These days we are all spoilt for choice when it comes to buying something. Thousands of lines of commodities are available to us for purchase from the supermarket or by simply going online. Some of the commodities that we purchase are locally made while others are imported.
With the vast number of products that have flooded the market, authorities need a method of monitoring what is imported into the country and what goes out as exports. This is where the system of harmonized codes comes in.
Harmonized codes are used universally to identify goods. It is a system of classifying the different types of goods. Several conventions and government initiatives recognize the WCO’s Harmonized Commodity Description and Coding System (HS).
The HS code, as it is commonly known, is used for the declaration of goods at the border customs, calculation of its correct customs duty, and the recording of such data. This is usually followed by the publication of trade statistics and their evaluation by the relevant bodies.
Every exporter or importer is legally responsible to correctly classify the goods that are shipped and declare this to the customs using the correct HS code at the time of export or import.
As the name suggests, it harmonizes customs and trade procedures on a global level.
Harmonized Commodity Description and Coding System shortened to HS System, was introduced by the World Customs Organization (WCO).
The HS System serves to standardize the names and terms used in classifying goods so that goods can be identified easily for different purposes during exports and imports.
HS codes help to remove ambiguity while classifying goods for charging customs duty, surcharge, taxes, etc. They are also used by governments, trade bodies, and the private sector to calculate freight tariffs, keep control over the goods while implementing trade quotas and policies set by governments, identify goods that are hazardous to the environment, plants, animals, and human beings, etc.
Numbering Convention of HS Codes
HS codes have a minimum of six digits. It is a number consisting of sections, chapters, headings, and sub-headings of the harmonized coding system. Typically, each country adds another two to four digits to this six-digit code prescribed by the WCO to form a unique HS number. For example:
The format of HS codes follows the first six digits set by the WCO followed by the two to four digits given by the respective country. As can be seen, the first six digits are always the HS code that has been set by the WCO.
The first two digits are the chapter number in the HS system of numbering, followed by the next two digits that show the heading under this chapter. The last two digits show the subheading under the heading.
In the above example, it means the tenth sub-heading under heading number fifteen coming under chapter number sixty-two of the harmonized coding nomenclature. The last four zeros are the digits given by the authorities of the country issuing this HS code.
The HS coding system includes more than 200000 internationally traded commodities. It has more than 1200 headings that have around 96 chapters. These chapters are grouped under 21 sections.
How Does the HS Code Work?
While importing or exporting goods the consignee or the consignor or their respective authorized agents have to declare the goods to the port customs by using the correct harmonized system codes.
By following the HS system, there is no confusion in the classification of goods that are imported or exported. This classification is important to the customs as well as the consignee or consignor as it is used for several purposes including calculating the customs duty and other surcharge or taxes.
Wrong declaration of goods using any other methods can result in a loss to one of these parties. The World Customs Organization does not set the customs duty rates as this is done at a national level, following the WCO classification by way of HS codes.
The current version of harmonized system codes used internationally is the HS 2017. However, the version that is set to be released on 1 January 2022 is the HS 2022.
This edition would include 351 sets of amendments to the existing rules that govern the trading of goods between countries. A new version is normally released every five to six years by the WCO and it takes into account issues that are encountered and the possible solutions to these issues.
The World Customs Organization (WCO)
Headquartered in Brussels, Belgium, the World Customs Organization or WCO was founded in 1952. It was initially called the Customs Cooperation Council or the CCC. This intergovernmental organization was set up for the cooperation, technical assistance, increased efficiency, and effectiveness of customs bodies all over the world.
Currently, the WCO includes about 183 customs bodies whose role is to provide guidance and support to the customs organizations of the world. Its performance is measured and evaluated through Key Performance Indicators (KPI) on the total initiatives taken to provide leadership, guidance, and support to its members.
The objectives of the WCO are to facilitate trade, improve the collection of revenue by the members, and take up initiatives that protect the environment and society.
The WCO strives constantly to improve its strategy for achieving its objectives. How does it achieve this? The WCO streamlines processes, international standards, and cooperation between nations. It is also involved in capacity-building through technical assistance for the improvement of standards and training of associated staff.
The Tariff and Trade Affairs Directorate (T&TA) of the WCO is mainly in charge of the classification of commodities, valuation of goods that are imported, as well as matters relating to rules of origin. The Harmonized System (HS), Valuation agreement, and the Rules of Origin of the World Trade Organization (WTO) are managed by the T&TA.
Another Committee of the WCO is the Harmonized System Committee (HSC). The main function of the Harmonized Systems Committee is the interpretation of legal texts, settlement of disputes in the classification of goods between parties, and to affect amendments to legal texts whenever there are developments in trade patterns or technology that affect the system.
The WCO works in close cooperation with some leading world bodies such as the Commonwealth Secretariat, the INTERPOL, and the FATF.
The Commonwealth Secretariat consists of 54 independent member states that work with the WCO in meeting its goals and for the mutual benefit of these states.
Founded in 1965, it is headquartered in London, UK.
The International Criminal Police Organization (INTERPOL) and the WCO have cooperated and continue to work on several issues that range from fighting criminal activities to weapon, drug, and human trafficking. A memorandum of understanding was signed between the WCO and INTERPOL in 1998 to this effect.
The headquarters of the INTERPOL is in Lyon, France and it has 194 member countries.
FATF (Financial Action Task Force)
Set up in 1989, this is an intergovernmental body that works to combat terrorism and money laundering. The FATF has set standards that help to deliver a coordinated global response for fighting terrorism, organized crimes involving drugs and human trafficking, and corruption.
The FATF monitors countries for the correct implementation of its standards. Defaulting countries are held accountable and punitive measures are taken until the corrective and effective actions are implemented.
The WCO works with the FATF to find and implement new methods in combating terrorism, terrorism funding, and financial fraud.
The headquarters of the FATF is in Paris, France.
HS Codes in India
In India, the ITC-HS codes are used for national trading as well as for import and export operations. ITC-HS stands for Indian Trade Classification – Harmonized Coding System (ITC-HS).
The ITC-HS is an eight-digit code. The first six digits being the WCO code followed by the code given by the office of the Directorate General of Foreign Trade of India.
The ITC-HS coding system has two schedules, one for the import of goods and the other for export. Import Schedule I of the ITC-HS explains in detail the rules and procedures to be followed while importing goods into the country.
The Export Schedule II of the ITC-HS explains the rules and procedures for exporting goods.
The Directorate General of Foreign Trade (DGFT) is responsible for HS codes in India. It is an arm of the Ministry of Commerce and Industry of India. The main tasks of the DGFT are to formulate and implement foreign trade policies and to promote exports.
HS Codes in the US
The HS codes that are used in the US have ten digits of which the first six are the WCO-designated HS code. These codes are called the Harmonized Tariff Schedule of the United States or HTS-US. The United States International Trade Commission (USITC) is in charge of these codes. The HTS-US codes are used for the classification of traded goods.
When it comes to exports from the country, this ten-digit code is known as a Schedule B number and is mandatory for all goods that are exported from the country.
The administrative authority in charge of the Schedule B number in the US is the United States Foreign Trade Division (USFTD) that comes under the US Census Bureau. The USFTD is primarily responsible for the compilation of data relating to domestic trade and export of goods from the US to other countries. The Schedule B number classification is mainly used for this purpose. A Schedule B number follows the same pattern as the HTS-US code although the last four digits of the ten-digit number may be different.
HS Codes in Europe
Integrated Tariff of the European Communities (Tarif Integre Communautaire) shortened to TARIC is used by countries of the European Union. Following WCO directives, the TARIC code also begins with the first six digits of the HS code followed by the European Union’s code.
This may extend to more than ten digits taking into consideration the TARIC coding methodology that includes tariff suspensions, preferences, anti-dumping quotas, embargo, etc.
The TARIC code is used in imports and exports between EU member countries as well as in international trade from these countries.
The United Kingdom and HS Codes
The United Kingdom is no longer part of the European Union with effect from 31 December 2020. Her Majesty’s Revenue and Customs (HMRC) is a department of the government of the United Kingdom whose main duties include facilitation of international trade, collection of taxes, and compilation of trade statistics of the country.
The administration and regulation of HS codes also come under this department.
Some of the other responsibilities of the HRMC are payment of benefits, enforce tax and customs rules, etc.
Faulty Declaration of HS Codes and its Implications
Incorrect declaration of an HS code to the customs can result in payment of the wrong duty and taxes on the commodity that is being imported. Overpayment or underpayment of duties and taxes has its implications. The overpaid amount can be claimed by the importer but only after the submission of the required supporting documents.
The waiting period for getting this refund is also usually very lengthy. Similarly, underpayments are recovered by the authorities along with hefty penalties or fines.
In certain countries, an underpayment may even result in the confiscation of the goods involved. Such confiscated goods are returned to the importer only after submission of the correct supporting documents and payment of penalties or fines.
To avoid such situations, the person who is responsible for submitting the customs documents that require the input of the HS codes should have a thorough and in-depth knowledge of the classification of commodities and their application.
Staff who are experienced in working with HS codes can help companies to avail benefits that are offered by the government.
When goods are classified correctly using the right HS code, it will show if the customs duty is suspended, whether a license is required to move your goods, if it has any anti-dumping duties or tariff quotas.
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Hari Menon is a Freelance writer with close to 20 years of professional experience in Logistics, Warehousing, Supply chain, and Contracts administration. An avid fitness freak, and bibliophile, he loves travelling too.
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