If you are in the business of exporting and importing goods, you would be familiar with the Harmonised Commodity Description and Coding System, better known as the Harmonised System (HS) or Harmonised System of Nomenclature (HSN). It is a universally accepted method of classifying traded goods. Its main function is to help customs authorities identify products and assess the right duties and taxes on them. In the Harmonised System, each product is assigned a unique numerical code called the HS code. This code has a minimum of six digits and can typically go up to 10 digits (though China has a 13-digit code). While exporting or importing, it is mandatory to include your product’s HS code in your shipping documents, such as your commercial invoice, packing list and shipping bill. And as an exporter or importer, it is your legal responsibility to correctly identify your product’s HS code. Incorrect classification can lead to problems that you’d be better off avoiding.
Given the importance of the Harmonised System and its correct application in international trade, this article contains all the relevant information you require, including:
The Harmonised System was a solution to the complications and costs associated with having different product classification systems for different countries. Before its creation, a single product could be classified as many as 17 times in a single transaction, according to this report. The Harmonised System came into effect on January 1, 1988. It is administered and updated every five years by the Belgium-headquartered World Customs Organisation (WCO). The system is used by more than 200 countries and economies and covers more than 98% of goods in international trade.
The Harmonised System comprises more than 5,000 groups of goods. These are grouped into 97 Chapters and 21 Sections. Each chapter is divided into headings and, where appropriate, sub-headings. As a rule, goods are arranged in order of degree of manufacture – raw materials first, then unworked products, semi-finished products and, finally, finished products. So, Chapter 1 is “Live Animals”, Chapter 41 is “Raw Hides and Skins (other than Furskins) and Leather” and Chapter 64 is “Footwear”.
In the Harmonised System, each product is identified by a six-digit code, arranged in a legal and logical way based on certain rules. The six digits of an HS code can be broken down into three parts:
There are certain rules that govern the Harmonised System and HS codes. These are:
1. General Rules for the Interpretation of the Harmonised System: These ensure a specific product is universally associated with a single heading (and subheading) and not with any other. There are six general rules of interpretation (GRI) and they are hierarchical, as in GRI 1 takes precedence over GRI 2 and so on.
2. Section, chapter and subheading notes: Certain sections, chapters and subheadings of the Harmonised Systems come with notes. These notes help interpret the specific sections and chapters by precisely defining their scope and limits. Like the GRIs, these notes are legally binding and are therefore also called “legal notes”.
The primary function of the Harmonised System is to act as a basis for customs tariffs worldwide. But it has other uses as well, such as:
As mentioned earlier, an HS code can go beyond the WCO-prescribed six digits. This is because countries are allowed to add more digits to the original six-digit code for further classification. These additional digits typically vary from country to country.
The United States uses a 10-digit code where the first six digits are the WCO-provided HS code. The US code is called a Schedule B number for export goods and a Harmonised Tariff Schedule (HTS) code for import goods.
Similarly, in India, goods for export and import have an eight-digit code called an ITC (HS) code, where ITC stands for Indian Trade Classification and/or Indian Tariff Code. This system has two schedules – Schedule I for imports and Schedule II for exports. Schedule I has 21 sections and 98 chapters. The chapters are further divided into headings and subheadings. Schedule II has 97 chapters. The ITC (HS) codes are developed, maintained and updated by the Directorate General of Foreign Trade (DGFT).
An ITC (HS) code comprises the six-digit HS code plus a two-digit national “tariff item code”. For example, if the ITC (HS) code is 09011111, then
HS codes are used by governments, customs authorities, statistical organisations, regulatory bodies and traders. As an importer/exporter, you are legally bound to classify your goods correctly and enter the correct HS code in your shipping documents.
As of April 1, the Indian government has made it mandatory for Goods and Services Tax (GST) taxpayers with a turnover of Rs 5 crore or more to include the international six-digit HS code in invoices they issue for the sale of taxable goods and services. The earlier requirement was a four-digit code. Similarly, taxpayers with a turnover of up to Rs 5 crore must include a four-digit HS code on B2B (business to business) invoices. The earlier requirement was a two-digit code. Thus far, many GST taxpayers have been voluntarily including six-digit HS codes on their invoices and GST returns. The objective behind the move, according to this report, is to make taxpayers furnish a more precise HS code so that tax officials can “arrest tax evasion from fake invoices and irregular tax credit claims”.
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