The importance of accurate HSN codes in international trade

In international trade, goods are categorised using a system of codes to simplify the process of customs clearance, taxation, and regulation compliance. These codes are essential for ensuring smooth transactions between countries.

International trade depends heavily on accurate HSN codes. Cross-border buying and selling activities contribute to economic growth and market development. The Ministry of Commerce & Industry estimates India will export $447.46 billion of goods during the current fiscal year 2022–2023. In the complex process of international trade, one key element businesses must get right is using the correct HSN code. This is crucial for ensuring smooth transactions and compliance with regulations.

Internationally, the Harmonised System of Nomenclature (HSN) is used by over 200 countries, providing a universal language for classifying goods and facilitating smoother trade. As the world’s 6th largest exporter, India stands to gain significantly from using the correct HSN code. Accurate classification reduces trade errors, simplifies international transactions, lowers barriers, and enhances competitiveness. For Indian businesses, understanding “What is HSN code” is key to navigating global markets efficiently.

What is HSN Code?

HSN stands for Harmonised System of Nomenclature, a standardised coding system used worldwide by the World Customs Organisation (WCO). The HSN code consists of six digits for customs and taxation purposes, providing a detailed description of the goods. Customs officials use this code to classify products and apply tariffs, taxes, and other regulations.

The system can be expanded to more digits (up to 12) based on a country’s requirements. For example, India uses an 8-digit code for GST classification, an extension of the 6-digit HSN code.

For example, if you import textiles from China, you need to classify the same under an HSN code to determine which duty, tax, and other regulatory procedures would apply. An accurate HSN code will ensure proper identification of the right product along with the correct tariff rate.

HSN codes are helpful not only to customs authorities but also to trading companies. It helps them avoid mistakes, complications, and even the hefty price they might have to pay for a mistake. Let’s delve into how important the HSN code is in international trade.

The Importance of HSN Code in International Trade

The HSN code ensures the correct tax rates are applied to goods during transit, allowing products and services to move freely in the global market. Incorrect HSN classifications can lead to differing tariff rates or misclassification of goods, which could result in customs disputes or penalties. Below are some key points highlighting the importance of using accurate HSN codes:

1. Ensures Accurate Customs Clearance

• Streamlined Processing: HSN codes simplify goods classification, reducing the time spent on customs clearance. Using these codes reduces errors during the inspection of imports and exports, which speeds up the overall process.
• Avoids Unnecessary Delays: Correct usage of the HSN code will further help avoid the chances of the goods being detained at customs for inspection, thus improving the delivery time.
• Enhances Transparency: This increases transparency because customs officers can quickly approve the classifications of products and duties, benefiting exporters and importers in the international market.

2. Prevents Legal and Financial Penalties

• Avoids Overpayment or Underpayment of Duties: If incorrect HSN codes are used, the wrong tariff rates will be applied, leading to underpaying or overpaying duties. This would cause unnecessary financial strain on the business.
• Mitigates Risk of Fines and Seizures: Misclassifying commodities may be critical to lawsuits, auditing, and even confiscation of goods, affecting business operations.
• Reduces the Chances of Audits: Using the correct HSN code can minimise the chance of a business being flagged for audits, reducing the risk of tax-related issues.

3. Facilitates Global Trade Compliance

• Standardised Classification: The HSN code system provides a clear way to classify products, making it easier for countries worldwide to understand each other, which helps improve international business.
• Simplified Customs Procedures: When UNCTAD was set, the HSN code eased business simplification according to the different customs in several countries.
• Aligns with International Trade Agreements: In 2019, India faced incorrect HSN classifications, leading to tariff disputes on several exports. It confused exporters and delayed shipments, causing financial losses. Later, after proper HSN classification, the situation improved, and exporters could smoothen their procedures and avoid disputes with customs. This indicates that using correct HSN codes in international trade is crucial.

4. Simplifies Supply Chain Management

• Enhanced Tracking: The HSN code system ensures that businesses can classify their goods consistently, reducing the risk of errors during customs checks. This system allows for smoother international trade by correctly applying tariffs and taxes, helping businesses save time and avoid costly disputes.
• Better Inventory Management: Using the correct HSN code makes it easier for organisations to meet the different customs regulations of various countries.
• Optimised Logistics: Most countries use the HSN code system to comply with international trade agreements and smooth cross-border business transactions.

5. Improves Trade Transparency

• Reduces Misunderstandings: For example, when an Indian company exports machinery parts to Germany using the correct HSN code, customs authorities will apply the right tariffs and taxes, avoiding delays or incorrect charges. This ensures clear understanding between trading parties and prevents costly mistakes.
• Prevents Fraudulent Activities: HSN codes ensure consistency, making cheating or avoiding taxes difficult by misclassifying goods.
• Promotes Fair Business Practices: The frequent use of HSN codes helps sustain an ethical business climate since both the purchasing and selling firms can easily confirm product details and tariff schedules.

6. Enhances Data Accuracy for Tax and Tariff Calculation

• Correct Tariff Calculation: Since taxes and tariffs are critical for providing services, the correct HSN code will have a significant impact. This ensures that businesses remit the correct duties on the goods.
• Improves Forecasting Accuracy: Accurate tariff calculation helps in forecasting and planning the duties, taxes, and other costs associated with international business.

7. Supports Efficient Documentation and Record-Keeping

Ensures Compliance with Standards: The use of the correct HSN code helps in ensuring that most of the documents that are required while importing, such as invoices, bills of lading, and

• certificates of origin, conform to international standards, and clearing the goods through customs becomes a lot easier.
• Reduces Documentation Errors: A correct HSN code ensures that the business avoids incorrect figures on trade documents, which could lead to hold-ups or disputes at control points.
• Speeds up Border Processing: When the correct HSN code is declared in trade documents, it is easier to verify–taking less time to get released–so that people spend less time at the counters at customs.

How to Find the Correct HSN Code?

Identifying the correct HSN code can be challenging for businesses, particularly those engaged in international trade or those just starting out with a diverse range of products. Fortunately, several reliable tools are available to help businesses accurately determine the right HSN code.

1.   HSN Code Finder

An HSN code finder is an online tool that allows businesses to search for the correct HSN code by entering their product information. Businesses can add the product name or type and will obtain a list of possible HSN codes under that product. Most customs departments worldwide also allow HSN code lookup from their respective websites or via a third-party HSN code finder for faster results.

2.   Consult Customs Authorities

Another is to validate HSN codes through the local customs authorities. They have relevant information on the correct classification of your products. Most countries have established specific agencies-their manuals or classification guides-that business entities can address.

Conclusion

The importance of HSN codes in international trade cannot be overstated. These codes are crucial for ensuring the efficient movement of goods and compliance at borders. Accurate classification using HSN codes avoids delay, reduces the risk of legal penalties, and streamlines international transactions.

Using an HSN code finder allows businesses to stay updated on the latest changes, ensuring there are no discrepancies.

FAQs:

1. What are HSN codes, and why do they matter in international trade?

The Harmonised System of Nomenclature codes classify the goods to be traded. Appropriate HSN codes are needed for proper calculation of customs duty, easy and effective customs clearance, and compliance with international trade regulations.

2. How do HSN Codes influence the Customs Clearance?

An accurate HSN code is useful for determining the products and applying the proper duty well in time to avoid delays and penalties while clearing.

3. Are fines likely to be imposed on defective HSN codes?

Indeed, errors in HSN codes may result in fines, delays, or even confiscation of goods since they may give the wrong tariff classification or even infringe on trade regulations.

4. Do all countries have similar HSN codes?

Although most countries use the same standard HSN code system, some might include additional sub-codes or slight deviations based on their local regulations or trade agreements.

5. How do organisations maintain the correct use of HSN codes?

Businesses can achieve this by regularly updating their knowledge of trade regulations, consulting customs brokers, or using automated systems for product classification.