HS code refers to the Harmonized System of product classification used internationally in the trade of goods. It was created to facilitate the categorization of traded goods in an easy, uniform and efficient way. The World Customs Organisation (WCO) developed it to better describe the shipped goods’ type and nature. It has streamlined Customs processes in such an efficient way that Customs officials in most countries now require it before they will allow any goods to enter or leave their jurisdiction.
This is a basic introductory article. If you need to know how to classify a HS code, you can refer to our simple HS code determination guide.
Structure of the HS Code
Here are some characteristics of the HS Code nomenclature:
- The first 6-digits of the code is globally harmonized
- It covers five thousand groups of commodities
- These groups consist of 99 chapters and 21 sections
- It is arranged in a logical way to facilitate easy use
- Thanks to its clearly defined regulations, it has become a uniform way of classifying goods all across the world
The HS code system a result of the 1974 Kyoto Convention and was intended to act as a uniform tool to simplify and harmonize Customs procedures across the globe. This has helped it become a global standard in Customs administrations all over the world.
Where is HS Code Used?
More than 95% of globally traded goods need to be assigned a HS Code, because more than 200 countries around the world employ this system of classification for calculation of tariffs as well as the collection of other statistics related to international trade.
Customs officials aren’t the only ones using HS Codes. Many international organizations and private firms also employ this code to manage goods. This management includes, among other things, the following:
- monitoring goods
- trade policies
- transport statistics
- quota controls
- traffic statistics
- origin rules
It can be safely said that the HS Code has become an integral part of international trade and is an international language concerning the classification of goods.
HS Code Maintenance and Classification
The World Customs Organisation (WHO) offers the official definition and interpretation of the HS code nomenclature. It is also responsible for its maintenance. Maintenance in this instance refers to the measures that need to be taken to keep the code updated to keep up with the technological advancements and changes in business patterns.
Harmonized System Committee
The Harmonized System Committee represents the HS convention signatories and parties. The WCO manages the HS Code through this committee. The tasks of this committee include:
- classification questions
- dispute settlement
- amending explanatory notes
- examining policy issues
In addition to the above responsibilities, the committee is also responsible for updating the HS System periodically (usually every 5-6 years).
How do HS Codes Work?
HS Codes are given to goods according to the process of HS classification. The classification standard used is known as GRI and stands for “General Interpretative Rules” of the Harmonized System.
Here are the six rules that need to be completed for HS applications. The order of the rules must also be maintained.
- GR1: This determines the 4-digit heading
- GR2: This is used in classifying unassembled or incomplete goods. Additionally, it can also be used for combinations of goods
- GR3: This is used for goods that can be classified under multiple HS headings
- GR4: This is used for products that aren’t covered by GR1, GR2, and GR3
- GR5: This is used for the classification of packaging if necessary
- GR6: This determines the six-digit heading
Challenges in the Classification of Companies
Since the system of classification has been accepted internationally, avoiding mistakes in implementation and interpretation carries great importance. Implementing the code wrongly can lead to confusion among Customs officials as well as add delays to shipments. In some cases, it can even lead to penalties.
Since people with different backgrounds and from different countries are implementing the same system, misinterpretation can happen. Such misinterpretation leads to false categorization, leading in turn to wrong tariff duties being imposed on the product. By the time mistakes are corrected, the trader has already lost a lot of valuable time. And as mentioned above, the loss can also be in the form of penalties due to wrong categorization. It is best to clarify any issue regarding the implementation of the HS code directly with the Customs authorities compliance professionals.