Import Costing: FOB vs. CIF vs Landing Cost

In this blogpost, we will understand the cost structure of importing an electronic good from China to India in detail.  When importing any item and negotiating with the seller in another country, broadly the options available are FOB and CIF. Not all sellers provide CIF but they atleast will have some agents who can take care of it in your country (the country importing goods).

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CIF – Cost Insurance and Freight (named port of destination): Seller must pay the costs and freight includes insurance to bring the goods to the port of destination. However, risk is transferred to the buyer once the goods are loaded on the ship.

FOB – Free on board or Freight on Board (named port of shipment):  This basically means that the cost of delivering the goods to the nearest port is included but the buyer is responsible for the shipping from there onwards and all other fees associated with getting the goods to your country/address. The seller must themselves load the goods on board the ship nominated by the buyer, cost and risk being divided at ship’s rail. The seller must clear the goods for export.

Importers generally buy CIF if they are new to importing or if they have a small shipment. CIF is a convenient way of importing as the buyer doesn’t have to deal with freight or other shipping details to his or her address, but in CIF the buyer will end up paying much more money that s/he should. In CIF, the supplier becomes responsible for arranging the freight and insurance details. Handling freight forwarding from port and dealing with multiple issues at port might be too detailed and complicated for a new importer, therefore the buyer asks the supplier to be responsible for it. However, not many suppliers can take this headache and even if they do they work with an agent in your country who will eventually call you multiple times for different documentation. The supplier will charge you extra for the freight forwarding fees plus the margin that he adds on it. While CIF seems stress-free, it rarely is and therefore I believe that CIF is not an efficient way of importing anyways.

On the other hand,  buying FOB has two major benefits over CIF. You have better control of the freight and the freight cost. Using your own freight forwarder will help you obtain more accurate information in a timely manner. They can assist you better once a problem arises. The logistic partner you choose always works together with you for your best interest, not your suppliers.

Import Costing – FOB vs. CIF. End Landing Price

Below is the start to end import costing of an electronic unit from Shenzhen in China to Chennai in India via. sea shipping.

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The above costing is largely self-explanatory except for a few duties which are explained below.

  • Basic custom duty is applicable on imported items that fall under the ambit of Section 12 of the Customs Act, 1962.
  • Countervailing duty (CVD) is an additional import duty imposed on imported products (by the importing country) when such products enjoy benefits like export subsidies and tax concessions in the country of their origin (ie., where it is produced and exported).
  • special additional duty (SAD) of Customs of 4% has been levied on all imports by the Budget 2006-2007. As no central sales tax or VAT is levied on imports, the levy of SAD is intended to create a level playing field for domestic goods vis- -vis imports.

Hope this is useful, thank you!

 

 

 

 

 

 

 

 

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