The Impact of 2022 HS Code Changes on Businesses in India

One of the most important functions in domestic and international trade transactions is an accurate classification of products. This classification determines the various tax liabilities and subsequent tax rates applicable to  transaction. Without the correct classification, organizations conducting business might be committing compliance violations.

The HSN system is a product classification system based on the globally standardized Harmonized Commodity Description and Coding System. While this system incorporates a large number of products and services and assigns standardized codes to all of them, the evolution of new products and services requires this system to be updated every five years. The last international update happened late in 2021 and has impacted all 200- member nations since.

On home turf, India has also updated its HSN classification system and brought more products under the HSN purview. This article explores what HS codes are, how they facilitate efficiency in trade transactions and how the new changes will impact businesses, both in India and abroad.

The World Customs Organisation introduced and implemented the HSN code system over 30 years ago and have since then helped regulate global trade. Essentially, the WCO assigns codes to products, which in turn, help customs authorities of at least 200 member nations. Under this system, six digits are universally assigned to products. The first two digits refer to the HSN chapter, the next set of digits refer to the HSN heading, and the final two digits refer to the HSN subheading.

Each country then has the liberty to add up to six more digits to the existing code depending upon their tariff and logistical needs. Several developed countries including the United States, South Korea, Canada, China etc have standardized ten-digit codes. Some countries like Turkey have been using a 12-digit HSN code system. India, on the other hand, has employed an 8 digit code system. A higher number of digits in an HSN system usually indicates a more detailed classification of products and captures the exact nature of the trade and the transaction, leaving little or no room for ambiguity. This reduces questions and concerns around tax liabilities while conducting transactions and allows for a seamless transaction. It also facilitates international cross-border trade, statistical data collection and comparison. This is achieved by harmonizing the description, classification, and coding of goods in international trade and standardizing trade documentation and the transmission of trade related data.

India has close to 2,500 products that still fall under the category of “other”. Because of lack of clarity on the nature of the product, organizations tend to file appeals and applications with Authorities for Advance Ruling in various states of the country.

After the 7th edition of the international HSN code system was rolled out in late 2021, India announced several significant changes in the classification of goods under the India Customs Tariff Act. As India is a member of the HS convention, it has made several changes in its Customs Tariff Act to follow the WCO’s latest HS release. These changes have been in effect since January 1, 2022, and directly impact tariff rates and custom duties. India is a party to the HS convention; it has made these numerous changes in its Customs Tariff Act following WCO’s latest HS update.

India has rolled out 351 amendments at the six-digit level, and replaced the existing 347 tariff headings with more than 1,000 new tariff headings. India has also announced the addition of new explanations and exemptions and has reshuffled tariff headings under the same chapter. The new changes include changes in classification of goods, changes to tariff rates, changes to benefits claimed under Free Trade Agreements (FTAs) etc. Some notable examples of these changes are as follows –

• HS Code 8708.22.00 for windscreens used in motor vehicles, electrical and electronic waste and scrap were previously under heading # 8549, and had multiple subheadings
• HS Codes 8517.13.00 and 14.00 for smartphones and other telephones for cellular networks
• HS Codes 8539.51.00 and 52.00 for LED modules and lamps.
• HS code for road tractors for semi-trailers moved to 8701.21.00, 22.00, 23.00, 24.00, and 29.00 from their earlier classification under 8701.20.10, and 20.90
• HS Code 8539.50.00 for LED lamps has been replaced with 85.39.52.00.

The new changes are expected to disrupt operations for the first few months while the database portal updates with the latest changes. The Central Board for Indirect Taxes and Customs (CBIC) has already started training officers stationed at inland container terminals, land crossings, international airports and seaports to help ease the transition. But the bigger question is, how will the HS codes impact the filing of the Goods and Services Tax (GST). At present, using the right HS codes is mandatory for filing GST invoices. Without the right HS code in their GST invoice, organizations are essentially committing a compliance violation. Therefore, India has mandated mentioning the first four digits of the HS code on B2B domestic transactions up to ₹5 crore and six digits on domestic B2B transactions exceeding ₹5 crores.

At this point, organizations urgently need to turn to automation solutions to help with accurate product classification. Using automated classification solutions will ensure that the organization stays updated with all changes in the HS code system, both in India and abroad. It will also help automate the process of applying the right HS code to the GST invoice, thereby ensuring ironclad trade documentation.

Author: Anil Paranjape, Director, Avalara India.

Publication: Banking and Finance Post.