Payment related documents in Export and Import business

Posted on 18 May 2023 Category : GST

DOCUMENTS RELATED TO PAYMENT IN IMPORT AND EXPORT

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(a) Letter of Credit

A letter of credit is a document containing the guarantee of a bank to honour drafts drawn on it by an exporter, under certain conditions and up to certain amounts, provided the beneficiary fulfils the stipulated conditions. For details of the letter of credit and the of the letter of credit in financing foreign trade, see Annexure to the Chapter on Export financing

(b) Bill of Exchange

The Negotiable Instruments Act, 1881, defines the bill of exchange as "an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument."

There are five important parties to a bill of exchange:

The Drawer: The drawer is the person who has issued the bill. The drawer is the creditor to whom the money is owned.

The Drawee: The drawer is the person to whom the bill is addressed or against who the bill is drawn. In other words, the drawee is the debtor who owes money to the drawer, the creditor.

The Payee: The payee is the person to whom the bill is payable. The bill can be drawn payable to the drawee or his bank.

The Endorser: The endorser of a bill is the person who has placed his name and signature pit the back of the bill signifying that he has obtained title to the bill and payment is due on his own account or on account of the original payee.

The Endorsee: The endorsee is the person to whom the bill is endorsed. The endorsee can obtain payment from the drawee.

There are the following important types of bill of exchange.

(i) Sight Bill of Exchange: A sight or demand B/E is one which is required to be paid by the drawee immediately on presentation of the bill.

(ii) Usance Bill of Exchange: In case of the usance or time B/E, there is maturity period the tenor, and the payment is to be made only on the maturity of the bill.

Generally speaking, the due date of payment of the usance bill is calculated from the date of presentation or sighting of the bill by the drawee. Such a bill is called after sight Usance Bill. But sometimes the date of maturity is calculated from the date of drawing of the bill. Such a bill is known after date usance bill.

(iii) Clean Bill of Exchange: A bill of exchange not accompanied by the relative shipping documents is known as a clean bill of exchange. In respect of the clean B/E, the documents are sent to the consignee directly and he can take delivery of the goods on their arrival at Port of destination.

(iv) Documentary Bill of Exchange: A documentary B/E is a bill of exchange accompanied by the relative shipping documents such as the bill of lading, marine insurance policy, commercial invoice, certificate of origin, etc. The documents accompanying the bill are delivered to the importer by the bank only upon either acceptance or payment of the bill. The former is called documents against acceptance and the latter is called documents against payment. It is the documentary B/E that is commonly used in foreign trade transactions.

Upon shipment of the goods, the exporter may draw a B/L on the importer or, frequently, on bank acting for the importer. The exporter usually draws the bill payable to his own order, or to that of his bank. He then endorses the bill and sells it to, or discounts it at, his bank. In this way the exporter receives his money immediately upon the shipment of the goods. The bank sends the bill and the documents to its foreign branch or correspondent bank which, upon arrival, promptly notifies the importer and presents the bill to him for payment or acceptance.' Until the importer has accented the bill or made arrangements for payments he cannot receive the bill of lading, which is his title to the goods.

(c) Trust Receipt

If the importer is unable to take possession of the documents by making the payment-on the DIP bill following the arrival of the goods, the merchandise may be made available to the importer by his bank under an arrangement whereby the importer signs a trust receipt. Under this arrangement, the importer is allowed to sell the imported good by acting as an agent of the bank; but the retains ownership of the merchandise until the importer has made full settlement; all sums received from the sale of goods must be credited to the bank until such settlement is made.

(d) Letter of Hypothecation

A letter of hypothecation is a document signed by the customer conveying to a barker the full ownership of goods at the port of destination in respect of which he has made advance either by loan or by acceptance or negotiation of bills of exchange. This is a sort of blanket document which any banker, who accepts bills, advances money or negotiates bills and shipping documents, demands from a customer to give him recourse on the bills and control of the documents. The letter of hypothecation pledges the documents of title with the banker as e security for an advance and gives the bank power to sell the goods. If necessary, to insure them and to warehouse them at the customer's expense.

(e) Bank Certificate of Payment

It is a certificate issued by the negotiating bank of the exporter, certifying bill covering particular consignments, has been negotiated and that the proceeds received accordance with exchange control regulations in the approved manner.

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