02 August 2021 • 19 min read
Customs Clearance: Guide To Cross-Border Trade
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Find out all the factors impacting custom clearance, rules and policies you need to be aware about and steps involved in custom clearance.
The process of getting your goods across international borders can be confusing and frustrating. Customs clearance not only requires a great deal of preparation and documentation, its procedures also differ from country to country. While international trade is simpler now than it was a few decades ago – thanks to the lowering of trade barriers, simplification of rules and introduction of new technology – customs clearance remains a challenge.
That said, this article aims to help you navigate the choppy waters of customs clearance and border security and will answer all the important questions on the subject, including:
- What are the factors impacting customs clearance?
- What rules, regulations and policies should I be aware of?
- What are the steps involved in customs clearance?
What are the factors impacting customs clearance?
The first requirement of international trade is to equip yourself with relevant information about the nature of the cargo you plan to ship as well as the trade laws, regulations and customs practices of the country of import/export:
- Nature of cargo: Are you shipping dangerous goods (explosives, toxic substances, radioactive material, etc)? Or food products? Is your cargo categorised as restricted (firearms, animals, plants, etc) in the country of import/export? Such goods can cross international borders only if they fulfil specific conditions related but not limited to labeling, packaging, declaration, transport and storage. You can’t ship hazardous cargo without a Dangerous Goods Declaration. Similarly, if you are exporting food or agricultural produce, you must satisfy the safety, quality assurance and certification requirements of both the importing and exporting country.
- Free trade agreements: Such an agreement between countries facilitates trade primarily by reducing tariffs. Trading within a free trade zone is advantageous. But to benefit from the tariff reductions, one must find out if one’s product qualifies for it. For example, does it meet the rules of origin requirements? (Rules of origin determine the national source of a product and, by extension, whether it is eligible for duty cuts/exemptions or whether it is restricted). If your product is eligible, you will need to produce a certificate of origin as proof. You will also need to look up the correct Harmonised System (HS) code of your product, enter this correctly in your shipping documents and check the target country’s tariff schedule for the applicable customs duty.
- Digital customs: With most countries digitising their customs systems, it is vital to know about the electronic data interchange (EDI) systems they use for customs clearance procedures and the activities that can only be conducted through these platforms. For example, many countries and free trade zones require importers to make an electronic cargo declaration before the goods enter their territory. This is largely for security reasons. In the US, such a declaration is called an Automated Manifest System filing while in the European Union, it is known as an Entry Summary Declaration. Failing to declare or declare on time means clearance delays. In India, important functions such as filing of the shipping bill and bill of entry can only be done on Icegate, Indian Customs’ EDI platform.
What rules, regulations and policies should I be aware of?
The laws and regulations governing foreign trade in your particular market have a bearing on everything, from the goods you plan to ship to the documents that must accompany them. Here are the key rules you need to brush up on:
- Foreign trade rules: Each country has its own set of foreign trade laws. In India, the key laws governing imports and exports are the Foreign Trade Policy (updated every five years), Foreign Trade (Development and Regulation) Act, Foreign Trade (Regulation) Rules, Customs Act and Foreign Exchange Management Act. At least a basic understanding of the international trade laws relevant to your target market is a must.
- Export control regulations: If you deal in dangerous goods, some understanding of export controls is useful. International export control groups, which bring together multiple countries, monitor trade in arms, chemicals, nuclear material and other such high-risk goods. The Australia Group, one such regime, regulates the export of material, equipment and technology that could be used to develop chemical and biological weapons. If you wish to ship a consignment of chemicals included in the Group’s Control Lists, you might be denied an export licence if you don’t strictly follow its export rules.
- Exchange control regulations: Exchange controls are government restrictions on transactions in foreign exchange. Some exchange control methods employed by countries that impact the import-export business include:
- Varying exchange rates for different categories of imports and exports
- Letter of credit, which is a promise by a bank on behalf of the importer to pay the exporter an agreed-upon sum. Some countries might only accept payments made through this method
- Clearing agreements, under which trading countries establish domestic accounts, importers pay for goods bought from a foreign buyer in the local currency and exporters get paid in their own currency as well
- Quotas: These are government-imposed limits on the value or volume of specific goods that can be exported or imported. Quotas are usually implemented to keep the prices of these goods low for domestic users. Before you sign a contract, check if your target country restricts the import or export of your product.
- Documentation: Customs clearance is a document-heavy process. It requires the importer and exporter to file a wide range of paperwork, including licences and certificates, and to make sure they are accurate, complete and submitted on time. Listed below are the mandatory and secondary documents key to customs clearance:
- Shipping Bill: Also called a bill of export, you cannot export goods by sea, air or road without this document. In India, a shipping bill is submitted electronically on Icegate in the form of an application in a prescribed format.
- Commercial Invoice cum Packing List: When you e-file a shipping bill, it must be accompanied by a copy of the commercial invoice cum packing list. The commercial invoice is a contract of sale between the exporter and importer while the packing list contains cargo details such as description, quantity and weight.
- Bill of Lading: Another must-have document, the bill of lading is a contract of carriage between the carrier and shipper, a receipt for shipped goods and a document of title (ownership) of the goods. It must be produced to customs at the port of destination for final clearance.
- Bill of Entry: A mandatory document for import clearance, a bill of entry marks the entry of goods into a country before their consumption or warehousing and is a legal requirement. In India, it is filed on Icegate.
- Import/export licences: Certain goods cannot be imported or exported without a licence issued by the relevant authority of a country. In India, import and export licences are required for trade in restricted goods and they are issued by the Directorate General of Foreign Trade (DGFT). In addition to these, Indian exporters need two more permits – an Import Export Code or IEC (a unique business number issued by the DGFT) and an Authorised Dealer (AD) Code (which must be registered at the port of export and is mandatory for customs clearance).
- Certificate of Origin: Many countries demand a certificate of origin for customs clearance. It certifies that a product was acquired, produced, manufactured and/or processed in a particular country.
- Health certificates: Required mostly for food products, health certificates vouch that the goods are fit for human consumption and meet the required safety and quality standards.
- Insurance certificate: This certificate from an insurance company states that the goods are covered for any loss/damage during transit. Insurance certificates help customs ascertain the duty applicable on the goods.
- Inspection certificate: This document confirms that the goods – which might include packaging material, especially wooden pallets – are free of pests.
- Consular invoice: This invoice acts as proof that the shipped goods are authorised by the embassy of the country of destination. Many importing countries insist on a consular invoice.
- Import/export declarations: These are declarations by the importer/exporter about the goods being imported/exported and are largely required by customs for the purpose of foreign trade data compilation.
What are the steps involved in customs clearance?
With customs regulations and practices varying from country to country, there is no single set of guidelines to clearing customs. Furthermore, different cargo types require different handling by customs authorities. Given this reality, compiled below are the most common practices, procedures and requirements in customs clearance, divided into two stages – pre-departure and post-arrival:
- Getting import/export ready: The first step, naturally, is to register with the customs department of your country and obtain the necessary import/export licences and permits as mentioned above.
- Filing the shipping bill: The export process starts with the exporter filing the shipping bill. But before this, the exporter needs to assess the HS code, value, weight and country of origin of the goods and the duty due on it, find out whether it qualifies as restricted/dangerous/prohibited or whether it is allowed by the importing country. The exporter must also acquire any cargo-specific certificates and permits that might be required, such as health/inspection/insurance certificates, dangerous goods declaration, consular invoice or certificate of origin. All of these details must be entered correctly in the shipping bill application and accompanying documents.
- Export customs clearance: After the shipping bill is filed, customs makes the necessary checks. This includes verifying the shipping bill to ensure the code, value, weight, duty rate, exemption sought and all other details as well as accompanying documents are correct, valid and in order. If the goods don’t raise an alarm, the shipping bill is endorsed with a Let Export Order, which is the final compliance requirement for export clearance. The goods can now be loaded for shipping. However, in some cases, customs might decide the goods require a deeper inspection, examination and scanning. This could be to verify the goods are as declared, to check for security risks such as radiation, or some such reason. Depending on the results of the examination, the goods might be cleared for export, detained or rejected.
Read our step-by-step guide to the export process here.
- Filing the Bill of Entry: After the goods arrive in the country of destination, the importer or their agent files the bill of entry.
- Import customs clearance: The goods once again go through a verification process with customs checking if the value, weight, HS code and duty are correct, whether the goods are restricted/prohibited for import, whether any required certificates are missing, and so on. If the goods are red-flagged for any reason, customs might request an examination, scanning or inspection of the goods. If not, it might endorse the bill of entry with a Pass Out Order, which means the importer can now take delivery of the goods after paying the applicable duty.
Read our step-by-step guide to the import process here.
If you are looking for the services of verified customs agents and freight forwarders to help you with customs clearance, try Cogoport.
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