HS Code Classification: A Layman’s Simple Guide

Customs authorities don’t have the time to read product descriptions individually before deciding which products can be allowed in or out, what duties or taxes should be applied or whether licensing controls or restrictions apply. This is where the HS code of a product becomes important.

So how do Customs authorities overcome this problem?

In almost every part of the world, importers and exporters have to declare a product classification number that in a way replaces product descriptions. This number allows Customs to know that an importer who is trying to import a “sweetened grape flavored carbonated drink”, is simply trying to import “aerated fruit juice”.

This number is called the HSN code, HS code, tariff code or HTS code and has been in use since 1988, maintained by the World Customs Organization or WCO.

WCO’s HS Code Nomenclature

WCO’s HS Nomenclature contains 21 sections, subdivided into 99 chapters that are further subdivided into more than 1,200 headings and more than 5200 subheadings. The WCO version only goes up to 6 digits and countries use the WCO version to develop local versions that go up to 10 digits or more.

That’s a lot of numbers! How would you know the correct HS code to use for a can of soft drink, a bicycle, a Christmas tree, apple or plastic injection molding machine?

Well, without knowing WCO’s 6 General Rules for the Interpretation of the Harmonized System, you wouldn’t. And you really shouldn’t take wild guesses either, because wrong classifications can lead to Customs penalties and fines. In many cases it can also lead to duty claw-back claims spanning several years of imports.

Let’s look at these rules, understand what they are and how to use them correctly.

The General Rules of Interpretation for HS Classification

The General Rule of Interpretation or GRI 1 requires products to be classified by the terms in tariff headings and by using the first four rules in hierarchical order. But first, you have to read all Section, Chapter and Heading notes relevant to your product to ensure that the product is not specifically included or excluded from any of these. If you are fortunate enough, the notes will specifically mention that your product is included in a heading, otherwise keep looking and exhaust all possibilities to be sure you are on the right track.

Most of the time, you would be able to classify your products using GRI1, but keep in mind that your product will probably not be described in the headings as you expect it to be. For example, we classified the carbonated fruit juice we talked about earlier under HS 22029950 which in the ASEAN Harmonized Tariff Nomenclature has the tariff description of “Other non-aerated beverages ready for immediate consumption without dilution”! If you were looking for the term “sparkling grape juice” or “grape soft drink” in the tariff book, you would never find it.

GRI 1 is easy to understand, but let’s make it complicated. What if you are selling a assemble it yourself wooden wardrobe that customers have to put together themselves. Would you classify this a furniture or wooden planks?

That’s where GRI 2 comes in. This rule consists of GRI 2a and GRI 2b. GRI 2a dictates that unassembled incomplete articles that have the essential character of the finished product will be classified as if they were the finished product. So, a box containing all the parts of an unassembled bicycle would still be classified as a bicycle. A motorcar missing its wheels would still be classified as a motorcar. However, since essential character can be determined using many aspects such as form, function, features, value, volume and weight, complications can arise quickly. For example, would a sedan missing all four tires and doors, both its axles, and perhaps it’s gear box still be considered to hold the essential character of a car? Different Customs authorities may have different opinions.

GRI 2b is very straight forward. It merely states that if the product you are trying to classify is a set, mixture or composite product it must be classified by GRI 3.

GRI 3 is probably the most hotly debated GRI of all. It consists of rules 3a, 3b and 3c. GRI 3a requires you to use the most specific classification possible in the tariff. This mean simply means that you should classify a valve made of polyethylene as a valve and not a general article of plastic. Another example would be to classify bicycles as vehicles and not toys.

Now we move on to GRI 3b. This is easily the most complicated rule to understand and apply. This rule requires that you classify sets or composite products according to the essential character of the item. As we have seen earlier, the idea of essential character can be very subjective. For example, in a men’s shaving set does the shaver handle, shaving cream or the blade cartridge give the set it’s essential character? What if the shaving cream was specially formulated and extremely expensive and the only reason a person would buy the set in the first place was to get a hold of the cream would that change your opinion?

What happens if you really think no single feature of your product gives it essential character? Then you use GRI 3c.

GRI 3c requires you to classify a product under the heading that appears last in the tariff book, if you cannot determine an aspect or component of the product that gives it essential character. For example, if you had a bag containing 5 chopped up apples and 5 chopped up pears of the same value, weight and quality you could use this rule to classify the product as pears since the HS code for pears appears after that for apples. Of course, sometimes Customs may just require you to declare them separately.

If you have made it up to here, congratulations! That means your product is so outstanding unique that the first three GRIs were useless. It’s specifically for situations like this that GRI 4 was defined.

GRI 4 allows you to classify a product as something similar, if and only if your product was so uniquely special that you could not find a suitable heading in the tariff book for it. In reality, it is very unlikely that you would use this rule, although not impossible.

The next 2 rules; GRI 5 & 6 are applicable for all steps when doing HS classifications.

GRI 5a and 5b require you to classify normally non reusable packaging with the item it contains. For example, a simple guitar case containing a guitar would be classified as a guitar. However, a reusable liquid canister meant for transporting large quantities of liquids would not be classified as the liquid it contains.

By now you would have noticed that tariff books seem to have a lot of dashes in them. That’s a strange way to format information wouldn’t you think? Unless those dashes have some special significance, which brings us to GRI 6, which is possibly the most important rule you need to understand.

According to this rule, when determining a suitable Heading, you need to compare only 1 dash level headings with one another, then compare 2 dash level subheadings, then 3 dash level subheading and so on until you reach a complete HS code. If this GRI is properly used, you will never find yourself comparing 2 sub heading terms that are exactly the same. If this GRI is not correctly used, you will almost always find yourself comparing 2 subheadings that appear exactly the same.

See the slide deck below for an idea of how to use GRI 6 to classify oxen used for farm work.

You can download the slide deck here.

GRI 6 HS Classification PPT Revised

 

 

Just 6 seemingly straight forward rules, yet it can take trade compliance professionals many years of expertise to master them. If ever in doubt, always get professional guidance or an experienced Customs broker to guide you.

Making mistakes with HS classification can be very costly. The good news is such mistakes can easily be avoided.

Download our easy reference HS Classification Process Guide Download HS Chart

 

Diagram showing HS Classification process

References:

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