Freight Cost Audit: The Procurement Leakage Beyond the Purchase Price

Most owners watch the purchase price closely. Very few watch what it costs to get the goods to the gate. A buyer who negotiates three per cent off a steel order is congratulated; the freight, packing, detention and demurrage that arrive later on separate bills, posted to separate ledger heads, are treated as unavoidable overhead. In a business buying Rs 200 crore of material a year, incidental costs of four to six per cent of spend are ordinary: Rs 8 to 12 crore that nobody negotiates and nobody audits.

Leakage starts at the purchase order

The root cause is rarely theft. It is that the purchase order does not say who bears what.

• Quotes compared on different bases, one vendor quoting ex-works and another delivered, so the cheaper quote wins on paper and loses on landed cost.

• Purchase orders that say “freight extra at actuals”, which is an open cheque with no ceiling and no rate reference.

• No delivery term recorded, so the point at which cost and risk pass to you is settled later, by whoever argues harder.

• Freight bills approved by the same buyer who placed the order, with no independent check against goods received.

Every purchase order should state the delivery term, the freight basis (per tonne, per trip, per kilometre), who arranges transport and who bears demurrage. Fix the document and most of the argument disappears.

What a freight cost audit should test

A freight cost audit is largely an exception-listing exercise. Pull twelve months of transport, clearing and packing ledgers and test for:

• Freight bills carrying no purchase order or goods receipt note reference.

• Freight paid in full on consignments short received or partly rejected.

• Billed weight against the weighbridge slip and GRN quantity. A consistent gap of two to three per cent is a pattern, not an error.

• Detention and demurrage for the year, and who caused each delay. This is the cleanest measure of how badly planning and procurement talk to each other.

• Repeat urgent or air freight on the same item from the same vendor, which is a reorder-level problem being paid for out of the logistics budget.

• Round-sum bills. Freight always billed at Rs 25,000 or Rs 50,000 is an estimate, not a measured charge.

The GST cost hiding inside freight

Road transport by a goods transport agency defaults to five per cent under reverse charge. Since 22 September 2025 a GTA opting for forward charge may bill five per cent without input tax credit or eighteen per cent with it. Check that the reverse charge liability is being discharged, the credit taken, and a forward-charge declaration held for every transporter billing you with tax.

Where the supplier arranges transport and charges you for it, Section 15(2)(c) of the CGST Act treats freight and packing as incidental expenses forming part of the value of the supply, taxed at the rate applicable to the goods rather than a separate freight rate. Suppliers who bill freight separately at a lower rate create a credit dispute that eventually reaches your books. Reconcile transporter and supplier invoices to GSTR-2B monthly, not annually.

Four questions worth asking

• What is our landed cost per unit for the top ten bought-out items, this year against last?

• What share of our freight is on our account, and what share is already built into supplier prices?

• How many freight bills last quarter carried no purchase order reference?

• What did we pay in detention and demurrage last year, and who approved it?

The bottom line

Freight and incidental costs are negotiable and measurable, but only if they are captured against the purchase rather than a general overhead head. Three things make the difference: price every purchase on a landed-cost basis, write the freight terms into the purchase order instead of settling them after delivery, and ensure the person approving the transport bill is not the person who placed the order. It is simply the part of procurement that nobody owns.

By CA Dhruv Seth, Seth & Associates, Chartered Accountants, Lucknow | dhruv@sethspro.com

This article is for general information and does not constitute audit, legal or tax advice. Regulations change; please verify the current position or speak to a qualified adviser before acting.