A Complete Guide on HS Codes, HTS Codes, and Tariff Codes

Introduction

Understanding and effectively navigating the intricacies of international trade relies significantly on the accurate classification of goods or products. HS codes, HTS codes, and Tariff codes play pivotal roles in this process. The Harmonized System (HS) provides a standardized classification framework adopted worldwide, enabling uniformity in identifying products traded across borders. Meanwhile, the Harmonized Tariff Schedule (HTS) extends the HS codes, specifically tailored to the country of import. Tariff codes, encompassing both HS and HTS classifications, are integral in determining customs duties, facilitating global commerce, and ensuring regulatory compliance.

This comprehensive guide aims to elucidate the nuances, significance, and practical applications of these classification systems, empowering businesses and individuals engaged in international trade.

Let’s start by understanding the customs classification.

What is customs classification?

Customs classification is the process of assigning a specific code to products intended for import or export. This code serves a dual purpose: first, it determines the applicable tariff rates for the goods, and second, it plays a crucial role in streamlining international trade by enabling customs authorities to accurately identify and track shipments throughout the import/export process.

There can be a few variations of a code you may see- HS codes, HTS codes, and Tariff or Commodity codes. Let’s dive deeper into them, one-by-one.

What is an HS code?

HS code stands for Harmonized System defined by World Customs Organization. Importers and exporters, across the globe, have to declare a product classification number that in a way replaces product description for a specific product for custom authorities to classify it. This standardized method of classification holds significance in ensuring the continuity and consistency in global trade processes. The Harmonized System assigns a six-digit code that classifies commodities ranging from paper to wood, plastic, eatables, fuels, and everything you can think of.

HS codes are six-digit codes that classify products or goods based on their nature, form, and composition. The following image shows the structure of an HS code.

• The first two digits in the HS code refer to a product’s chapter classification under the HS Nomenclature
• The next two digits signify the heading that the product falls under
• The last two digits signify the appropriate chapter subheading

Want to check how an HS Classifier solution works? Try this advanced AI Powered HS Classifier API

What is an HTS code?

Individual countries have the flexibility to add their supplementary classification codes, known as Harmonized Tariff Schedule (HTS) codes, to further specify the goods. HTS codes are often confused with HS codes, the HTS or Harmonized Tariff Schedule codes, are country-specific codes that help traders identify which duties and taxes are applied to products being imported.

HTS codes are 8-to-10-digits long or can even have more digits, depending on the country. These codes are used to streamline the process of applying any customs fees like tariffs, duties, and taxes. The HTS incorporates various components such as General Notes, General Rules of Interpretation (GRIs), General Statistical Notes, and supplementary guidelines. These resources offer additional descriptions and clarifications that serve as essential references when categorizing goods and comprehending tariff rates.

• The first six digits of the HTS code signify the HS code of a product
• The next two digits identify the country-specific subheading of the HS code These digits help in identifying the appropriate tariff rates for a specific product
• The last two digits do not classify the product, rather, they signify a statistical suffix that collects trade duty data. These digits are country-specific and the length of the code also varies according to the country duty codes.

Consider the following example that can make a clear differentiation between an HS code and an HTS code.

Every 5 years, the World Customs Organization (WCO) undertakes a revision of the Harmonized Commodity Description and Coding System, or simply, HS codes. Comprising over 5,000 distinct commodity groups, each distinguished by a six-digit code, the HS codes undergo periodic updates. Remarkably, more than 98% of global merchandise traded internationally is categorized utilizing these HS codes. Consequently, these changes in HS codes necessitate synchronization across over 200 tariff schedules in numerous countries to ensure alignment with the revised classifications.

While the first six digits of the HTS code change every five years, any changes at the 10 digit statistical level are published twice in a year, however, additional revisions are made on a regular basis.

What is a Tariff Code?

A Tariff code, also known as a commodity code, serves as classification identifiers and are crucial in determining the applicable customs duty for a specific product. These codes typically consist of six or more digits (depending upon specific countries involved), playing a pivotal role in categorizing goods. The initial six digits of the code represent the HS code, while the remaining digits vary by country, providing unique specifications tailored to each nation's individual tariff system.

Tariff codes are similar to HTS codes and are used interchangeably in several countries. Though a lot of people get confused with multiple terms being used for the same codes, HS codes, HTS codes, and Tariff codes are essentially the same depending on their length. Consider the following image for better understanding.

Ace the HS Code Classification

How to use HTS codes or HS codes?

When shipping freight, it's crucial to accurately include the accurate HS Code on each line of your commercial invoice.

Incorporating an HS Code on the commercial invoice guarantees a smooth customs clearance process for exports, reducing delays. This ensures that importers receive their goods promptly and enables quicker payment for exporters. Misclassifying the HS Code from the commercial invoice may lead to incorrect tax payments by the importer. Furthermore, it might result in interest/penalty charges for any incorrect payments and the potential seizure of your goods.

Avoid common mistakes while using HTS codes

Using a wrong or incorrect HS code or HTS code can turn out to be a big trouble and can cause additional cost and time-consuming complications. Improper classification of products can lead businesses to overpay or underpay on custom duties and taxes. It can also cause steep custom penalties and delays in custom clearance which can further lead to potential loss in sales. In worst cases, suspension of import-export license can also happen, so correctly classifying your product’s HS code, HTS code, or Tariff code is crucial in international trade.

Use the right HTS code

HS codes or HTS codes are not static as new products keep entering the market regularly and the HS Code nomenclature keeps on changing either by WCO or countries themselves. The World Customs Organization (WCO) reviews and updates the Harmonized System (HS nomenclature, the first 6 digits) every five years, the last update happened in 2022 while the tariff code or HTS code (country-specific code, the code after initial 6 digits) gets updated more frequently and the frequency of update varies for different countries. Importers should stay up to date on the latest regulations and changes in the HTS codes and ensure that their products are classified appropriately. Though the Harmonized Tariff Schedule classifies products into logical, and relatable categories, importers and shippers may find it difficult to find the exact matches for their products. They may want to choose an HTS code that appears to be the “best and the closest fit,” or the one that has the lowest tariff rate against it, but in both cases, the code can still be wrong and can cause issues.

The Right Approach

Search for HTS codes and use a trusted solution to get the right code to avoid fines and penalties. There are solutions available in the market that enable you to validate your HS code to ensure the right HS codes for your products. Some of the AI-powered, advanced solutions not just enable you to validate your HS codes in bulk but also provide you additional attributes including import duties and VAT rates applicable to the requested HS codes.

Now that we’ve built a basic understanding of custom classification and various product codes, let’s summarize why this classification and Validation of HS codes or HTS codes is crucial for global trade. HTS code classification and validation essentially ensures the following:

Product Identification

HS codes provide a systematic way to identify and classify products. This is especially important in cases where products have specific regulatory requirements, safety standards, or restrictions based on their nature.

Customs Clearance

Valid HS codes are essential for customs clearance. Customs authorities use these codes to identify and categorize products correctly, as well as to determine applicable duties and taxes to facilitate smooth movement of goods across borders each time when a transaction happens.

Tariff Calculation

The correct HS code is crucial for determining the applicable tariffs and taxes on imported or exported goods. Using an incorrect code can result in overpayment or underpayment of duties, leading to financial implications for the importing or exporting entities. In extreme cases, customs can cancel a company's import or export license too.

Supply Chain Efficiency

Accurate HS codes contribute to the efficiency of supply chains. With proper classification, businesses can streamline logistics, plan inventory more effectively, and reduce the risk of delays associated with customs-related issues.

Legal Compliance

Complying with international trade regulations is crucial for businesses. Using valid HS codes ensures that companies adhere to the legal requirements of the countries involved in the trade, helping to avoid penalties and legal consequences.

Trade Negotiations and Agreements

HS codes, HTS codes, or Tariff codes play a role in trade negotiations and agreements between countries. They help in defining the terms of trade, including tariff reductions or exemptions for specific products. When companies intend to save taxes, valid HS codes play a very important role in their analysis.

Conclusion

To conclude, an HS code functions as a globally recognized classification system, assigning a distinctive numerical code to each product. This classification capability is crucial for accurately categorizing goods, aiding businesses in determining applicable customs duties and adhering to trade regulations during import or export operations. Though initially challenging, investing time in comprehending the HS Code system proves valuable. It empowers businesses to potentially reduce tax expenses when engaging in international trade.