02 August 2021 • 22 min read
HS Code: Classification Of Goods In Export-Import
Know about the Harmonised System Code (HS Code), how to find the correct code for the product along with their importance, correct uses & the consequences of incorrect usage
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:
- What is the Harmonised System?
- What is an HS code?
- Why are they important?
- What is the ITC (HS) code?
- How do you use HS codes correctly?
- What happens when you use them incorrectly?
- What is HS Code under GST - New rule?
- How to find the HS code for your product
What is the Harmonised System?
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:
- The first two digits identify the chapter the goods fall in. Example: 09 (Coffee, Tea, Maté and Spices)
- The next two digits identify a heading within that chapter. Example: 0901 (Coffee, whether or not roasted or decaffeinated; coffee husks and skins; coffee substitutes containing coffee in any proportion)
- The last two digits denote a sub-heading that makes the classification even more specific. Example: 090111 (Coffee, not roasted, not decaffeinated). In the absence of a subheading, the last two digits will be indicated by zeroes.
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.
- GRI 1 states that “classification is determined by the terms of the headings and of the section or chapter notes”. If classification cannot be thus determined, then GRI 2 to GRI 5 are applied.
- GRI 2 has two parts. GRI 2 (a) extends the scope of a heading to cover not just finished products but also “incomplete”, “unfinished”, “unassembled” or “disassembled” products, provided they have the “essential character” of the finished product. GRI 2 (b) extends the scope of a heading to cover mixtures or combinations of materials or substances, which must then be classified according to GRI 3.
- GRI 3 lays down the rules for classifying goods that fall under more than one heading. GRI 3 (a) calls for classification under the heading with the most “specific description”. But if two or more headings refer to only a part of the materials or substances in the composite product, then these headings are regarded as “equally specific”. In this case, GRI 3 (b) applies, which says the product will be placed in the “heading applicable to the material or component which gives them their essential character”. If the product cannot be classified on the basis of GRI 3 (a) and GRI 3 (b), then GRI 3 (c) provides for its classification “in the heading which occurs last in numerical order among those which equally merit consideration in determining their classification”.
- GRI 4 applies to goods not specifically covered by any heading (perhaps because they are newly introduced). These will then fall in the “heading appropriate to the goods to which they are most akin”.
- GRI 5 applies to the classification of boxes, containers and cases in which products are packed (cases for cameras, guns, jewellery, etc). The classification of any packaging that doesn’t fall under GRI 5 is left to the discretion of countries.
- GRI 6 applies to the classification of goods in the sub-headings.
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”.
Importance of the Harmonised System
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:
- The collection of international trade statistics
- The collection of internal taxes such as excise duties and value-added tax (VAT)
- As a basis for freight and transport tariffs
- As a basis for rules of origin (which are the criteria to determine the national source of a product)
- As a basis for the setting of preferential tariffs and MFN (most favoured nation) tariffs under free trade agreements
- As a basis for governments to decide their trade policies
- For the monitoring of controlled goods (narcotics, chemical weapons, endangered species, waste, etc)
- As a facilitator of customs controls and procedures such as risk assessment and compliance
What is the ITC-HS code?
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
- 09 – Coffee, Tea, Maté and Spices
- 0901 – Coffee, whether or not roasted or decaffeinated; coffee husks and skins; coffee substitutes containing coffee in any proportion
- 090111 – Coffee, not roasted, not decaffeinated
- 09011111 – Arabica plantation: A Grade
How to use HS codes, and the consequences of incorrect usage
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.
Using the correct HS code ensures:
- You pay the right duty
- You receive the benefits you are eligible for, such as a suspension of customs duty
- You are informed of whether your product attracts anti-dumping duty, requires a special licence to be shipped or comes under a trade quota
Incorrect HS code usage means you end up paying a higher or lower rate of duty. When discovered, this can result in:
- Steep fines and penalties imposed by customs authorities
- Denial of import-export privileges
- Denial of refund or a lengthy process to claim a refund if you have paid a higher rate of duty
- Payment of duty difference plus interest if you have underpaid
- Confiscation of goods if you have underpaid, which is the practice in some countries. The goods are released only after the fine has been paid and certain documents submitted
- Rejection of input credit tax (ITC) claim under the Goods and Services Tax (GST)
- Shipping delays and the effects of that on your business
- Additional expenses (demurrage/detention/storage charges, etc) as a result of the delay
HS Code under GST – New rule
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”.
How to find the right HS code for your product
- Use search tools: In India, you can use the ITC (HS) code search tools on Icegate, which is Indian Customs’ electronic data interchange platform, or on the Indian Trade Portal, which is the property of the Commerce Ministry. In both search tools, you need to enter part of the ITC (HS) code, if you know it, or a brief description of your product. Similarly, to move goods in and out of the US, you can use the US Census Bureau’s Schedule B search tool or the US International Trade Commission’s HTS search tool. For the UK, you can use the Trade Tariff tool, provided you know the type of your product, the material used to make it, and its production method.
- Go through HS code lists: A simple Google check is all it takes to find one of these lists. The current version of the Harmonised System, which is the 2017 edition or HS 2017, is available on the WCO website. In India, you can search the DGFT website or several non-governmental portals for the ITC (HS) code list. In the US, you can look up the Harmonised Tariff Schedule on the ITC website. Once you get to the list, click on the relevant chapter and search through the headings and subheadings to find the right HS code for your product.
But keep in mind…
- HS codes vary from country to country. If you are exporting, for example, find out the correct HS code for your product in the country of import, as it might be different from the HS code for the same product in your country. A single digit might be all that is different but it could lead to your goods getting stuck, delayed or even rejected.
- HS 2022 has been approved and will come into effect from January 1, 2022. With 351 amendments, it makes several major changes to HS 2017. Rules governing the classification of certain goods – including electronic waste, tobacco and nicotine-based products and smartphones – will reportedly change. Traders must familiarise themselves with these changes before the new system kicks in.
- Look out for updates and amendments. In June 2020, for example, the Indian government made amendments to Appendix 3 of Schedule II of the ITC (HS) Classification system, which deals with the export of SCOMET (Special Chemicals, Organisms, Materials, Equipment and Technologies) items. These include controlled substances such as nuclear material, toxins, aerospace systems, electronics and even computers. The amendments included changes in headings, new entries, the deletion of some entries and the addition of some notes, among others.
- Most traders leave the classification of their products to their customs agents. Make sure you pick a professional with experience in this field. Remember, customs will hold the owner of the goods (exporter or importer) and not the agent responsible for any classification violation.