Alignment of the rates of duty over the last decade or so, has led a large belief that the classification disputes have come a long way of being buried. In the recent times. At International level, The World Customs Organization (WCO) developed the Harmonized Commodity Description and Coding System generally referred to as “Harmonized System (HS)” classifying goods with six-digit code system. This ensues uniformity in classification of goods in cross-border transactions.
HSN codes used by India is based on the internationally standardized HS and uses an eight-digit code system which arranges the goods in 98 Chapters. Under each Chapter, there are certain circumstances wherein some goods would attract different rates of duty depending upon the classification adopted. If the goods are classified into specific HSN linked category, a higher rate would apply, whereas lower rate would be applicable if the goods are classified under residual category i.e. “others” category without mentioning the more appropriate and specific HSN code.
The Government of India over the last few years have realised that the goods that have been categorised as “others” constitutes quite a large chunk of the imported goods where there is an enormous forex outflow. It is said that almost 20 percent of the goods imported are classified as “others”. The classification of goods of late has again become a matter of dispute between the taxpayers and the Department as taxpayers would take the benefit of ‘others’ category while paying Customs duties. Further by mentioning ‘others’ category, at times restricted goods can also be imported causing the domestic manufacturers loss to their business. One of the reasons attributable by India Inc for continuing to import goods under the “others” category is due to the fact that there were no appropriate classification heading at the time of initial imports years back and the practice was continued.
Currently India’s import and exports systems are Governed by the Foreign Trade (Development and Regulation) Act, 1992 and India’s Export Import (EXIM) Policy. Under the said regulations, imports and exports of all goods are free, except for the list of items regulated by the Exim Policy or any other law currently in force as regards the restricted good. Restricted goods can be imported only after obtaining an import license from the relevant regional licensing authority.
Earlier, importers and exporters were needed to obtain license from the regional authority for each good imported or exported into/ from the country, which was a tedious and lengthy task, delaying the clearance process. With the increase in the percentage of goods imported by mentioning ‘others’ category while filing bill of entry, trade and industry has been warned by Government through various trade notices issued from time to time (Trade notice no 37/2019-20 dated October 22, 2019 and Trade notice no 46/ 2019-20 dated January 17, 2020) so as to ensure that appropriate classification of goods and specify the exact or near 8 digit HSN category of goods they fall under. This would ensure that the goods are classified according to their description and a better practise of understanding the nature of the goods that are imported into the country can be ascertained.
Further through trade notices, trade and industry is warned that if they continue to follow the practice of filing the bill of entry by mentioning ‘others’ category, the Department would discontinue the current practice of clearing the goods on the basis of Import Export Code (IEC) and would reintroduce the import license practice for clearing the import of goods under ‘others’ category.
There are inherent compliance and regulatory risks involved if the Revenue authorities is to re-introduce the import license practice for ‘others’ category of goods, importers would be at loss in terms of cost of obtaining import license for each good and in terms of time consumed to do the periodic compliance. To be saved from lengthy compliance under import license practice, importers should have proper 8-digit HS code product classification while clearing the goods and can be saved from below issues:
- Effect on Duty Rates: Duty rates are closely involved with HSN codes. Not assigning an HSN code or providing an incorrect HSN code could be very commercially risky. Understanding duty tariffs is a very critical step of the entire shipping process. In addition to the standard duty rates, antidumping and countervailing duties are also closely connected to HSN codes.
- Risk of Delays: Shippers risk delays and face storage charges when customs brokers are not able to classify a shipment correctly and identify the commodity and its corresponding HSN codes
- Regulatory Risk: Shippers also risk regulatory intervention. Not assigning 8-digit HSN codes is a risky venture resulting in lower accuracy. Improper HSN codes can lead to the importer paying too much duty or being fined for the inaccuracy.
- Importer Security Filing: One of the most effective methods to comply with Importer Security filing requirements is to provide the HSN code within the purchase order for the importer.
Providing the correct HS code is a part of both the importer’s and exporter’s legal responsibilities. Both parties need to make sure that they have included all the necessary classification resources and that they take time to get them right – no matter the assortment of products being imported or exported.
Further importers are advised to provide practical difficulties and suggestions for classification of goods under 8-digit HS code by filing online form stated in Trade notice no 47/ 2019-20 dated January 29, 2020.
NEXT STEPS
It is very critical that India Inc needs to take steps on realigning the appropriate classification of goods especially the goods currently being imported under “others”.
The first step will be to review the details of identified imported products, including its description, form, features, functionality etc., including the current classification adopted by the company.
The product information provided by the company and which is available in the public domain can be a reliable tool to do the same and to review the classification of identical and similar products imported in the recent past
To Conduct a detailed study of the specific product by its form, fitment, functionality, technical, chemical composition, and properties to see the appropriateness of the classification.
While arriving at the appropriate classification, it is pertinent to note that the following should be relied upon. Namely
ascertaining the General Rules for Interpretation
- Explanatory notes of the World Customs Organisation (WCO)
- Alphabetical index derived by the WCO
- Customs Act, 1962
- Customs Tariff Act, 1975
- Any other Regulations governing tariff classification for imported products
For inputs/further clarification on the above write-up, please do get in touch with NV Raman, Founder Partner of Novello Advisors at [email protected]