The Harmonized System of Nomenclature (HSN) is the backbone of international trade classification. Globally, these codes categorize goods uniquely to ease their movement across borders.
For Indian companies, eight-digit HSN codes are vital in Exim documentation and tax compliance. Getting these codes right is not just critical but also a strategic practice for optimizing costs and avoiding penalties.
Impact of HSN Codes in Exim Documentation
According to the WCO, over 98% of global merchandise trade is classified under the HSN system.
Incorrect classification can lead to shipment delays, financial losses, and even legal repercussions. Here are some things companies must keep in mind to make the best use of this global system.
1. Preventing shipment delays due to incorrect documentation
Exim documentation such as the Bill of Entry, Shipping Bill, and commercial invoice are all required to carry the HSN codes for the shipped goods.
The HSN code on both the supplier and importer sides should match. It also has to bear scrutiny by authorities on both sides.
If there is any mismatch, your documentation may need revisions, delaying your shipment. Keeping your paperwork in order will prevent such delays, saving significant costs.
2. Saving time and money in customs clearance
Customs duties and taxes on exported/imported goods are calculated as per HSN codes. Any errors or mismatches will delay customs clearance, leading to heavy demurrage and other associated costs.
With incorrect codes, you may pay more duty than you should. Alternatively, you may underpay and get penalized later, paying the duty difference plus penalties. Your cargo could even be flagged for under-invoicing or rule violations.
By ensuring that the right HSN codes have been applied, you can keep your customs calculations more accurate.
3. Accuracy in tax and duty calculation
In India, the eight-digit HS or HSN code is also connected to the GST (Goods and Services Tax) framework.
Businesses must declare HSN codes in invoices for correct tax reporting and compliance. Errors here would lead to the wrong rate of GST getting assessed.
Like customs duty, you may end up overpaying—or underpaying and bearing penalty charges later.
HSN codes are also the basis for deciding eligibility for tariff benefits under Free Trade Agreements (FTAs). Incorrect HSN classification may disqualify your product from preferential duty rates.
Some Indian textile exporters lost out on reduced tariffs in the EU due to misclassification under HS chapters 52 and 62.
You’ll also need to keep your HSN codes updated to benefit from special export schemes such as the Remission of Duties and Taxes on Exported Products (RoDTEP), etc. as these are also calculated according to HSN codes.
4. Better regulatory compliance
Using the correct HSN code ensures adherence to regulatory guidelines for all importers and exporters in India.
Since the HSN classification is revised regularly, companies must track changes to stay compliant. This can be hard to do without a system to maintain records.
Also read: The CFO’s Guide to Meeting EPCG Export Obligations
Best Practices for Indian Companies Using HSN Codes
To avoid the pain of non-compliance and penalties, here are some things you and your team should follow:
Ensure you use the correct code: Similar products can often have multiple codes according to usage, and it’s easy to pick the wrong one. For e.g. tobacco leaves (chapter 2401) attract 5% GST, whereas unmanufactured tobacco under the same chapter attracts 28% GST. Train all your employees on the right HSN codes for your products.
Trezix Tip: The Trezix Exim management platform checks the HSN codes in your shipping documentation and alerts you of any discrepancies, saving time, money, and effort.
Stay updated about changes to the HSN classification: With new categories of goods being added, HSN codes change every few years. For example, the reclassification of solar panel components under new HSN codes in 2022 increased BCD from 5% to 25%, causing significant losses to unaware importers.
Use technology to reduce costly errors: Platforms like Trezix use real-time links to Exim databases to keep HSN codes updated. Digitalizing your documentation can help avoid millions of rupees in losses.
Make Your Exim Operations More Efficient With Trezix
For Indian businesses involved in global trade, HSN codes are more than just a regulatory requirement; they are a strategic tool for optimizing trade efficiency, cost management, and compliance.
Proactive businesses that integrate HSN compliance into their operational strategy will gain a significant competitive edge in global trade.
To see how Trezix can help you reduce documentation errors, get a demo today.
