, as stipulated in the terms of the buyer’s credit facility, rather than at the time of purchase according to the payment terms.
Seller’s Credit or Supplier’s credit:
In this arrangement the finance is extended by the exporter to the importer. It is an arrangement where the supplier provides the goods to the importer immediately but the payment is required to be made at a later date. Usually, Supplier’s Credit can be arranged against LC transactions. In this transaction, the drafts are drawn with some agreed usance period. The importer accepts the draft for payment at a future date. The supplier’s bank will discount the drafts and make the payment to the supplier. Thus the arrangement is comfortable for both, supplier as well as the importer.
Often, in Import related transactions these two terms are not interpreted correctly. To have clear understanding, please go through the following:
Merchanting Trade transactions are those transactions where the trader in one country A, purchases goods from country B and supply the goods to a buyer in country C. Thus the goods never touch the boundary of the country of trader. In India such trade transactions are regulated and certain restrictions are placed on them. The RBI guidelines on such transactions are available in Master Directions on Imports of Goods and Services Para C.14.
High seas sale:
If a buyer wants to sell his consignment to a third party before arrival of goods but after sailing vessel from load port, such sale is known as high sea sale. In simple words, the ownership of goods is transferred, when goods are on transit.
As defined in Central Sales Tax Act 1956. Section 5 (2), A sale or purchase of goods shall be deemed to take place in the course of import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.
As per above definition, for a transaction to be consider as high seas sale, it have to satisfy three conditions:
- A sale or purchase shall be deemed to take place in the course of import of the goods in to the territory of India only if :
- the sale or purchase either occasions such import, or
- it is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontier of India.
- Section 2(4) of the Sales of Goods Act,1930 defines “document of title to goods,”
“document of title to goods” include a bill of lading, dock warrant, warehouse-keeper’s certificate , wharfinger’s certificate, railway receipt, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof to the possession or control of goods, or purporting to authorise, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented”;
The bill of lading is considered to be document of title to goods and the sale can be
made by endorsement delivery or by mere delivery of a blank bill of lading before the goods cross the customs frontier. It may be noted that airway bill is not a document of title to goods. However, delivery order issued by banker is recognised as a negotiable document.
- Section 2(ab) of the Central Sales Tax Act, 1956 defines “Crossing the customs frontiers of India”. It is defined as under:
“Crossing the customs frontiers of India” means crossing the limits of the area of a customs station in which imported goods or export goods are ordinarily kept before clearance by custom authorities.
Process flow of High Sea Sales Transaction:
The following is the procedure that is followed in case of High Sea Sales:-
- High Sea Seller places order with supplier for import of goods.
- Supplier ships the goods to High Sea Seller and submits the documents to his bank counter. (Assumption in this case: Payment mode is Documents Against Payment)
- High Sea Seller sells the goods to High Sea Buyer while the goods are still on High Sea by entering into an agreement of sale to effect the sale on high sea of specific goods.
- Documents arrives at banks counter of High Sea Seller’s bank. High Sea Seller makes payment and gets documents released.
- The document of title i.e. Bill of Lading is endorsed by the High Sea Seller in favour of High Sea Buyer and provides him with local invoice (in INR) and other documents required to file Bill of Entry.
- High Sea Seller retains a copy of the endorsed Bill of Lading and hands over original Bill of Lading to High Sea Buyer under covering letter.
- High Sea Buyer shall file Bill of Entry and pay customs duty, clearing charges etc. and gets the goods released.
- High Sea Buyer hands over a Copy of Bill of Entry to High Sea Seller for further submission to his Bank.
Documents Provided By High Sea Seller to High Sea Buyer
- High Sea Sale Agreement
- Sale Invoice in INR
- Consignee Copy of B/L – Duly Endorsed in favour of Buyer
- Import Invoice, Packing List, Certificate of Origin & Insurance Certificate-Duly Endorsed in favour the High Sea Buyer.