How to use the 6 rules to accurately determine the HS code is a highly important and complex skill in the field of import-export and customs procedures. In this article, ExtendMax will guide you through what an HS code is, how to use the tools, and how to properly look up HS codes. Additionally, we will provide a variety of practical examples to help you better understand how to use HS codes for applying specialized inspection policies, estimating import-export taxes, and handling interactions with state regulatory agencies in complex situations.
What is an HS Code?
HS Code, or Harmonized System Code, is an international commodity classification system developed and managed by the World Customs Organization (WCO). The HS Code system was created to standardize the naming and classification of goods on a global scale, facilitating international trade and commerce statistics.
In English, the system is called the Harmonized System Code, and in Vietnamese, it is translated as "hệ thống mã số hài hòa" or "hệ thống hài hòa." This system is recognized and used by all member countries of the WCO to ensure "harmonized" interests between traders and participating nations in international trade.
HS Codes provide detailed classification of goods, serving as the basis for determining tax rates, implementing import-export management policies, and resolving trade disputes.
Structure of HS Codes
HS Codes are a system of numerical sequences with legal and international significance for classifying goods. According to current regulations in Vietnam, HS Codes are applied with a standard length of 8 digits, while in some other countries, such as the United States, they may consist of 10 digits, depending on the management requirements of each country.
However, to ensure harmonization and consistency in international trade, member countries are required to use at least the first 6 digits in accordance with the rules established by the World Customs Organization (WCO).
Section
The HS Code system consists of a total of 21 or 22 sections and appendices, depending on the commodity classification of each country. According to Circular 31/2022/TT-BTC issued by the Ministry of Finance, Vietnam's HS Code system includes 21 sections. Each section is accompanied by section notes that clarify the content and scope of application of that section.
The "section" is not explicitly reflected in the HS Code of goods; however, ExtendMax provides an overview of this content to help you better understand it.
Chapter (first 2 digits of the HS Code)
The chapter provides an overview of the type of goods and is numbered from 01 to 97.
Chapters 98 and 99 are typically reserved for specific regulations of individual countries. According to Circular 31/2022/TT-BTC, Vietnam’s HS classification system does not include Chapters 98 and 99.
Similar to sections, each chapter is also accompanied by chapter notes to clarify its application.
Heading (group) (next 2 digits)
Products within each chapter are divided into groups based on certain common characteristics, making classification easier.
Sub-heading (next 2 digits)
Larger groups are further divided into subheadings to ensure greater accuracy in describing the distinct attributes of products.
National HS code (next 2 digits)
The 8-digit HS Code, or sub-subheading, is determined according to national regulations. Each country establishes its own rules at the 8-digit HS Code level. This level of classification plays a crucial role in defining the applicable tax rates for goods.
Extended National HS code (last 2 digits - if applicable)
This is an extended part used for broader classification and can be customized according to the specific regulations of each country. Extended National HS code often provide more detailed classifications of products, serving domestic management purposes.
Example: The 8-digit HS Code for a two-way air conditioner with a capacity not exceeding 21.10 kW is 84158197. This code can be extended by 2 more digits for detailed classification, such as 84158197xx for inverter air conditioners and 84158197yy for non-inverter air conditioners.
Applications of HS Codes
The HS Code system is not merely a classification system for goods; it also plays a crucial role in international trade and the management of import-export activities. The key applications of HS Codes include:
Basis for Implementing Free Trade Agreements (FTA)
HS Codes are essential for fulfilling international trade commitments under Free Trade Agreements (FTAs). They serve as a tool to determine the eligibility of goods for preferential tariffs as per FTA provisions. HS Codes are a critical factor in determining the origin of goods that meet the "HS Code conversion" criteria.
Similarly, HS Codes are also the basis for implementing Most Favored Nation (MFN) policies.
Determining Import-Export Duties and VAT
HS Codes are the foundation for calculating import duties, value-added tax (VAT), and other taxes such as special consumption tax.
Example: A server computer classified under HS Code 84714990 has an import duty rate of 0% (MFN preferential tariff) and a VAT rate of 10%. Businesses can easily calculate the total tax payable using the following formula:
Tax payable = (Customs value + Customs value × 5% MFN import duty) × 10% VAT
Where:
- Customs value (GTHQ): The declared customs value of the goods.
- MFN import duty (TNK MFN): Most Favored Nation preferential import duty rate.
- VAT: Value-added tax rate.
Application of Non-Tariff Policies
Import Quotas: Certain goods, such as raw tobacco, salt, poultry eggs, refined sugar, and raw sugar, are subject to annual import quantity limits.
Import Licenses: Some products require specific permits from relevant authorities before importation. For example, the import of civil cryptography products requires a license from the Government Cipher Committee under the Ministry of National Defense.
Quality Inspection and Specialized Inspection: Many goods, such as IT broadcasting equipment, consumer electronics, and construction materials, must undergo state quality inspections or energy efficiency testing before being cleared for import.
Legal Basis for Justification and Dispute Resolution
In cases of disagreements between businesses and customs or state regulatory agencies, HS Codes and related regulations serve as the legal foundation for justification or dispute resolution. Accurately identifying HS Codes helps businesses protect their interests and avoid unjust penalties.
Example:
A "Print Server" model N8372, which is a component exclusively used for printers and functions solely with printers, has WiFi transmission capabilities. However, it does not function as a WiFi Access Point or provide internet network access to other devices. In this case, the correct HS Code for the product would fall under Chapter 84, not Chapter 85.
If the business is classified under Chapter 85 by customs, it can request a certificate of origin from the exporting country (with the exporting country's HS Code) as a basis for dispute resolution. Reassigning the HS Code from one chapter to another would be inconsistent with the rules of the World Customs Organization, of which Vietnam is a member.
Example of HS Code for Lexmark Print Server Model N8372
6 Rules for HS Code Classification
Under the General Rules for the Interpretation of the Harmonized System (GRI) issued by the World Customs Organization (WCO), goods are classified into HS Codes based on six rules. Vietnam fully adopts these rules, as outlined in Circular No. 31/2022/TT-BTC.
Rule 1: Chapter Notes and Product Identification
- Section, chapter, and sub-chapter titles serve only as a guide to locate the general scope of goods and do not have legal authority for classification.
- Classification is based on the chapter and group explanatory notes, which are the most critical factors.
Example: HS Code for an iPhone
- Based on the product name, identify its scope in Chapter 85 (Electrical machinery and equipment).
- Refer to Chapter Notes. Note 5 of Chapter 85 places smartphones in group 8517.
- Identify the most specific subheading. The iPhone, as a smartphone, is classified under 85171300.
Rule 2: Incomplete Products and Mixtures
Rule 2(a): Incomplete Products
Goods that are incomplete but retain the essential characteristics of the finished product are classified under the HS Code of the finished product.
Examples:
- Electric Fan without Blades: A fan missing its blades and guards is still classified as a complete electric fan.
- Disassembled LED Light Components: LED light parts (bulb housing, chips, driver) are classified under the HS Code for LED lights, as they can be assembled into a complete product.
- Raspberry Pi: Although it lacks a case and power supply, it performs basic functions of a data processor. It is classified under 84714990.
Rule 2(b): Mixtures and Composite Materials
Goods consisting of multiple materials are classified based on the predominant material.
Examples:
- Copper Wire Coated with PVC: Classified under 854411 based on its copper core.
- Nutriboost Milk: A mixture of milk, sugar, fruit juice, and additives is classified under the HS Code for milk.
Rule 3: Goods Falling Under Multiple Groups
If goods can be classified into two or more groups due to Rule 2(b) or other reasons, Rule 3 applies.
Rule 3(a): Specific Description Prevails
Goods are classified under the group with the most specific description.
Examples:
- Brewing Mix: A mix of 55% wheat (HS 1001), 35% barley (HS 1003), and 10% hops is classified under 1001 (wheat).
- Leather Belt: A belt with leather as the primary material is classified under 4203 (leather goods).
Rule 3(b): Predominant Material or Component
If Rule 3(a) cannot apply, goods are classified based on their predominant material.
Example: A haircare set with a curling iron, rollers, and clips is classified under the HS Code for the curling iron, as it has the highest value.
Rule 3(c): Default to the Last Group
If neither Rule 3(a) nor 3(b) applies, goods are classified under the last applicable group.
Example: A toolkit containing screwdrivers, pliers, and wrenches is classified under the HS Code for the wrench, as it appears last in the list.
Rule 4: Classification by Resemblance
If goods cannot be classified under the preceding rules, they are classified under the group most similar to the product based on description, characteristics, and intended use.
Rule 5: Packaging and Containers
Rule 5(a): Specially Designed Containers
Containers specifically designed for a product are classified together with the product if:
- They are custom-shaped for the product.
- They can be reused for extended periods.
- They accompany the product at the time of sale.
Example: A guitar case is classified with the guitar.
Rule 5(b): Common Packaging
Regular packaging, such as plastic bags or cartons, is classified with the goods. However, durable, reusable containers (e.g., steel gas cylinders) are classified separately.
Example: A reusable steel gas cylinder is classified under its own HS Code, not the gas's.
Rule 6: Subheading Classification and Comparisons
When classifying goods into subheadings, the following must be observed:
- Classification must align with the wording of each subheading.
- Subheading notes must be followed.
- Chapter notes must also be adhered to.
When comparing goods between groups or subheadings, ensure the comparison is at the same level of classification (e.g., between subheadings, not between headings and subheadings). This ensures accurate and consistent HS Code assignment.
Where to Look Up HS Codes
You can look up HS Codes using the following tools:
Online HS Code Lookup: Use official platforms such as the Vietnam Trade Information Database (https://vntr.moit.gov.vn) managed by the Ministry of Industry and Trade, or the General Department of Customs website (https://www.customs.gov.vn/). This is the most official and convenient method. You can use the Ctrl+F function to search for HS Codes by keyword.
Circular 31/2022/TT-BTC: This circular is issued in hard copy format, making it less convenient for quick searches. However, it remains an official legal document issued by the government.
Import-Export Tariff Schedule: You can download the latest import-export tariff schedule from the internet to look up HS Codes. However, keep in mind:
- The tariff schedule is not an officially promulgated legal document.
- Specialized inspection policies in the tariff schedule rely solely on HS Codes and may not be entirely accurate.
- Minor errors or typos may exist in the tariff schedule.
6 Common Mistakes to Avoid When Determining HS Codes
Here are six frequent mistakes to watch out for:
Mistake #1: Relying Solely on the Product Name or Generic Description
Some products have similar names or descriptions but belong to different HS Codes.
Examples:
- Smart Car Keys: Although they serve as physical keys, their primary function is remote control. Therefore, the correct HS Code for a smart key corresponds to remote control devices.
- Switch Devices: A switch used in telegraph systems differs from a switch used in internet systems and is entirely different from an electrical switch, even though they all share the name "switch."
 Electrical switch |  Ethernet Switch |
Mistake #2: Not Updating the Latest HS Code Lists
HS Code lists are updated periodically. Using outdated codes can result in declaration errors.
Example: The HS Code for firewall devices used to be 85176229, but since December 1, 2022, it has been updated to 85176299 under Circular 31/2022/TT-BTC issued by the Ministry of Finance.
Mistake #3: Applying HS Codes from Other Countries Without Adjustment
Each country may expand HS Codes at the 8-digit or 10-digit level. Applying HS Codes from another country without proper adjustment can lead to incorrect classifications.
Mistake #4: Failing to Distinguish Between Primary and Secondary Functions of a Product
Examples:
- Printer with Fax Functionality: The correct HS Code should be based on the primary function (printing).
- Handheld Barcode Scanner: A Zebra handheld barcode scanner primarily functions to scan barcodes, while secondary functions include acting as a 4G terminal (SIM-enabled) and WiFi communication to transmit data to a server. The HS Code should be classified under 84719010 for barcode scanners, as this is its primary function.
Mistake #5: Failing to Differentiate Product Usage Purposes
Returning to the example of switches:
The usage purpose of a switch in telegraph systems differs from that of a switch in internet systems and is entirely different from a switch used in low-voltage electrical systems, even though they are all referred to as "switches."
Mistake #6: Relying on Unreliable Sources for HS Code Information
Using information from unreliable sources, such as inexperienced acquaintances, casual inquiries on Facebook or Zalo groups, or outdated websites, can lead to significant errors.
To ensure accuracy:
- Submit an official request to the General Department of Customs for HS Code pre-determination.
- Consult reliable experts, such as the professionals at ExtendMax, for HS Code advice on electronic and electrical products.
Consequences of Misclassifying HS Codes
Customs Clearance Delays
Incorrect HS Code declarations may result in customs officers requiring reclassification of the goods. This leads to extended customs clearance times, and the shipment might be diverted for inspection ("red lane"). Such delays can incur additional storage fees and prevent goods from reaching the market on schedule, disrupting business operations.
Administrative Penalties
According to Decree No. 128/2020/ND-CP (as amended by Decree No. 102/2021/ND-CP), incorrect HS Code declarations can result in the following administrative fines:
- A fine ranging from 1,000,000 VND to 2,000,000 VND for incorrect HS Code declarations that do not affect the payable tax amount.
- If the incorrect HS Code declaration results in underpayment of taxes, the fine can be up to 20% of the under-declared tax amount or, in severe cases involving tax evasion, criminal charges may be applied.
Back Taxes on Imports
During post-clearance audits or immediately upon customs inspection, if incorrect HS Code usage leads to underpayment of taxes, the business will be required to pay back the owed tax. This can impose significant financial burdens and disrupt cash flow for the company.
Conclusion on the Importance of HS Codes
HS Codes are a cornerstone of international trade, playing a critical role not only in tax management but also in ensuring legal compliance. Businesses must adhere to the 6 classification rules and avoid the 6 common mistakes to optimize import-export processes, minimize risks, and enhance operational efficiency.
In cases of uncertainty, utilize reliable lookup tools or consult with ExtendMax experts for professional guidance and support.
