The WCO reviews the HSN every five years; following this review cycle, all-contracting parties have accepted a new edition of the HSN to the Harmonized System Convention. The seventh edition – HSN 2022, came into force on 1 January 2022. Accordingly, a new HSN has been introduced with nearly 351 amendments at the six-digit level, covering a wide range of goods moving across borders.
India, a contracting party of the Harmonized System Convention, adopted this to align the first schedule of the Customs Tariff Act, 1975 (the Act) with the HSN 2022. Basis the changes in HSN, suitable amendments have also been made in GST notifications to align the goods classification under GST with HSN 2022.
HSN 2022 has been prepared to clarify several high-profile product streams to recognise the change in trade patterns. The new HSN has also provided an emphasis on the adaption of HSN by trade to identify new products and address environmental and social issues of global concern to introduce new products by following important conventions and methodology:
- Basel Convention assigned a new Heading for electrical and electronic waste
- Rotterdam Convention covers pesticides and industrial chemicals that have been banned or severely restricted for health or environmental reasons, and new sub-headings have been introduced for specific chemicals controlled under the Chemical Weapons Convention
- Issues in the classification of nicotine products resulted in a new provision for tobacco and nicotine-based development by amendments in Chapter 21
- Unnamed Aerial Vehicles (UAV’s), also known as Drones, gained a separate heading to simplify the classification of aircraft
- Smartphones are also given their sub-headings
- Multi-purpose intermediate assemblies are classified to avoid the unnecessary delay caused by deciding their end-use
- Amendment to the HS to clarify the classification of diagnostic test kits, to facilitate cross-border transportation of such kits
HSN 2022 has introduced significant changes with 77 amendments in the goods from the agriculture sector, 58 and 52 modifications in the goods from the chemical and machinery sector respectively, 38 amendments in the goods from the wood sector, 27 amendments in the goods in the base metal, 22 amendments in the goods related to the transport sector, 21 modifications in the goods in the textile sector and a total of 56 amendments in other sectors.
In terms of the Act, any goods imported into India are subject to Customs duty. The classification is determined after analysing the competing tariff headings in the Act read with the General Rule of Interpretation. With the introduction of new product streams and modification of existing product classifications, the trade will be required to revisit the type of goods from the inward and outward sides to ensure correct reporting, adoption of the appropriate rate of tax, claim of exemption and accurate payment of duties/taxes.
While the Indian Government has adopted HSN 2022, which brought about significant changes in the Act and modified tariff items, the Government has specified that these changes will not alter the effective rates of duties/taxes as applicable for the time being under Customs and GST provisions. However, there are new Tariff lines, deletion of obsolete entries, and modification of the description on goods, which allows the Government to revisit the rate of duties from both Customs and GST perspectives. This calls for a revisit of the classification of the items and adoption of the same appropriately in internal records, documents, and IT systems of the enterprises.
While presenting Union Budget 2021-22, the Finance Minister indicated that the Government would be evaluating various duty exemptions at regular intervals. Accordingly, it is expected that Budget 2022-23 may witness a restructure of Customs Duty rates along with various exemptions, unlike in the past, where rate changes were not carried out frequently. Globally, there is ample deliberation on environmental and social issues to recognise new product streams and modify existing product classifications.
It is also important to note that major economies like the USA, EU and Singapore have a pre-review/support Centre for HSN to facilitate cross-border trade. Accordingly, it is expected that the finance minister would consider setting up a help desk to provide an overview/guidance for HSN Classification/interpretation and make announcements on the future plans during the upcoming union budget.
(Gunjan Prabhakaran is Partner and Leader – Indirect Tax and Krishna Barad, is Partner – Customs and International Trade, Indirect Tax, BDO India)
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