Credit terms and imports from Pakistan

It is common to pay taxes when importing into a country.  Some countries, however, apply taxes when exporting from their country, and one such country that applies an “Export” tax is Pakistan.  This tax is known as the Export Development Surcharge (EDS).  Before the 6th January 2003 Pakistani exporters used to have to pay the EDS (which is charged at 0.25% of the total FOB value of the goods) before shipment.  However, in January 2003 the law was changed to allow for this tax to be deducted from the proceeds of the export.

New Procedures for collection
The State Bank of Pakistan is responsible for ensuring that this tax is collected and the way they do this is by controlling who is allowed to export from Pakistan (all exporters must be registered with the Export Promotion Bureau and be a member of at least one trade organisation) and by ensuring that a necessary document required in the export customs clearance procedure is a Form E.

The Form E is only issued when the exporter “guarantees” to the State Bank of Pakistan that they will collect the funds due to them.  The only way they can guarantee this is to either receive 100% of the funds upfront, or have a guaranteed method of payment, such as a Documentary Credit.  The problem arises when the Pakistani seller offers credit terms to the overseas buyer.  In these circumstances the State Bank of Pakistan insists the payment terms be Cash against Documents because credit terms are inherently unsafe for the seller.  The buyer, for whatever reason, can default at any time.  Hence the State Bank of Pakistan’s insistence on the Cash against Documents system.  If the Pakistani seller sends the documents direct to the overseas buyer without first obtaining funds or a guaranteed method of payment, they can have heavy penalties levied against them by the bank.

In order to obtain the Form E the seller must show the State Bank of Pakistan proof that they will obtain the funds within a short period of time in order to pay the tax.  This can cause a lot of inconvenience to the buyer if they are unaware that this system exists and they have not arranged for a Cash against Document facility to be made available to them by their own bank.  It can take time to set up such a system and its not good practice to ship the goods before the export documents are available to arrange the import customs clearance.  Otherwise demurrage and/or storage costs may apply.

Conclusion
Therefore, credit terms as such don’t exist in sales contracts when importing from Pakistan. The best deal that an importer can obtain is Cash against Documents, regardless what the sales contract states.

 

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or check some of our other articles on International Trade at the Point to Point Export Services website at www.point-point.com
 
 

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