HSN or HS (Harmonized Commodity Description and Coding System) is a multipurpose international product nomenclature developed by the World Customs Organization (WCO). HSN codes are internationally recognized system of codifying and classifying all the products in the World. India, a member of WCO, has been using HSN codes since 1986 to classify commodities for Customs and Central Excise
The HS code consists of 6-digits. The first two digits represent the HS Chapter. The second two digits denotes the HS heading. The third two digits denotes the HS subheading. For deeper classification, Customs and Central Excise added two more digits to the 6 digits to make the code more precise, resulting in an eight-digit classification.
With the growing complexity of supply chains as well as the increasing number of government regulations around importing and exporting, dealers are realizing the need to proactively manage trade compliance data in order to minimize risk, such as the inaccurate classification of data. Classifying products is typically a manual and time-consuming process.
Let us understand the meaning of classification, it is a process in which objects are recognized, differentiated, and understood. The process of assigning HS codes is known as "HS Classification".
Let's look into an example of the hierarchical structure of the Harmonized System:
The HS code 1006.30, for example indicates Chapter 10 (Cereals), Heading 06 (Rice), and Subheading 30 (Semi-milled or wholly milled rice, whether or not polished or glazed).
Understanding HSN structure:
- The HSN structure contains 21 sections, with 99 Chapters, about 1,244 headings, and 5,224 subheadings. Sections and chapters are arranged in order of a product's degree of manufacture or in terms of its technological complexity. Natural products like animals and vegetables appear in the earlier sections; man-made or technologically advanced products like machinery appear later.
- What does the dash (-) in the HSN indicates? A single dash (-) at the beginning of a description denotes an article that belongs to a group covered under a heading. A double dash (--) indicates that the article is a sub-classification of the preceding article that has a single dash. Similarly, a triple dash (---) or quadruple dash (----) indicates the article is a sub-classification of the preceding article that has a double dash or triple dash.
- HS codes can be determined by a variety of factors including a product's name in trade parlance, its composition, form and its function. An example of a product classified according to its form would be tamarind. The classification will also change depending on whether the tamarinds are fresh or dried. Fresh tamarinds are classified under HSN 0810.90, under the heading other fruit, fresh, Sub heading Other, while dried tamarinds are classified under HSN 0813.40 under the heading fruit, dried, other than that of headings 0801 to 0806; mixtures of nuts or dried fruits of this chapter, subheading other fruit.
- Each Section is a collection of various chapters. Sections represent a broader class of goods, and chapters represent a particular class of goods. For example, Section XV relates to base metals and articles of base metals, while Chapter 72 to section XV is for iron and steel specifically, Chapter 74 is for copper & articles thereof and Chapter 75 nickel & articles thereof.
- Each chapter is further divided into various headings depending upon different types of goods belonging to the same class. For example, Chapter 74, Heading 74.03 deals with refined copper and copper alloys, and Chapter 74, heading 74.19 deals with other articles of copper.
- Each heading is further divided into sub-heading, which contains products, for which HSN code is ultimately assigned. For example, Copper-tin base alloys (bronze) under Copper-alloys, bears the HSN code 7403.22. HSN code for other products under Copper-alloys are classified under 7403.29.
- For better identification of goods, India and a few other countries use eight-digit codes for deeper classification. For example, 740322.10 is the HSN code for Phosphor bronze under Copper-tin base alloys (bronze).
- Now, let's understand the above examples in an inverted pyramid,
Classification by using General Interpretative Rules. (GIR)
GIR are the rules that govern the classification of goods under the HSN. Once a classification is complete, there's no need to continue applying the remainder of the rules. There are 6 General Rules. which must be applied in consecutive order.
Rule 1: Prescribes how to classify products based on the wording of the headings and the relative HS Section and Chapter Notes.
Rule 2: Prescribes how to classify both incomplete and unassembled goods, and mixtures and combinations of goods.
- Rule 2(a) specifies that the incomplete/unfinished goods having essential characteristics of the finished/complete product to be classified as that of the finished product .
- Rule 2(b)specifies that the mixture of material/substance falling under one heading with other materials/substances falling under another heading, the classification of goods consisting more than one material/substance shall be determined under Rule 3.
Rule 3: Prescribes how to classify products that are, prima facie, classifiable under two or more different HS headings.
- Rule 3(a) Specific heading to be preferred over general headings
- Rule 3(b) Mixtures/composite goods consisting of different materials/components should be classified according to the material/component that gives them their essential character.
- Rule 3(c) If two headings are equally suited to the item, then the heading that appears last in numerical order to be chosen.
Rule 4: Prescribes that goods cannot be classified under above rules, to be classified under the heading appropriate to the goods to which they are most akin.
Rule 5: In respect of packing material& containers following rules shall be applicable.
- Rule 5(a) specifies containers specifically designed for the article and suitable for long-term use shall be classified along with that article, if such articles are normally sold along with such cases. For example, a camera case would be classifiable as cameras.
- Rule 5(b): Packing materials and containers are to be classified with the related goods except when the packing is for repetitive use.
Rule 6: Prescribes how to classify products at subheading level, based on the wording of the subheadings and the relative HS Section and Chapter Notes. Only subheadings at the same level within the same heading are comparable.
Example: A framed glass mirror is found to be classified in heading 7009. Thereafter, it would have to be classified within the subheading structure of that heading by application of Rules 1 to 5 pursuant to Rule 6.
Summary of HSN sections:
- Section I (Chapters 1 to 5) covers live animals and animal products
- Section II (Chapters 6 to 14) covers vegetable products
- Section III (Chapter 15) covers animal or vegetable fats and oils
- Section IV (Chapters 16 to 24) covers beverages, spirits, vinegar, and tobacco
- Section V (Chapters 25 to 27) covers mineral products
- Section VI (Chapters 28 to 38) covers chemical and para-chemical products
- Section VII (Chapters 39 to 40) covers plastics and rubber, and articles thereof
- Section VIII (Chapters 41 to 43) covers certain animal hides and skins
- Section IX (Chapters 44 to 46) covers wood, cork, manufactures of straw, and articles thereof
- Section X (Chapters 47 to 49) covers pulp of wood, paper, paperboard, and printed products
- Section XI (Chapters 50 to 63) covers textiles and textile articles
- Section XII (Chapters 64 to 67) covers footwear, headgear, umbrellas, walking sticks, prepared feathers, artificial flowers, and articles of human hair
- Section XIII (Chapters 68 to 70) covers articles made of minerals, stone, plaster, cement, etc., and ceramic and glass products
- Section XIV (Chapter 71) covers precious metals and stones
- Section XV (Chapters 72 to 83) covers base metals and articles thereof (Note: Chapter 77 is reserve for future use)
- Section XVI (Chapters 84 to 85) covers machinery and mechanical appliances, electrical equipment, sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles
- Section XVII (Chapters 86 to 89) covers vehicles, aircraft, vessels, and associated transport equipment
- Section XVIII (Chapters 90 to 92) covers optical, photographic, cinematographic, and musical apparatus and equipment; measuring, medical, surgical, and other instruments; and clocks and watches
- Section XIX (Chapter 93) covers arms and ammunitions
- Section XX (Chapters 94 to 96) covers miscellaneous manufactured articles
- Section XXI (Chapters 97 to 98) covers arts, collector's pieces, and antiques
Under GST, a dealer have to mention two or four or eight-digit HSN codes on tax invoice for their commodities, depending on the annual turnover in the preceding financial year:
Annual turnover in the preceding financial year
Number of Digits of HSN Code
Upto 1.5 crores
>1.5 crores but upto 5 crores
> 5 crores
- Those with a turnover of less than INR 1.5 Crores not to mention.
- Those with a turnover exceeding INR 1.5 Crores but less than INR 5 Crores shall be using the 2 digit HSN codes
- Those with a turnover exceeding INR 5 Crores shall be using the 4 digit HSN codes
Those dealers who are into imports or exports shall mandatorily follow the 8 digit HSN codes, as GST has to be compatible with international standards and practices.
Challenges in classification for companies
The acceptance and versatility of the HS code as a universal economic language and code for goods has made it an indispensable tool for international trade which is incorporated into many of the customs clearance systems around the world.
1. Variety of products: Companies who do import and export meet challenges of how to classify products with the growing varieties of products. Classification and restrictions, to some extent, has a bad effect on free trading and growing of business.
2. Risk of loss caused by difference in classification: Firstly, the proper classification of item is essential to export or import any goods. And subsequently exporters and importers need to be aware of how to classify the products accordingly and which category should be classified to. A slight difference in classification can mean a huge difference in the duties that are paid.
3. Incorrect classification may also, result in the imposition of non-compliance penalties. Companies may even miss-out exemption available on that particular product.
So a proper classification can save huge amount of money for the company which is why nowadays importers and exporters are dying to find a perfect way to solve those issues above.