What are Incoterms 2020?
#Incoterms (International Commercial Terms) are a set of globally recognized trade rules established by the International Chamber of Commerce (ICC). First published in 1936, these terms are periodically updated to reflect the evolving realities of global logistics. The latest iteration, Incoterms 2020, came into effect on January 1, 2020.
Incoterms serve as a universal language for buyers and sellers. When integrated into commercial contracts, they definitively clarify three critical elements of international shipping:
- 1Obligations: Who is responsible for organizing transport, securing insurance, and managing shipping documents?
- 2Risk: At what specific geographical point does the risk of loss or damage to the cargo transfer from the seller to the buyer?
- 3Costs: Which party pays for packaging, freight, loading, unloading, and customs duties?
It is vital to note that Incoterms do not govern the transfer of ownership (title) of the goods, nor do they dictate payment terms. These must be addressed separately in your commercial contract.
Why Incoterms Matter for Indian Businesses
#For Indian exporters and importers, selecting the correct Incoterm is not just a logistical decision; it is a profound compliance and financial strategy.
- Customs Valuation: Indian Customs relies heavily on the chosen Incoterm to determine the assessable value of goods. For instance, basic customs duty on imports is generally calculated on the CIF (Cost, Insurance, and Freight) value.
- FEMA and RBI Compliance: Under the Foreign Exchange Management Act (FEMA), Indian exporters must realize the full value of their exports. If an exporter uses an Incoterm like DDP (Delivered Duty Paid), they assume unknown destination clearance costs, which can complicate export realization if unexpected delays or penalties occur.
- Risk Mitigation: Using an inappropriate term (such as using FOB for air freight) leaves businesses vulnerable in the event of cargo damage, as insurance claims can be contested based on misapplied legal frameworks.
The 11 Incoterms of 2020: A Detailed Breakdown
#The 11 rules are categorized into two main groups based on the mode of transport.
Group 1: Rules for Any Mode or Modes of Transport
These terms can be used regardless of whether the goods are transported by air, road, rail, sea, or a combination of these (multimodal).
1. EXW (Ex Works)
- Definition: The seller fulfills their obligation when they make the goods available at their premises (e.g., factory, warehouse).
- Application in India: The buyer bears all costs and risks from the seller's door to the destination. For Indian exporters, EXW can be problematic because the foreign buyer is legally responsible for export customs clearance in India, which is practically impossible without a registered Indian entity and an Import Export Code (IEC).
2. FCA (Free Carrier)
- Definition: The seller is responsible for export customs clearance and delivering the goods to a carrier nominated by the buyer at a specified location.
- Application in India: Highly recommended for Indian exporters utilizing air freight or containerized sea freight. It gives the seller control over export documentation while limiting their risk once the goods are handed to the carrier.
3. CPT (Carriage Paid To)
- Definition: The seller clears the goods for export and pays the freight charges to transport the goods to the named destination. However, the risk transfers to the buyer as soon as the goods are handed over to the first carrier.
- Application in India: Useful when the seller has better negotiating power with freight forwarders but does not want to bear the risk during transit.
4. CIP (Carriage and Insurance Paid To)
- Definition: Similar to CPT, but the seller is also obligated to procure comprehensive insurance cover against the buyer's risk of loss during carriage.
- Application in India: Under Incoterms 2020, CIP requires the seller to provide a higher level of insurance (Institute Cargo Clauses 'A'), covering 'all risks' rather than the minimum cover previously required.
5. DAP (Delivered at Place)
- Definition: The seller bears all risks and costs to deliver the goods to the named destination place, ready for unloading.
- Application in India: The buyer is responsible for import customs clearance and unloading. This is a balanced term for Indian importers buying highly specialized machinery where the seller coordinates the complex logistics.
6. DPU (Delivered at Place Unloaded)
- Definition: The seller delivers the goods and unloads them at the destination. The seller bears all risks and costs until the goods are unloaded.
- Application in India: This is the only Incoterm where the seller is responsible for unloading. It replaces the old DAT (Delivered at Terminal) term, expanding the scope to any named place.
7. DDP (Delivered Duty Paid)
- Definition: The maximum obligation for the seller. The seller bears all costs, including import duties and taxes, and risks to deliver the goods to the buyer's premises.
- Application in India: Not recommended for Indian exporters unless they have a subsidiary or a highly capable customs broker in the destination country. Managing foreign VAT/GST and local customs regulations can be an operational nightmare.
Group 2: Rules for Sea and Inland Waterway Transport
These terms are exclusively for bulk cargo, commodities, and non-containerized goods transported by sea.
8. FAS (Free Alongside Ship)
- Definition: The seller delivers the goods alongside the vessel nominated by the buyer at the named port of shipment.
- Application in India: Commonly used for bulk exports like iron ore or grain from Indian ports. The buyer takes over risk and cost of loading.
9. FOB (Free on Board)
- Definition: The seller bears costs and risks until the goods are loaded on board the vessel nominated by the buyer at the named port.
- Application in India: Historically the most popular term for Indian exports. However, it should only be used for sea freight, not air or containerized freight (FCA is the correct term for containers).
10. CFR (Cost and Freight)
- Definition: The seller pays the freight to bring the goods to the destination port, but risk transfers to the buyer once the goods are loaded on board the vessel at the origin port.
- Application in India: A standard term for Indian agricultural exports where the exporter arranges shipping but shifts transit risk to the buyer.
11. CIF (Cost, Insurance, and Freight)
- Definition: Exactly like CFR, but the seller must also obtain minimum insurance cover (Institute Cargo Clauses 'C') for the buyer's risk during transit.
- Application in India: Very common for Indian imports. Importers should note that the seller only provides minimum insurance. If broader coverage is needed, it must be expressly agreed upon.
Key Changes from Incoterms 2010 to 2020
#While the foundational principles remained intact, the 2020 revision introduced pragmatic updates:
- DAT to DPU: 'Delivered at Terminal' was renamed 'Delivered at Place Unloaded' to clarify that delivery and unloading can happen anywhere, not just at a terminal.
- Different Insurance Cover: Under CIF, minimum cover (Clause C) remains the default. Under CIP, comprehensive 'all risks' cover (Clause A) is now mandatory.
- On-Board Bills of Lading with FCA: When using FCA for sea freight, buyers can now instruct carriers to issue an on-board bill of lading to the seller, a crucial requirement for processing Letters of Credit through Indian banks.
Strategic Advisory for Indian Businesses
#Choosing the right Incoterm requires a holistic assessment of your supply chain capabilities, banking requirements, and risk appetite.
For Exporters:
Avoid EXW if you wish to maintain control over your export documentation to claim GST refunds and export incentives (like RoDTEP). Transition from FOB to FCA if you are shipping containerized goods out of Nhava Sheva or Mundra, as the risk under FCA transfers as soon as you hand the container to the terminal, shielding you from damages occurring during terminal handling before the container is loaded onto the ship.
For Importers:
Buying on FOB or FCA terms gives you control over the international freight costs. By negotiating directly with your preferred Indian freight forwarder, you can often secure better rates than if the foreign seller arranged the transport (as under CIF or CFR).
Navigating international commercial law requires precision. Leadforce operates as an independent business and management consultancy firm, offering strategic guidance, compliance coordination, and administrative support to help you align your trade contracts with optimal Incoterms. While we do not provide binding legal representation, our operational consulting ensures your import-export operations are structured securely and efficiently.