Cross-border Trade

What exactly is a HS code and what does it do?


HS code

Image: A2Z Taxcorp LLP 

You might have seen a terminology called HS Code across many trade documentations or correspondences, but what exactly does it mean? Who uses it and what is it used for? - Here’s all you need to know. 

What is a HS code?  

HS stands for Harmonized System. It was developed by the WCO (World Customs Organization) as a multipurpose international product nomenclature that describes the type of good that is shipped. Today, customs officers must use HS code to clear every commodity that enters or crosses international borders.  

How is the HS code structured?  

  • Six-digit identification code 
  • 5000 commodity groups 
  • Groups have 99 chapters 
  • Chapters have 21 sections 
  • Arranged in a legal and logical structure 
  • Well-defined rules support it to adopt uniform classification worldwide 

Importing and exporting

Image: Shaunl on unsplash 

Why are HS codes important?  

Now more than ever, HS codes are used tremendously in electronic messages like EDIFACT – Due to this, it has made it simpler for the system to be set as a worldwide standard for describing a good through various platforms. Its almost universal usage allows authorities like Port and Customs departments to better identify products.  

Who uses the HS code & what is the HS code used for? 

The HS system is used significantly by over 200 countries and other economies around the world for the collection of international trade statistics, and as a basis for customs tariffs. More than 98% of goods involved in international trade are classified in terms of the HS code as well, which shows its rising popularity.  

On top of governments, this code is additionally used by private-sector firms and international organizations - They use it to monitor, update, and optimize controlled goods, internal taxes, rules of origin, trade policies, transport statistics, compilation of national accounts, quota controls, price monitoring, economic research, engaging in analysis, and many more.  

Hence, the HS code is seen as a vital tool that enriches international trade, universal economic language, and coding for commodities.  

Importance of HS codes when importing/exporting  

HS codes are crucial to both importers and exporters, as having the right product classification falls under their legal responsibility. Before diving straight into the importing and exporting market, the most key step for shippers to take is assigning a HS code.  

Usually, suppliers just accept an importer’s purchase orders and ship their goods without knowing its HS code – However, shipping before assigning a HS code is not good business practice as it causes issues that could be costly, harmful to both parties’ core businesses, and damaging to their reputation. Here are some issues that may occur when HS codes are not assigned either properly or at all, or when there are incorrect HS codes assigned:  

Duty rates affected

Risk of delays & storage charges 

Regulatory risks 

  • Duty rates are tied closely with HS codes 
  • One of the most important steps of the entire shipping process 

 

  • Faced by shippers, when customs brokers are unable to: 
    - Classify shipment correctly  
    - Identify commodity and its corresponding HS codes before the vessel arrives and free time at the terminal finishes 
  • Faced by shippers: 
    - Regulatory intervention 
  • Assigning HS codes in a rush --> Lower accuracy 
  • Incorrect HS code --> Importer pays too much duty/gets fined for inaccuracy 

Challenges in the implementation and use of the HS  

  • Might be complex and difficult to implement without very extensive training  
  • Might give room to duplicative work  
  • Might require the development of various other analytical classifications 

However, with the right training and precision, HS codes boast plenty of benefits which sure do outweigh the challenges, as seen below. 

Benefits associated with the usage of HS code   

Universal Language  

International comparability of trade statistics 

Used as building blocks of other product classifications 

Flexibility in accommodating national needs  

  • Encircles legal text and extensive explanatory notes  
  • Maximum possible uniformity in interpretation of definitions of commodity groups 
  • Both in commercial practice and trade negotiations. 
  • Facilitates detailed analysis of international trade and its role in the globalization of national economies. 

 

  • As, the HS contains detailed descriptions of commodities. 

 

  • Allows each country to introduce its own level of statistical detail beyond the six-digit level  
  • Provides necessary flexibility in accommodating national needs. 

 

Keeping track of your HS codes 

It is good practice to put aside some time periodically to review all the HS codes that have been used historically. At the same time, ensure that your intermediary has a list of any new products beforehand that will be coming through the system. 

When choosing the correct classification of HS codes, you can look at the classification list and check that the code given to you by your intermediary matches the actual description. However, the definitions used are based upon the Harmonized System and might not always be the ones that you would use normally. For example, the everyday definition of a product is not always what the HS definition dictates. One simple way to check is to get access to the Explanatory Notes (EN) that correspond with the Harmonized System. This is available on your government customs websites. Therefore, you can now check the classifications of your products, which will also show the customs office that you have taken all reasonable and necessary care. It is especially important to do this as the law states that the importer is responsible for showing the correct HS code on every entry submitted in their name. 

Warehouse

Image: Onurdongel on Unsplash 

There are many businesses in the import and export industry, and every business and supply chain are slightly different and make use of different business methods. Thus, it is important to be mindful to provide the correct HS codes. Make sure that both parties include all required classification resources. It is perfectly fine if time is taken to get them right, but they eventually must be so - no matter the assortment of products that are imported or exported 

For more information, contact Trustana today. 

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