What can go wrong when HS codes are incorrect?

In a world governed by various languages and colourful cultures, HS codes act as a singular  language that connects global trade in a legal and logical way. Currently, it is adopted by 200 countries that comprise approximately 98% of the world trade.

Harmonized System (HS) codes help identify exported or imported products across international borders. Different products fall under different tax brackets; thus  HS codes help custom authorities assess the right duties and taxes on them. This code usually has anywhere between 6 to 10 digits depending on upto which extent countries want to segregate. 

The HS codes have to be written according to the country of origin. The World Customs Organization recommends a minimum six-digit code; for the ease of classification, several countries go beyond ten digits to make things easier. China had a 10-digit HS number until 2021 and then moved to a 13-digit format in 2022. 

The initial six-digit part of the code is the same across the globe; these six-digit HS numbers can be broken down into chapters, headings, and subheadings. 

For example, The code is for a Coffee powder exporting from India- 09011111 

First two numbers-  09- Chapter- Coffee, tea, and spices

First four numbers-  0901- Heading- Coffee, coffee husks and skins, coffee substitutes 

First six numbers-   090111-Sub heading- Coffee, not roasted, not decaffeinated 

All numbers-  09011111- Extra level of identification- Coffee, Arabica, Grade A

Governments mandate the usage of HS codes for better transparency and accountability while levying taxes on import and export goods. 

Pros of using the correct HS codes: 

• The customs duty can be claimed back for a few packages by the sender. It’s easier for the claim to be processed correctly.
• Information about anti-dumping duty and respective licenses can be taken as soon as the information is upfront.
• Taxes and duties are appropriately matched to the respective package.

Keeping the basics in mind when approaching imports and exports is very important. What could’ve been verified with a simple google search may lead to a significant delay just because of HS numbers in the wrong place in the wrong order. Outsourcing to an agent is a good idea when they have experience handling such a crucial part of the business. The customs will not hold the agent responsible; they will hold the sender responsible for this issue. 

From January 2022, HS 2022 has brought in several significant changes in the HS codes involving several new categories to address new phones- foldable, electronic waste management, and nicotine-based products- vape pens. Traders have to hold themselves responsible for keeping up with the HTS code and being up to date with the world around them. 

It’s hard to get away with mistyping an HS Code for shipping. With strict guidelines and filtration conducted by the customs authorities, any discrepancy will cause severe consequences. The lack of an HS system gives way to unaligned HS numbers. The complications consist of but are not limited to the following: 

• The customs authorities impose excessive fines and penalties for the hassle.
• Risk of rejection during import and export.
• Lengthy processes to claim refunds.
• If paid extra duty, denial of refund is more likely than a claim for that refund.
• If underpaid the duty, a penalty on top of which the difference is levied with interest. 
• Risk of confiscation; in a few countries, spending more and providing more documentation is necessary to authenticate the legitimacy of your package claim.

Let’s look at an example of an excessive fine that has been revised in the 2021-2022 Finance Bill for Bangladesh:

For declaring incorrect or evasive HS code information, the National Board of Revenue (NBR) has increased the fine to a maximum of Tk 100,000 from Tk 50,000.

The HS system comprises over 98% of international trade merchandise. The latest updates and numbers will only get complicated with new systems. Choosing the correct code might take time initially, but processes will get easier. 

The revision and doubling of fines from the Bangladesh government example stated above are enough for us to ponder and evaluate the need for automated HS code classification methods. Streamline mapping of domestic and international tax codes through simplified product software solutions offered by Avalara!