This Note is an update to the note, we, at Novello Advisors had published in July 2020. The same is being updated since the issue on hand has not been diluted and the issue on hand has assumed a sense of urgency.
The Hon’ble Finance Minister has stated in the Union Budget 2021-22 that a new harmonized system of nomenclature 2022, is to usher in changes to the First Schedule of the Customs Tariff Act with effect from 01/01/2022. At this point 351 amendments are proposed to the existing HSN covering a wide range of goods which would facilitate recognition of new product streams, facilitating the changing nature of commodities being traded, embracing the digital age with the advent of new technologies, all with an intention of ‘ease of business’
The Finance ministry in a recent announcement made in the second week of July, has stated that there is a plan of a Rejig of Customs Duty Structure and insertion of a revised Customs Duty Structure in place from October 2021, where around 400 old customs duty exemptions would be reviewed and import duty concessions on as many as 97 items may be withdrawn to boost local production, giving access to raw materials without relying on imports. As part of the duty structure review the ministry has sought the opinion of the public on these items which are to be submitted by 10th of August.
What is Classification?
The appropriateness of the classification in terms of adherence to the International Tariff Code (Harmonised System of Nomenclature) is essential to remove the concept of “Tower of Babel” and bring in uniformity in giving numbers to description of goods and sorting it out so that a common universal coding is possible. While every nation including India has its own set of Tariff coding, the same is aligned at a base level globally so that the global trade facilitation is smooth.
When even at a National level, with the standardised coding which is published and available as Customs Tariff spreading over different Sections and Chapters with its own Section Notes and Chapter notes, when the language spoken by different players in the field are different from an interpretation perspective, issues relating to Classification arises. While the language is the same, interpretation is different, the same leads to disputes in classification.
An easy example to understand the relevance of the above pointer would be printers. One cannot simply assume that the ordinary printers and the multifunctional printers and scanners and a 3D printer are all the same and to be classified under the same heading. Similarly, the traditional watch is not the same as say a “smart watch” that can not only tell the time but act as a pedometer and also act as an instrument to take a “WhatsApp call”. Classification is therefore very critical and relevant even today.
Why is Classification still relevant?
While the GST part of the levy is still operating as a Counter vailing duty as IGST on imports, the same is available by and large as an Input Tax credit to the importer manufacturer/Trader. However, in most of the cases, the Basic Customs Duty (other than exceptions) becomes a tax cost to the importer. In such events any change in BCD rate can lead to a large amount of dispute between the Revenue and India Inc., since if an alternate classification heading is possible with a variant rate, the clamour for the higher rate from the revenue and the lower rate from the industry will emerge.
As is widely known, since there are no Customs Duty on exports (consumption-based tax being the reason), it becomes very critical to align the right classification on the import of goods since the import duty can be sizeable as part of the import value. It is widely prevalent in India that the classification of the goods is normally done on the basis followed by Customs house agents and freight forwarders who many of the times use the inward shipping bill/Bill of Lading from the point of origin as a reference point for arriving at the Classification.
Equally vexating is the issue of the “others” or the “residual entry” currently existing in the system. For every chapter heading and sub heading when the like products or goods that doesn’t have a specific heading attributable the same can be sorted and classified under the “others” of the same heading. The Damocles sword in this case would be where the importer has filed a Bill of Entry at a tariff heading under others that has a reduced BCD impact as opposed to say a more appropriate classification that may carry a slightly higher BCD.
At times the above methodology of erroneous classification is also done when goods are imported under Free Trade arrangements which basically gives benefits of exemption especially from the Basic customs duty that can be otherwise a cost. Imagine a classification dispute leading to a situation where the entire BCD waiver benefit is lost out of a past import since the classification has been wrongly filed. This may also lead to a situation where every imports of the importer can come under the scrutiny from an FTA benefit perspective.
Customs Duty being part of the Indirect tax is a tax on transaction which is live and current. Any erroneous classification that is challenged by the Revenue Authorities and sustained at higher level can easily remove the bottom line or the profit which the importer would have had in the transaction. It also pinches when there is an element of interest that needs to be paid and if the action is not Suo moto or voluntary may involve in payment of various penalties as well.
A Peep into the recent past on the events that has triggered the changes to be brought.
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 ensures 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 in the past 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 required to obtain license from the regional authority for each good imported or exported into/ from the country, which was a tedious and lengthy task, thereby 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 will 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 prevent a lengthy compliance under import license practice, importers should have proper 8-digit HS code product classification while clearing the goods and can be avoid the following issues:
Effect on Duty Rates
Duty rates are closely involved with HSN codes. Not assigning an appropriate 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.
Providing the correct HS code is a part of both the importers 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 commence taking the suitable 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., and the current classification adopted by the company. It is also important to understand how the products are in the market of the exporting country as well as in our own country. The nomenclature as well as the trade name of the goods to be imported is very critical as a first step.
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 go beyond the nomenclature and 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 also 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)
- The detailed Section notes that are given in the Customs Tariff
- The detailed Chapter notes given in every chapter
- Alphabetical index derived by the WCO
- Any other Regulations governing tariff classification for imported products
Flow Mapping of activities to be performed on adopting appropriate Classification:
Way Forward
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]