Full-Form of CIP (Carriage and Insurance Paid)
The full form of CIP means Carriage and Insurance paid up to a certain place. CIP is part of “INCOTERMS,” for International Commercial Terms. There are 11 “INCOTERMS” out of which CIP is a part. The International Chambers of Commerce defines the INCOTERMS. INCOTERMS helps to standardize the export and Import process.
This is very helpful for businesses that are engaged in the Export and Import of goods. The export of goods involves lots of customs clearings and charges. So it is essential to know who exactly will pay the charges. This standardization is required for the expansion of international tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. .
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How Does CIP Work?
CIP or Carriage and Insurance Paid is the amount that sellers pay for freight and insurance to ensure the proper delivery of goods to the other party at a decided location. With the growing economy, the world is coming closer. So the Export/Import has increased tremendously. It is also necessary to import goods if you are getting them at a lower cost than producing them In-House. So for this, we need to standardize trade between countries. It is a form of standardization.
Let’s understand this concept, Stepwise.
Say a seller in Srilanka wants to export five tones of coconut extracts to New York. He mentioned that carriage and insurance were paid in New York Port, USA.
- Step 1: Srilankan seller will have to pay loading charge, transportation charge of the goods from the factory to Srilankan Port, and any freight charges that are charged for land transportation.
- Step 2: When the goods reach the PORT, it needs to be stored in a warehouse where the seller will pay charges. The seller shall also bear the unloading charge at the port.
- Step 3: The goods will have to be loaded into the vessel for transportation. The seller also bears this cost.
- Step 4: Seller will pay the SEA Freight charges for the transport.
- Step 5: Any goods, when sent, need to be insured. So the seller will have to ensure 110% of the contract value. Any additional insurance will have to be borne by the buyer.
- Step 6: Once the Goods reach New York port, whether the Seller or Buyer will pay the unloading cost should be predefined as this may confuse.
- Step 7: The buyer will bear customs clearing charges as the goods have reached the point where the carriage and insurance paid are agreed upon. The seller would pay the customs charges if the office agreed on carriage and insurance in New York.
CIP becomes an effective way for the authorities to generate revenue as the frequency of export and import is increasing as the national markets meet globally.
Here is a list of characteristics exhibited by CIP:
- The seller pays freight to a certain point for all costs related to the delivery of goods, say transportation or carriage.
- This can be used in any transportation mode, say you are sending goods by Air, Sea, or Land. It can be used.
- The most important feature of carriage and insurance paid is that it is still a certain place. So when you mention carriage and insurance paid, you need to mention the place.
- There is one rule of CIP for SEA transfer. It is only applicable for goods that are transported in sealed cargo. Any good that is not stored in a container and sent, like Coal or Crude, is not applicable.
- If, say, CIP is mentioned till a place says New York port, then the seller’s responsibility ends till the port; now, whether the seller will pay for the unloading or not depends on the terms already decided.
- When the Goods reach the decided carriage and insurance paid point, the buyer takes the responsibility, and the buyer from there pays all other costs here.
Carriage and Insurance Paid is the amount that offers a lot of advantages to the authorities involved in the collection and usage of the money for social and economic good.
Let us have a look at the merits of collecting this amount:
- It is part of INCOTERMS, so this is a standardized agreement that helps make trade between countries easier. Without proper guidance and stipulated terms, it would not have been easy to set terms regarding who would pay for the transportation charge, freights, and other charges required to transport goods from one place to another.
- It gives confidence to buyers as they are confident that there are trade rules that the seller can’t break. So this ultimately improves the frequency of purchase and sale of commodities between countries.
- It is also helpful to sellers as they now know an agreed place where their responsibility ends. Earlier it was difficult for the seller to know where exactly their responsibility was over. The buyer used to sue the seller whenever there used to be an obstacle in the transit.
- It helps the seller to know the exact charges they will have to pay, so it helps them to add the costs to the selling price.
CIP Vs CIF
Both Carriage and Insurance Paid and Cost, Insurance and Frieght play an important role in INCOTERMS. Though the name might suggest similarity between these terms, one must be aware of the differences between them.
The differences between the two have been listed below:
- The main difference between CIFCIFCost, Insurance and Freight (CIF) are the expenditures borne by the seller to cover not just the regular costs but also the charges on the freight and insurance for securing the losses that may arise out of probable damage or theft of a customer’s order. and CIP INCOTERMS is that CIP covers all modes of transportation, and CIF covers only transportation via SEA. So this is a huge difference. The stretch of CIP is wider than CIF.
- Say it is decided that goods will be transferred from port A to Port B, so CIF will help the buyer to get goods delivered safely by the seller till the loading point of port A. Under CIF, the seller’s responsibility is to board the goods in the vessel at the loading point. In carriage and insurance paid, all the responsibility remains with the seller until the goods reach a pre-determined place. The seller will pay all the charges and Insurance for the journey until the buyer gets the goods.
This has been a guide to what is the Full Form of CIP. Here, we explain how it works along with its features, benefits & its differences from CIF. You may refer to the following articles to learn more about finance –