Harmony as the word suggests is a pleasing arrangement of elements which give them better meaning and utility. Over the years, the number of products traded worldwide has gone up drastically. Each nation may have its own name and code for a particular product and this makes it next to impossible, tracking and classifying them. As a solution, World Customs Organization (WCO), an independent intergovernmental organization, came up with a multipurpose nomenclature code, now referred to as Harmonized System Code. This nomenclature is a systematic numbering of all the commodities that are traded internationally. The code came into effect in 1988 and ever since, WCO has been responsible for its development and maintenance.
The commodities are categorized over 5000 groups. It has 22 sections and 98 chapters that define each product with great detail. Products are grouped according to conditions such as crude/natural products, unprocessed/semi-processed/ processed, utility/function etc.
The companies can use the general rules of interpretation and explanatory notes for classification of a certain new commodity. A six digit code structures the commodities with welldefined rules and regulations. Of the six digits, first two digits are called ‘Chapters’, next two digits as ‘heading’ and last couple of digits as ‘sub heading’. Depending on the country an 8 digit or even a 10 digit code can be applicable for further detailed classification of the product, though the first six digits remain constant globally.
For a perspective, Section I is Live Animals and Animal Products, under which there are 5 chapters. Chapter 1 pertains to live animals, Chapter 2 contains meat and edible meat products, Chapter 3 is used to classify fish and crustaceans, molluscs and other aquatic invertebrates, so on and so forth. To understand it better, let us take a simple example from Setion IV- Chapter 22: Beverages, Spirits and Vinegar; Code 220110.
- The first two digits, i.e, 22 is the chapter number.
- The middle two digits 01 is applicable to waters, natural, not sweetened, ice and snow.
- The last two digits 10 are given to Mineral Waters and Aerated Waters (Not Containing Added Sugar and Flavor).
- In India an 8 digit code is used, known as the Indian Tariff Code (ITC). The additional two digits make it easier to identify the product in greater detail.
- For the same example from Chapter 22 given above, the Indian Tariff Code classifies it as 22011010 for Mineral water and 22011020 for Aerated water, with the last two digits defining mineral or aerated water respectively.
An important feature of classification is that products are categorized according to materials in chapters 01-83 and according to function in chapters 84-97. More than 205 countries use the HS code as a basis for its Customs tariffs and trade statistics. An overwhelming 98% of the goods traded are classified according to the HS Code.
The advantage of using HS Code is that everything has been previously well defined, structured and recorded, thus reducing the efforts required by the trading parties for documentation of the carried goods. The commodities can pass through the Customs faster, making the trade a lot smoother and time-saving affair. The use of HS Code doesn’t just end with Customs and trading companies. The simplicity and impeccable reliability of HS Code makes it ideal for use by governments, international organizations and the private sector for many other purposes such as internal taxes, trade policies, monitoring of controlled goods, rules of origin, freight tariffs, transport statistics, price monitoring, quota controls, compilation of national accounts, and economic research and analysis.
‘The International Convention on the Harmonized Commodity Description and Coding System’ is responsible for the governing of the HS Code. They give the explanatory notes and come up with new rules for the classification of goods in lieu of latest developments in technology and changes in the trade patterns. The WCO handles work such as examination of the policy matters, answering quarries on interpretation and settling of disputes.
Along with the many advantages, the HS Code comes with its own set of disadvantages as well.
- To begin with, due to harmonization of standards for commodities, the developing nations have to make do with the international standards set by the already developed nations, for their level of technology and advancement in manufacturing goods. It’s similar to kicking the ladder away for the ones following suit, in the race for a patent.
- The biggest problem with HS Code is the interpretation itself. Classification is often subjective and products are at the mercy of the experts doing the job of classifying the products. It’s not unusual to find packages that have been wrongly classified, leading to excessive taxes or penalty at the hands of the governing authority in a particular region.
- Within the same country itself, there could be auditors who interpret the goods differently, leading to a situation of chaos. When a single product such as a laptop or speaker is being imported, with an incorrect HS Code or lack of any HS Code at all due to unawareness in the part of the importer, heavy taxes have to be paid since the customs officer will impart a duty as he sees fit.
- When new commodities are being classified, companies ought to be careful to avoid incorrect classification. Changing the Code once approved can turn into a costly affair as well as have legal and technical issues regarding tax laws and delay at international borders.
You can purchase a subscription for Online Harmonized System Database using this link. It can be used to search for products by keyword or by using an HS code number to retrieve the information you are looking for.