HS codes are important for importing and exporting products, but can often be difficult to understand. Whether you're someone in the business of imports and exports, a customs broker or agent, or the logistics or e-commerce industry, you need to correctly classify your products with an HS code when they cross borders.
If you’re wondering about HS code automation potential, statistics show that the global trade in goods hit an all-time quarterly high of $5.6 trillion in the third quarter of 2021 alone.
In this article, we will take you through understanding what an HS code actually is, discuss common challenges of determining an HS code of your product as well as the risks and business implications of incorrect customs tariff classification. We will end off with important HS 2022 updates and the automation potential of HS codes and customs procedures in general.
What is the Harmonized System (HS)?
If you’re wondering what the Harmonized System (HS) is, it is a numerical classification method devised and maintained for the classification of traded products by the World Customs Organization (WCO). It is utilized by customs authorities across the world to identify items while assessing duties and taxes, as well as for compiling statistics.
HS codes are utilized by more than 200 countries and economies as the basis for their customs duties and trade statistics collection. Hence, more than 98 percent of items traded internationally use HS for classification.
The HS is the most widespread method for classifying goods in international trade and is used by almost all countries. It influences and harmonizes customs and trade procedures, thereby lowering international trade costs.
Now that you know what the HS is, let’s take a look at what an HS code actually is.
What is an HS code?
The Harmonized (Commodity Description and Coding) System, or HS code, is a system of classification using a sequence of six digits to form a unique number that identifies each unit of merchandise. This unique number is then used by customs to classify the product.
Basically, the HS code:
- Is a unique six-digit identification code.
- Is organized into 21 sections and 99 chapters.
- Has more than 5,000 commodity groupings in total.
- Is structured according to strict legal and logical parameters.
- Is defined by rules that support consistent, and uniform global classification.
The Harmonized System (HS) is a global statistical standard used to collect international trade data and set customs duties and tariffs. The HS Code is used as a foundation for import taxes and classifies most of all goods traded internationally.
So, in order for a good to be legally imported into a country, the HS code of that good must be listed on the commercial invoice. It is also required to list a unit of measure for each commodity in a package so that it can be easily identified and processed by customs officials when being exported or imported.
What’s more, HS codes are utilized by businesses in the private sector and international organizations. They’re used to track, update, and optimize controlled products, taxes, rules of origin, policies, transport statistics, freight duties, national accounts, controls, price monitoring, research, and analysis.
As a result, the HS code is seen as an important instrument for international trade, a global economic language, and commodity coding.
The structure of the HS code is as follows:
- The first two digits represent the Chapter.
- The second two digits represent the Heading.
- The last two digits represent the Subheading.
The first two digits designate the category (Chapter) that the product falls into, while the last four digits (Heading and Subheading) refer more to what type of product it is in more detail. This is the number that customs agencies around the world use to identify the contents of your box.
So which product does the HS code 080810 describe? An apple, as simple as that. Here’s the logic of how it is translated in the HS code language:
- Chapter: Edible fruit and nuts; peel of citrus fruit or melons (08) - this represents the broader category to which the product is assigned.
- Heading: Apples, pears, and quinces, fresh (08) - this is the subcategory of the product and provides more details about the product.
- Subheading: Apples (10) - This is the actual product.
- HS Code: 080810
HS codes follow certain rules known as GRI, which stand for General Rules for the Interpretation of Customs Tariff Schedules. There are around 5,000 six-digit HS codes in existence, and they are updated every few years to reflect changes in global trade. The latest update to HS codes came into force on January 1, 2022.
Additionally, when importing or exporting goods each country’s customs authorities might require additional information about a product that will help them put it into the right category. That's why HS codes often have extra numbers after them – because further details are necessary to accurately describe a product.
Depending on the country you are importing or exporting to, additional digits might be added to the HS code to further specify what the product is. This may depend on the importing or exporting country's rules.
Why is it so hard to get the HS code classification right?
Did it seem easy to determine the HS code of an apple? Sometimes you might be comparing apples and oranges without even realizing it. Here are some common challenges we have found with determining an HS code for a product:
- You must be familiar with the General Rules of Interpretation and General Notes, which are legal languages that might be difficult to comprehend.
- Your goods or services may not always match up precisely, in terms of characteristics and use, to any given HS code.
- The code may be difficult to determine if you don't have the necessary information at hand (an example of this may be you're an e-commerce seller, selling items that you didn't produce).
- The HS curriculum can be out of date and does not always reflect the latest technological innovation.
- The HS schedule is written in an old-fashioned language that might not align with contemporary lingo.
Why are HS codes important?
Despite all the complexities and shortcomings of the HS code system, you should assign the correct HS code to your product to the best of your understanding and abilities. That’s because carelessly assigning HS codes carries some risks:
- Risk of Incorrect Duty Rates
HS codes are closely linked to duty rates. Not assigning an HS code or providing an incorrect HS code may be quite detrimental to a company's bottom line. Understanding duty tariffs is a crucial stage in the shipping process. Antidumping and countervailing duties are also closely linked to HS codes, on top of standard duty rates.
- Risk of Delays and Fees
When customs brokers are unable to correctly classify a shipment and identify the commodity and its corresponding HS codes before the ship arrives, they may face delays and storage fees.
- Regulatory Risk
Shippers also run the danger of regulatory intervention. Assigning HS codes on the fly is a high-risk operation that may result in reduced accuracy. Inaccurate HS codes can result in an importer being charged with duty overages or fines for failing to meet duty requirements of the inaccuracy.
Incorrect classification and its associated risks can translate into a real impact on your business.
For example, incorrect HS codes lead to wrong duty and tax rates applied to a product. It means that you might be overcharging your customer or that the customer faces unexpected costs when their package arrives. From this perspective, HS codes assist in assessing whether your products will incur additional charges upon arrival in the destination country, allowing you to notify your consumers and adjust the pricing accordingly, in advance, which is especially important for the booming e-commerce industry.
If customs authorities discover that you, unintentionally or maliciously, have misclassified a product and pay less (or more, for that matter) in duties and taxes than you legally should, you can face penalties for wrong classification and non-compliance.
Similarly, if customs authorities have suspicions about your shipment, they can run a customs audit, seize goods or even deny import. It can significantly prolong delivery times and result in dissatisfied customers.
To help you navigate the latest update, here is some need-to-know information.
HS update in 2022
Every five years, WCO undertakes to thoroughly examine the existing HS coding system as it stands. These examinations are to ensure that the HS stays current, as new technology and product lines emerge and to give insights into developing product streams and unfolding issues (environmental, health, and safety) on a global scale. Updating to the latest HS code is required; however, there may be minor differences between them, which are often subtle or subjectively interpreted. That being said, each update is vital in understanding the up-to-date customs tariff classification.
The most recent review cycle began on the first of January this year and will be the seventh edition of the HS (HS 2022). This new update aims to correct a total of 351 changes for a wide range of products.
Here's what you need to know about this latest HS code update that took effect 1 Jan 2022:
- Headings have been introduced for 3D printers and unmanned aerial vehicles (drones).
- New subheadings have been added for electric and hybrid heavy-duty motors and smartphones. Additionally, to clarify the scope of smartphone devices, additional notes have been added.
- To track the movement of toxic electronic waste, it has been placed in a separate category (85.49) rather than being included under "Electronics."
- The process of classifying rapid diagnostic tools for malaria has been simplified to speed up the detection and diagnosis of contagious diseases and prevent epidemics.
- New rules also address new tobacco and nicotine-based goods to make sure that they are being taxed correctly and to help people quit smoking, as well as making classifying possible dual-use items (such as radioactive materials, and explosives) more complex to combat terrorism.
If you’re wondering where to find the news for the HS 2022 update, click here. Last, let’s discuss the automation potential here.
Automation potential in HS code classification
There is a massive amount of potential in the automation of HS code classification. For example, Artificial Intelligence (AI) and Machine Learning technology may be used to match product descriptions to HS codes using Natural Language Processing (NLP).
The top benefits of automating HS code classification:
- Time savings
- Cheaper than having a classification expert team.
- Avoiding potential negative legal and business implications.
Many worldwide trade experts, on the other hand, will disagree and claim that automatic HS codes are impossible. In some situations, these experts may be correct, but you can't ignore that AI technology development is frequently taking things that once seemed improbable and making them a possibility.
A search engine that translates product descriptions or keywords into languages that customs can understand can tackle the issue by taking into account the intricacy of customs regulations. We can get the most relevant tariff code from the product information using Natural Language Processing and Deep Learning technology.
AI is a critical tool in the customs world. While it will not replace customs personnel, it will contribute to their productivity by aiding them in their responsibilities. AI may be used for a variety of domains and duties, and it can be implemented as a software system.
By incorporating AI into your customs procedures, you can acquire the following benefits:
- Ease the burden of economic actors and facilitate better compliance and reliability for customs as well as businesses by classifying the commodities into the HS.
- To enhance the efficiency of freight inspections, computer vision can be utilized for image analysis of shipping containers.
- Customs control allows customs authorities to search for irregularities more quickly while also allowing controllers to focus on issues of non-compliance.
- Improved targeting when managing high-risk commercial shipments through real-time data analysis for cargo inspections that detect instances of smuggling or counterfeiting, more easier.
- Guarantee that duties and taxes are correctly calculated and collected at the border.
- Machine Learning of customs tariffs, explanatory notes, and analyzing a huge amount of data from around the world's supply chain can help you discover your customer's needs faster and more accurately than humans.
To sum all of that up for you, the HS code is an international classification system that assigns a unique numeric code to each product. This enables you to classify products correctly, which in turn helps businesses determine the appropriate customs duties and other trade regulations for importing or exporting goods.
It may be daunting at first but it’s worth investing time into learning because understanding how an HS Code works will help your business save money on taxes when trading internationally. Over time, this can lead to significant financial savings!
If you’re interested in learning more about how AI can help you in the importing and exporting of goods, reach out!