1.0 port of destination, and provide the buyer with

1.0       INTRODUCTION

Cost, insurance and freight (CIF) is a trade term requiring the
seller to arrange for the carriage of goods by sea to a port of destination,
and provide the buyer with the documents necessary to obtain the goods from the
carrier.

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Cost, Insurance and Freight (CIF) and Free on Board (FOB) are international shipping agreements used in the
transportation of goods between a buyer and a seller. The specific definitions
are different for every country, but CIF and FOB have similar uses. They differ
in who assumes responsibility for the goods during transit. Both contracts
specify origin and destination information that is used to determine where liability officially begins and ends

In
CIF agreements, insurance and other costs are assumed by the seller, with
liability and costs associated with successful transit paid by the seller up
until the goods are received by the buyer. Goods are not considered to be
delivered until they are in the buyer’s possession.

FOB
contracts relieve the seller of responsibility once the goods are shipped. Once
goods have passed the ship’s rail, they are considered to be delivered into the
control of the buyer. When shipping to the buyer begins, the buyer then assumes
all liability.

Each
agreement has particular advantages and drawbacks for both parties. While
sellers often prefer FOB and buyers prefer CIF, some trade agreements find one
method more convenient for both parties. A seller with expertise in local
customs that the buyer lacks would likely assume responsibility to encourage
the buyer to accept a deal, for example. Smaller companies may prefer the
larger party to assume liability, as this can result in lower costs. Some
companies also have special access through customs, document freight charges
when calculating taxation, and other needs that necessitate a particular
shipping agreement.

 

 

 

 

TERMS OF COST, INSURANCE AND FREIGHT
(CIF)

The
specific stipulations of a CIF agreement are as follows (it is important to
realize that because this is a legal term, its exact definition is much more
complicated and differs by country; contact an international trade lawyer
before using any trade term): 

Under
the terms of CIF, the seller’s responsibilities include the provision of the
goods and commercial invoice in conformity with the contract of sale, the
acquisition and cost of any and all export licenses and other official
authorizations, as well as the contracts and costs of the carriage of goods and
insurance coverage. The seller is also responsible for the delivery of goods
aboard the ship at the port of destination and during the stipulated timeframe,
as well as the risk of lost or damaged goods up until the point of delivery,
and the division of freight, customs and other associated costs. Further, the
seller must give sufficient notice of delivery to the buyer, provide the buyer
proof of delivery, cover checking, packaging and marking costs, and fulfill any
other stipulated obligations.

Meanwhile,
the buyer is responsible for the payment of the price agreed upon in the
contract, the acquisition of necessary licenses and other authorizations, the
reception of goods at the point of delivery and the transfer of risk at that
juncture, assuming responsibility at that point for any and all losses or
damages of the goods. The buyer is further responsible for the division of
costs relating to the goods including duties, taxes, customs and other official
charges, as well as for payment of the pre-shipment inspection of goods. The
buyer must give notice for timing of delivery to the seller, provide proof of
delivery and fulfill and other necessary obligations, including providing the
seller with the necessary information for procuring insurance. The buyer has no
contractual obligations for the carriage of goods.

 

 

 

 

 

 

STATEMENT OF THE PROBLEM

Sugar is a strategic food
commodity. State of the world sugar market is tracked and monitored physical
exchange market sugar. Price volatility is a major problem in this market. The
price situation on the market of the product induces futures quotes on leading
“sugar” exchanges. The collection 50 per cent charges of cost,
insurance and freight may on other hand cause the price of sugar to go up
despite CIF charges are charges apart from customs and excise duty.

 

The standard procedure for
calculating import parity prices begins with the cost insurance freight (CIF)
price for the item and then adjust for the market involved in moving the item
from the ship to the destination (warehouse). Basically, the CIF price usually
quoted in a foreign currency, US dollars preferably and this must be converted
to domestic currency using card exchange rate.

Taking Nigeria as an example of
the importer of sugar, it was assumed that the CIF price is 50 percent of the
final price. The implication of this rule is that a percentage tax on CIF
prices could be modeled as a tax of half that rate on the market price.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LITERATURE REVIEW

Why buy CIF?

Importers generally buy CIF if
they are new in international trade or they have very small cargo. It is a more
convenient way of shipping since they don’t have to deal with freight or other
shipping details, but you must realize that you are probably paying a lot more
to get the goods than you should. Your supplier is responsible for arranging
the freight and insurance details. Handling freight may be too detailed or
complicated for a new importer, therefore they simply let their supplier
deliver the product to them. It is an easy way of bringing the cargo from point
A to point B without dealing with details but with a higher cost. Why CIF might
cost you more and even the price of raw materials imported go high? The vendor
often will work with his own forwarder and mark up the cost offered from his
forwarder as an additional way of making profit.

Having CIF terms might not work for you when you start buying more. As the
number of CIF shipments increase, more problems can occur, since obtaining
accurate shipment information becomes more difficult. Overseas suppliers might
not help you on a timely manner to handle service issues that might develop in
transit. Their responsibility ends on destination port and for any problem, you
may have to bear extra demurrage, per diem or unexpected shipping related
costs. Importers have to rely on their supplier and the freight agent they are
using. The communication and information flow might be a hassle and even a day
delay can be very costly.

Also take into consideration that
when you buy CIF you might end up paying duty on the freight and insurance
charges your supplier adding on. The freight and insurance charges are not
dutiable but it can be very difficult to separate those from the actual invoice
value. These costs cannot be estimated. It has to be actual ones and evidence
of payment must be submitted to US customs. This is not a problem when you buy
FOB since those charges are not in the selling prices.

The following are the reasons that
importation of raw materials/goods on CIF terms

Commercial
Invoices will understandably show the agreed upon CIF costs. 
Unfortunately, that means the ocean transportation and insurance costs
have been included in the sales price and are subject to duties and
fees.  For example, if your product is subject to a 3% tariff and the
ocean freight cost included in the CIF price is $4,000 then you will pay
an additional $120.  In years past, many suppliers showed the cost of
ocean transport on the invoice in order to avoid this situation, but customs
now expects rated Ocean/Air Bills of Lading as proof to substantiate any
deductions to dutiable merchandise value. This will face the importation
of industrial sugar price to go high than expected purchasing power of the
consumers

 

VERY
frequently, CIF pricing includes hidden supplier profits on
transportation.   These profits inflate your overall cost of
goods unnecessarily.You
will have a nearly complete lack of control of your precious cargo. 
If your supplier is arranging the freight, they will understandably select
the carrier whose vessel/plane will meet the contractual requirements but
at the cheapest possible rate.  In a situation where you need to
select a faster or unique routing, your hands are tied.Often
times your contracts are based on departure dates from the port of
origin.  While this fact seems inconsequential, the transit time
between carriers can be significant – especially if the supplier selected
carrier is using a transshipment ocean service.  When you are
expecting a 24 day transit to the East Coast and it takes 36 days, for
example, the impact to your operation and cash flow are more than
significant.  To make matters worse, you usually learn of the delayed
arrival after the vessel has departed and it is too late to arrange for a
premium service.CIF
shipments are frequently quoted without Destination Handling Charge (DTHC)
noted in the quotation.    While this meets the
requirements of the terms of sale, it does not give the importer the full
picture of total cost.   Many CIF importers are unpleasantly
surprised by substantial charges upon freight arrival.  When you
control your cargo through FOB terms, you can readily accumulate the TOTAL
cost of freight for your goods.There
is a “dirty little secret” in the shipping business.  
Frequently, the “invisible” DTHC charges noted in item 5 above are also
charged well above market rates to transfer freight cost obligations from
shipper to consignee (from supplier to buyer).   If you were the
freight forwarder being paid by the shipper, who would you
be more eager to please when shipping CIF goods?   The supplier,
correct.Are
you actually well protected by the cargo insurance provided by your supplier? 
First of all, who is listed as the beneficiary on the insurance? 
Under most situations, the company which arranges the insurance is also
the beneficiary; therefore, your supplier will receive the payment if your
product is damaged.  And, since damage is usually discovered when the
freight is unloaded at your warehouse, you probably have already made the
final payment on the shipment and now have to hope your supplier will
reimburse you from the insurance payment they receive.Unfortunately,
the problems with insurance do not end with item 7 above.  Even if
you require that the supplier list your company as the beneficiary, what
costs does their insurance cover?  It might only cover the CIF price
and now you are left “holding the bag” for Customs Entry, Duties, and the
inland transportation from the CIF seaport/airport.   And, who
pays for the office time, opportunity costs, and therapy
sessions?      Nobody.The
last major concern is the Importer
Security Filing (ISF) Filing.  On a CIF shipment, you are relying on your
supplier to provide the ISF information to you for the filing.  The
problem is that as the US Importer of Record, you are held accountable for
its accuracy and timeliness.   If your supplier is late with the
information, you will be held accountable.  ISF penalties
start at $5,000 per event with a maximum of $10,000, and who wants to
explain to senior management why this fine has to be paid?

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 CIF 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 CIF 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 (Author’s 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 CIF 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

 

 

 

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 kilograms 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.

Further, if the consignment value is
more than US $17,000, the shipping companies will charge freight charges as 3%
advance on the consignments arriving from African 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, 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 raw material (particularly
industrial sugar).

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 (as per author’s 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.

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 CIF value. Usually, freight charges are more than 20% of the
CIF value depending on the bulk, 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. 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.

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINDINGS

The
findings from different websites articles, books and research papers from
different authors/scholars, they reveal that CIF charges do not affect customs
charges. The buyer still has to pay customs duty whether shipping is done
through CIF or the Free On Board model (FOB). On findings, it revealed that the
FOB model is better for a buyer in terms of profit, because the buyer is
responsible for insuring the goods and paying freight when using FOB. In FOB, the goods are considered delivered once they cross
the ship’s rail. The buyer can negotiate a better price for freight than the
seller who might be looking to make extra profit. There is also better
communication when the buyer uses his or her own forwarder rather than relying
on one selected by the vendor who might charge extra to make a profit. However,
the 50 percent charges of the CIF value on industrial sugar imported may effect
on sugar price due to the charges collected.

 

The
industrial sugar import price is used as the basis for the reference price. The
basic assumption is that there are minor quality differences between local and
imported commodities to warrant price adjustments. The CIF prices are adjusted
for port charges and domestic transport costs to arrive at the actual border
prices at different locations

The
CIF charges directly involve the price of imported sugar to increase, because
the charges were included in the total amount shown on the invoice hence lead
the price of imported sugar to go up despite of the quality as well as better
packaging.

Currently, in Tanzania the government has restricted for the local business man
to import sugar as to give the local sugar processing industries to supply
their sugar in the country.

It
makes sense for the Tanzania government to give their producers some protection
against the cheap sugar imports. Changes in policy may result in temporary
price spikes and hoarding, but this is likely to be short term as Tanzania
allows more sugar in or increases its own production. It should be easy for
Tanzania to satisfy its own demand for sugar without resorting to biofuels and
sugar export projects. Development efforts should focus on projects which
increase the quality of life in rural communities and the diversity of
livelihoods and provide Tanzanians with nutritious food.

 

But Tanzania faces
slightly challenge on sugar production where the factories
have a production capacity of 320,000 tonnes against an annual demand of
420,000 tonnes. The deficit is filled by imports from South Africa, Brazil and
Kenya and a permit system overseen by President John Magufuli office and that
of Prime Minister Office.

Despite
the CIF charges led to the slightly increase of sugar price when arrived into
destination point, the CIF charges on other hand will also encourage for the
local manufactures as due to the cost of importing sugar from outside.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONCLUSION

 

From the above, it is
concluded that there is wide scope for minimizing the charges on insurance,
freight and customs duty on imported consignments by adopting the methods emphasized
on literature review

On other hand, the importing sugar
has numerous disadvantages. For example importing of industrial sugar could
lead the erosion of the domestic markets and national economies specifically
when there is trade deficit occurrence that is the import is higher than the
export.

Some
other problems can also be increased due to import of sugar such as conflict in
the domestic values due to the acceptance of social values. The domestic
industries can also not be able to perform well due to the importation of such
commodity where the wages are low and the domestic industries are unable to
compete since they cannot lower down their prices of goods than the cost of
goods and also they have the obligation to the worker union.

 

 

 

 

 

 

 

 

 

 

 

 

 

REFERENCES

 

1.      Tarimo,A.J.P.,
& Takamura, Y. T., (1998). Sugar cane Production, Processing and Marketing
in Tanzania. Sokoine University of Agriculture, Tanzania and Centre for African
Area Studies, Kyoto University. African Study Monographs, 19(1): 1 – 11, May
1998.

 

2.     
Republic
of Kenya, (2010). Kenya Sugar Industry Strategic Plan, Enhancing Industry
competitiveness.

 

3.      Mulwa, M. R., Murithi, F.M., &
Emrouznejad, A.,(2009).Impact of Liberalization on efficiency and productivity
of the sugar industry in Kenya. Journal of Economic Studies, 2009; 36 (3): 250
– 264.

 

4.      http://smallbusiness.chron.com/difference-between-cif-fob-39152.html

 

5.      http://generalcargoship.com/sales-contract-CIF.html