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Explained | What are HSN codes and why are they changing?

Come January 1, 2022, the set of codes used to monitor and regulate global trade by more than 200 nations, will be changing.

December 29, 2021 / 03:42 PM IST
Representative image

Representative image

From January 1, 2022, onwards, the codes used to classify every internationally traded item will change. The globally standardised Harmonized Commodity Description and Coding System, better known as the (HSN) tariff nomenclature, will be updated from this day onwards.

The changing codes are expected to impact exporters and governments alike. The classification of goods is expected to take longer until trade terminal softwares are fully updated and the sector memorises the new codes. Moneycontrol takes a look at why the codes are changing, the challenges involved and what to expect, going forward.

What exactly are HSN codes ?

Issued by the World Customs Organization (WCO), the HSN codes have been used to classify and regulate global trade since 1988. They help customs administrations in 200 member-nations and the private sector across the world maintain a globalised database of goods, the flow of which can be easily measured and regulations implemented.

The Brussels-based WCO is an independent inter-governmental organisation that maintains and periodically updates the codes in line with the changing nature of global trade. The latest set of codes (HSN 2022) will be used to capture the trade in a variety of new fields.


How does it work ?

HSN codes are given to every traded product and they are organised logically by economic activity or component material. The existing HSN codes are organised into 21 sections, which are subdivided into 99 broad chapters. They are used to analyse national trade.

Chapter 1-5 corresponds to live animal and animal products, 6-12 to edible agri-products, and 13- 24 to industrial agri-products and so on. For India, the important chapters include 27 (mineral fuels, crude oil and processed petroleum), 30 (pharmaceuticals & components), 74 (gold, diamond, gems & jewellery), 84 (heavy engineering goods) and 85(electronics). These are the product categories, where large chunks of India's trade is concentrated in.

The 99 HS chapters are further subdivided into 1,244 headings and 5,224 subheadings. The system consists of separate levels of data classification to categorise more than 10,000 separate categories of products.

Where does India stand?

The first six digits of the HSN tariff number are used universally. Each country may then add up to six more digits according to its tariff and statistical needs. The first two digits designate the HSN Chapter. The second two digits designate the HSN heading. The third two digits designate the HSN subheading.

India has remained at the eight-digit level, while major exporting nations have graduated to even more detailed higher levels of trade classification. Turkey uses a 12-digit HSN code system. Most major developed economies such as the European Union, the United States, South Korea, Canada, and China have standardised 10-digit codes.

Having a more detailed level of trade classification allows a country to zoom into the exact nature of trade, identify the problems such as bottlenecks in exports or a glut of particular imports and create specific policy for these.

According to Commerce Department officials, it helps in finding the minute trade patterns of today that may become the norm in the coming months and years.

India has, for years, tried to upgrade its trade classification. Latest official figures show 2,433 items -- all classified under the ‘other’ category or not clearly mentioned. This has led to a lacunae in policymaking, whereby the government does not have a clear idea where the items are coming from. India will continue to have eight digits in the updated HSN codes as of now.

What is happening now?

As new products are traded, new definitions are drawn up, standardisation takes place and new product categories are opened up, so that they can be added to the list. WCO has regularly updated its database of HSN codes every five years and the latest (7th edition) set of codes will go live from January 1, 2022.

The Finance Ministry has confirmed that since India is a party to the HSN convention, the government has brought in necessary changes through the Fifth Schedule to the Finance Act, 2021. This will align the first schedule of Customs Tariff Act, 1975, with the HSN 2022.

What will be the impact?

The Commerce Department expects the change to a new set of codes to disrupt classification for the first few months at least. Officials clarify that while the department has already updated its monthly and annual trade databases to mirror the changes, it is working with the private sector to raise awareness.

In general, exporters usually leave the business of classifying shipments based on HSN codes to trade firms and overseas logistics companies. These entities work with freight forwarders to ship most of the cargo, traded internationally. The government had started to work with these companies well in advance to inform them of the new codes, officials say.

However, the Revenue Department under the Finance Ministry expects greater digitisation to ease the pain of moving to a new code. The Central Board of Indirect Taxes and Customs (CBIC) has begun to train its officers stationed across inland container terminals, land crossings, international airports and sea ports. The CBIC maintains separate databases on merchandise trade through India’s international ports.

What will this mean for tax filings under GST?

Currently, HS codes are mandatory for filing GST invoices. While traders will, from now on, have to mention the new set of codes, the government is not planning to change the rules for GST, sources said. These HSN codes must be declared in every tax invoice issued by the taxpayer under GST. All eight digits of the HSN code are mandatory in case of exports and imports under the GST.

Currently, for recording domestic transactions up to Rs 5 crore, it is mandatory for B2B tax invoices to mention the first four digits of the HSN code of the product, the sale of which is being recorded. However, this provision is optional for B2C transactions. For domestic transactions beyond Rs 5 crore, mentioning HSN codes up to six digits is mandatory for all invoices.
Subhayan Chakraborty has been regularly reporting on international trade, diplomacy and foreign policy, for the past 6 years. He has also extensively covered evolving industry and government issues. He was earlier with Business Standard newspaper.
first published: Dec 29, 2021 03:41 pm
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