One of the leading challenges importers face in international trade is HS code classification. HS codes lay the foundation for the valuation of goods and assessment of customs duties and tariffs.
With HS codes, importers from over 200 countries identify imported goods and determine the cross-border shipping requirements.
But what exactly is HS code? Is it the only way to classify goods, or are there alternatives? What entails the code, and what criteria are used when developing the codes for varied products?
This article discusses HS codes, providing answers to the above-mentioned questions.
Let’s dive in!
What is the HS Code?
Harmonized System (HS) is one of the three standard classification systems for trading physical goods. The system is standardised between countries at a 6-digit basic level with a 2-4-digit extension specific to varied countries.
The first 6-digit level is the same for all the countries that use it. However, the additional digits are country-specific and aim to accommodate national goals.
The HS codes were adopted in January 1988 due to the rise of varied classification systems that offered no uniformity.
Following the lack of uniformity, the Customs Cooperation Council developed the Customs Cooperation Council Nomenclature. However, the nomenclature only supported a limited number of countries and was manual.
Hence, the Harmonized Commodity Description and Coding System was developed. Today, over 200 countries have adopted the international Harmonized System. It is useful when classifying goods intended for shipping to the global market.
Why is HS Classification Important?
HS classification is critical in every cross-border transaction. Here are the three reasons why the classification is essential:
It’s Part of the Law
Your responsibility as an importer or exporter is to accurately identify your goods when moving overseas. It’s not a choice but a requirement in every cross-border transaction.
The best strategy you can adopt as an importer or exporter involves sharing the HS code within the purchase request. It helps any third-party IOR or EOR responsible for customs clearance to find the HS code easily.
Helps Avoid Unnecessary Costs
The HS classification reduces the hassle of identifying your goods. Wrong classification implies the following:
- Penalties: You may be penalised, especially when you intentionally assign the wrong codes to evade relevant duties and fees.
- Overpayment: If you assign the wrong code and your goods are overvalued, you can change the code afterwards. But you receive no refund for the overpayments.
- Underpayment: You are allowed to make a disclosure if you realise underpaid duties. However, you must pay the amount owed and wait for the customs authorities to determine if you are eligible for penalties.
Hence, HS codes help avoid penalties, overpayment, or underpayment of suits and fees. It also provides a means to identify cross-border requirements for imported or exported goods, including export licenses.
Helps to Streamline Cross-Border Supply Chain
HS codes hold the centre for any cross-border transaction. Without them, it would be challenging to determine the import/export requirements, the amount of duties and fees payable, the value of the goods, and customs clearance.
Besides, international organisations use HS codes to control trade policies, trade tariffs, quota controls, price monitoring and transport statistics.
Who is Responsible for Finding the HS Code?
The importer is responsible for the accurate classification of goods. And in cases where the importer partners with a customs broker for the import transaction, it’s the customs broker’s responsibility.
How do I Find my HS Code?
Finding an HS code is a step-by-step process involving several stages. The stages apply the general rule of interpretation and sometimes incorporate an individual’s strategies to find the code easily.
Here are the various strategies you can use to find your product’s HS code:
- Considering a bill of material (BOM): This involves understanding the product’s classification using the product’s manufacturing information.
The manufacturing information includes the product’s chemical composition, manufacturing process, packaging information, and application.
- Referring to your country’s HS code classification website: Most countries follow internationally agreed principles of HS code.
Hence, you can find the product’s physical characteristics and other features on the HS code classification website.
- Competitor research: if your product matches a competitor’s bill of materials, characteristics, composition, etc, you can refer to the same HS code.
- General rules of interpretation (GRI): The World Customs Organization highlights six principles that could facilitate finding the HS code based on the product’s classification.
- Binding Tarrifs information (BTI): The BTI is issued by customs authorities and links your items with a legally binding HS code classification tariff. Hence, you can use it to find your product classification.
How do you Read an HS Code?
To read the HS code, you must understand how it is structured and organised. First, the HS code consists of distinct digits, with the first two reflecting the chapter.
The next two digits refer to the headings appropriate for the chapter, and the subsequent two digits represent the subheadings of the classification.
Ideally, the HS code is defined by six digits for each product. However, depending on each country’s regulation, the HS code can be up to twelve digits. The additional digits represent the subheadings within the hierarchical organisation.
Once you understand the HS code structure, you can apply structural reading.
For instance, start by reading the code’s chapter to obtain a rough product overview. Then, read the headings and subheadings for an in-depth understanding of the specific classification of the product.
What are the Rules of the HS Code?
HS classification offers six general rules of interpretation, updated and maintained by the World Customs Organization (WCO). The authority guides the interpretation and application of the system, including updating Explanatory Notes.
Here are the six general interpretive rules:
Rule 1
Section Titles, Chapters and sub-Chapters are only meant for reference purposes. The legal classification should be based on chapter notes, section notes, or terms of headings.
Rule 2
This is the rule of unfinished or incomplete merchandise. It entails two sub-rules:
Rule 2a: Unassembled or disassembled articles presenting the characteristics of a complete or finished product should be classified as complete. For instance, a car without two of its tires is still a car.
Rule 2b: Articles presenting the characteristics of a mixed product should be classified using rule number 3.
Rule 3
This is the rule of goods whose classification falls under multiple headings (prima facie). It entails three subrules:
Rule 3a: You should prioritise headings with the most specific descriptions over generic ones. However, if the varied headings refer to various parts or substances making up the goods, they shall be considered equally specific.
Rule 3b: Composite goods, mixtures, and goods comprising various components should be classified according to the components that determine their character.
Rule 3c: If the goods cannot be classified by 3a and 3b, the various equally specific components shall be assigned independent headings.
The goods classification takes the heading with the highest classification number (heading occurring last in numerical order among those equally meriting consideration)
Rule 4
This is the rule of associating similarities. Goods that cannot be classified in rules 1,2,3, and 4 are assigned the classification heading of goods presenting similar characteristics.
Hence, the goods are compared with other similar goods. And the classification that corresponds (to a greater extent) to the goods in question is adopted.
Rule 5
This is the rule for classifying packaged merchandise (goods in containers and cases).
Rule 5a: Goods packaged in fitted cases suited for the specific articles (cases normally used for packaging such goods) should adopt the same classification as the cases. For instance, camera cases, gun cases, and musical instrument cases.
Rule 5b: If the packing materials indicated in 5a are suited for repetitive use or can be used for multiple products, the product and container should be classified independently.
Rule 6
This is the legal rule of correct heading and sub-heading interpretation. The rule requires a comparison of only subheadings of the same level.
That is, the subheadings of a heading can only be determined based on the terms of those subheadings and related subheading notes.
As such, you can only compare a single dash with the description of another, and the same is true of double dashes in tariff classification.
Conclusion
We discussed several ways of finding your HS code, and the six general rules of classification are just one way. Hence, you can adopt various techniques to classify your goods accurately.
However, we understand that the process can be complex. Especially if you are new to international trade. You don’t have to endure the hassle of finding the HS codes for your goods. You can transfer that responsibility to a global logistics partner.
A global logistics expert who acts as both an importer of record and exporter of record can be a lifesaver. Whether you are importing or exporting, they will ensure your goods are accurately classified, simplifying the customs clearance process.
