Pre-shipment inspection and licensing of exports and imports

1. Pre-shipment inspection: what and why

Pre-shipment inspection (PSI) is the checking of the quality, quantity and price of goods in the exporting country before they are shipped, by an inspection agency appointed by the government of the importing country. Many developing countries used private agencies in the 1980s and 1990s to stop under-invoicing (customs fraud and capital flight) and over-invoicing (illegal transfer of foreign exchange), and to check customs classification, because their own customs services were weak. Exporters complained of delays, arbitrary price challenges and disclosure of confidential business information. The Uruguay Round produced the Agreement on Preshipment Inspection in Annex 1A.

2. The WTO Agreement on Preshipment Inspection

• Coverage (Article 1): all PSI activities carried out on the territory of members, whether contracted or mandated by the government of a user member. “Preshipment inspection activities” are verification of quality, quantity, price (including currency exchange rate and financial terms) and customs classification.
• Obligations of user members (Article 2), the heart of the Agreement:
  • non-discrimination: procedures applied on an objective and equitable basis to all exporters;
  • governmental requirements: national treatment for laws and regulations;
  • site of inspection: in the customs territory of export, or of manufacture;
  • standards: quality and quantity inspections according to the standards agreed in the contract or, failing them, relevant international standards;
  • transparency: exporters informed of all requirements;
  • protection of confidential business information;
  • conflicts of interest to be avoided;
  • no unreasonable delays: a clean report of findings within five working days of inspection;
  • price verification: a contract price may be rejected only if the verification shows it is not comparable with prices of identical or similar goods offered for export from the same country at about the same time; the agency may not use the selling price of locally produced goods, the price of goods from other countries, the cost of production, or arbitrary prices; and
  • appeals procedures for exporters.
• Obligations of exporting members (Article 3): non-discriminatory laws, transparency and technical assistance.
• Independent review (Article 4): disputes between an exporter and an inspection entity may be referred to an independent entity constituted jointly by the organisations representing inspection entities and exporters, whose decision is binding on the entity and the exporter.
• Notification (Article 5), review (Article 6), consultation (Article 7) and dispute settlement under the DSU (Article 8).

The WTO Trade Facilitation Agreement (2017), Article 10.5, now prohibits members from requiring PSI for tariff classification and customs valuation, though other types of PSI remain allowed. Use of PSI has declined as customs administrations have improved.

3. Export inspection in India

India also inspects its own exports, to protect the reputation of Indian goods abroad. Under the Export (Quality Control and Inspection) Act, 1963, the Central Government, after consulting the Export Inspection Council (established under section 3), may by order (section 6): notify commodities subject to quality control or inspection prior to export; specify the type of control or inspection; establish or recognise standard specifications; and prohibit the export of a notified commodity unless it is accompanied by a certificate under section 7 or carries a recognised mark or seal. Section 7 provides for agencies for quality control and inspection, the Export Inspection Agencies. Food products for markets such as the European Union (fish, honey, egg and milk products) require EIC certification. Separately, the Foreign Trade Policy requires a pre-shipment inspection certificate from approved agencies for certain imports into India, such as metal scrap, to guard against explosive and radioactive material.

4. WTO limits on licensing

GATT Article XI prohibits quantitative restrictions on imports and exports, whether by quotas, import or export licences or other measures, subject to exceptions (temporary export restrictions to relieve critical shortages of foodstuffs, Article XI:2(a)), Articles XII and XVIII:B (balance of payments), XIX (safeguards), XX and XXI. The Agreement on Import Licensing Procedures requires licensing to be simple, transparent, predictable and neutral; automatic licensing must not restrict imports, and non-automatic licensing must not add restrictive effects beyond the underlying measure. After India – Quantitative Restrictions (Appellate Body, 1999), brought by the United States, India had to remove balance-of-payments quantitative restrictions on some 2,700 tariff lines, which it completed by 1 April 2001.

5. The Foreign Trade (Development and Regulation) Act, 1992

The 1992 Act replaced the Imports and Exports (Control) Act, 1947. Its object (long title) is the development and regulation of foreign trade by facilitating imports into, and augmenting exports from, India. It was amended in 2010 to extend to services and technology and to add export controls.

• Section 3: the Central Government may by Order make provision for the development and regulation of foreign trade (3(1)), and for prohibiting, restricting or otherwise regulating the import or export of goods, services or technology (3(2)). All goods so regulated are deemed prohibited goods under section 11 of the Customs Act, 1962 (3(3)).
• Section 5: the Government formulates and announces the Foreign Trade Policy by notification and may amend it.
• Section 6: appointment of the Director General of Foreign Trade (DGFT), who advises on and implements the policy.
• Section 7: no person shall make any import or export except under an Importer-exporter Code Number (IEC) granted by the Director General. The IEC is now issued online against the PAN.
• Section 8: suspension and cancellation of the IEC for contraventions.
• Section 9: fees for, and grant, renewal, suspension or cancellation of a licence, certificate, scrip or other instrument (an authorisation); refusal only for reasons recorded.
• Section 9A (Chapter IIIA): quantitative restrictions as a safeguard against import surges causing serious injury to domestic industry.
• Sections 10 to 14: search and seizure, penalty and confiscation for contraventions (section 11), adjudication with opportunity of hearing.
• Sections 14A to 14E (Chapter IVA): controls on the export of specified goods, services and technology, the SCOMET list (Special Chemicals, Organisms, Materials, Equipment and Technologies), with transfer controls and catch-all controls for dual-use items, in line with India's non-proliferation commitments.
• Sections 15 and 16: appeal and review.

6. How licensing works in practice

Every item is classified in the ITC(HS) schedules of import and export policy, under the Harmonized System codes, as free (no licence needed beyond the IEC), restricted (import or export only under an authorisation from the DGFT), prohibited (such as wild animals and certain items of beef), or reserved for State trading enterprises. The Foreign Trade Policy 2023, in force from 1 April 2023, has no fixed end date and is updated as needed; with the Handbook of Procedures it governs authorisations such as Advance Authorisation (duty-free import of inputs for exports) and the Export Promotion Capital Goods scheme, and export incentives such as RoDTEP. Restrictions are imposed in practice by DGFT notifications: export bans on wheat (2022) and some rice exports, and import authorisation requirements for laptops and computers (2023, moved to an online import management system).

How this is examined

For the PSI short note: meaning and purpose, the user-member obligations in Article 2 (especially price verification and confidentiality), independent review under Article 4, and India's own export inspection under the 1963 Act. For the licensing essay: GATT Article XI and the Import Licensing Agreement, then the 1992 Act (sections 3, 5, 6, 7, 9, 9A, 11 and Chapter IVA), the ITC(HS) categories, and the Foreign Trade Policy 2023.