A PO (Purchase Order) without correct HS Code will cost you a lot.

Do You Issue Purchase Order or Proforma Invoice Without First Knowing Product HS Code? If the Answer is 'YES', It will Cost You a Lot.

Just think, you are going to a business meeting or job interview and you wear socks outside your shoes!

What will happen then-No doubt, it will ruin your dream. Similarly, if you issue or accept a PO (Purchase Order) without knowing and assessing the HS Code (Harmonized System of Tariff Nomenclature Code), you feast a lot of troubles such as work inefficiencies, damage to the company’s reputation with regulatory authorities, and waste of money.

Choosing a Wrong HS Code can affect your business efficiency and profitability.

Selected correctly HS codes ensure that your export shipments are cleared by Customs without any delay and will reach to final destination hassle-free, enabling you to receive payment from your buyer quickly. Most businesses consider it a best practice to include the correct HS codes in their commercial invoices, but they may encounter situations where inadvertently including HS codes can actually backfire. In this article, we are going to discuss some such situations, ignoring which the risk of business loss increases.

Adding HS Codes as Per Importer's Country Requirements

Using HS Codes You're Not Sure About

Using the Wrong HS Codes Bear the Brunt

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Adding HS Codes as Per Importer's Country Requirements

An exporter needs to understand that the first six digits of the HS code are the same for countries that agree to the harmonized system developed and maintained by the World Customs Organization. Following this six-digit HS code, individual countries have the right to add additional digits to form an 8-digit, 10-digit, or 12-digit HS code, depending on their taxes and controls requirements.

For an example, an Indian exporter exports the "Steering wheels, steering columns and steering boxes; parts thereof" by declaring 8-digit HS Code 8708.94.00 to a US based importer. In the United States, this 8-digit HS Code is identified in 5 different 10-digit HS Codes. These are:

• 8708.94.10.00

• 8708.94.50.00

• 8708.94.60.00

• 8708.94.65.00

• 8708.94.70.00

In such a situation, the Indian exporter would be able to clear the shipment from his home country but customs clearance at the destination port in the United States may delay. It is possible that the customs department in the United States may not provide duty benefits to the importer in the absence of a correct interpretation of the imported goods.

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Using HS Codes You're Not Sure About

Finding the appropriate HS code for your products is not always easy. When you go through the customs tariff schedule of an exporting or importing country, you will sometimes find that more than one HS code is a possible match for your export product.

Sometimes the discovery of such product assortment creates conflict between seller/exporter and buyer/importer. Each party may have valid reasons why they use a different HS code than the one that uses it. Since the customer is always right, sometimes he/she may just instruct the seller/exporter to use a code that will help him/her to import at a lower duty rate.

In the process of commercial transaction, the first process is to ship the goods and hence it becomes the seller's responsibility to use the correct HS code under any circumstances. And, in a case where the seller/exporter believes that the buyer/importer is insisting on using the wrong HS code and still uses the same in the invoice, it will be treated as an act of fraud.

It is better not to add HS code to the invoice than to fraud, but not adding HS code is not the solution to the problem. In the absence of HS Code, there can be many such mistakes in Customs Clearance which can hurt both the parties in future. In case of such conflict, both parties should refer to the section, chapter and classification notes of the product. The parties should seek expert advice in this matter so that a lot of money and time can be saved.

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Using the Wrong HS Codes Bear the Brunt

As I mentioned earlier, it is essential to mention the correct HS Code on the invoice and diluting its importance is tantamount to incurring a business loss. Using an incorrect HS code can cause a business loss in the following ways:

1) Customs duties – Duties, other than CENVATABLE, are the direct cost for the buyer. Failing to determine the correct HS Code can change the technical description of the goods and thus it costs to higher duties including luxury tax and Anti-dumping duty.

2) FTA (Free Trade Agreement) – Any goods can qualify for FTA benefits based on HS code. Knowledge of correct HS code is of utmost importance to avail of such duty concessions.

3) Filing of Import Declaration – Any export to the USA attracts ISF (Importer Security Filing) by the US Importer which requires HS Code matching with PO. PO is a legal document.

4) Shipment Delay – Any foreign trade shipment is assessed at two places; origin and destination countries port. As a preventive measure country imposes regulatory requirements on exportable and importable goods. Not knowing or quoting incorrect HS Code may put the shipment in deep regulatory assessments. Sometimes, without producing a laboratory test report or special kind of license, one can’t clear the goods for export or import. It will lead to shipment delay and thus the cost of money.

5) Fine and Penalty – Improper HS Codes can lead to the importer paying too much duties or being fined for the inaccuracy.It is often seen in business that the responsibility of mistakes is put on the shoulders of the supplier and in such cases, the customer claims compensation with the supplier. Ultimately the supplier bears such expenses to maintain the business relationship.

Conclusion: Don’t issue or accept PO without knowing the HS Code and related regulations. It can create trouble for the exporter as well as importer.

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Disclaimer: This blog is for informational purposes only and should not be construed as legal or financial advice. The information contained in this blog is not intended to be a substitute for professional advice. You should always consult with a qualified professional before making any financial decisions. The author of this blog makes no representations as to the accuracy or completeness of the information contained herein. The information in this blog is subject to change without notice. The author of this blog is not liable for any losses or damages that may arise from the use of this blog.