PGDCCFF PAPER I - Tariffs SEM I

TOPIC I: HISTORICAL BACKGROUND:

Duty on goods imported or exported is being levied since ancient times. The form and quantum of
collection has been changing since that time. The collection rate or quantum differs according to the
commodity.

Historic evidence of such a system of collection of duty at different rates on different commodities is
found in “Kautilyas Arthshastra”, of the Maurayan period, some 2200 years ago.

Duty is levied on the importation or exportation of goods and not on persons. When do the goods
become liable to duty? Who is responsible to pay? What if the same is not paid? These questions are
answered in the Customs Act.

The problem faced by the international trade was that the traders and the Governments, which
resulted into higher levy of duty, did not understand the correct nomenclature of goods.

To avoid such a situation and arrive at an acceptable nomenclature of goods, attempts have been
made as can be seen from Indian history. The East India Co., which came to trade, became the ruler
and its governors imposed different rates of duties on such or like goods, in Eastern and Western
India, and published a list of charges leviable in the years 1867 and 1870. After the British Govt.
took over from the East India Co. in 1859 - a tariff for the entire British Indian Empire, was enforced
in the form of “Indian Tariff Act, 1884”.

When the European empires, came into power they introduced their own tariff in their territories.
The colonial rulers, classified their national products differently thus hampering free exchange of
trade by such protectionism. These type of actions resulted into clashes between the trading
countries.

After First World War, the powerful foreign governments decided to have an international body to
overcome such problems and disputes and joined hands to establish the "League of Nations", the
mother of present "United Nations Organisation (UNO)". Under this auspicious body, a dialogue
for a common agreement on trade and tariff started. A simple agreement on division of commodities
according to their broad description was arrived at sometime in 1923/24, but was not mandatory.
The experience of this broad based description helped them in their future dialogue, and clubbing of
certain commodities into each of the broad based descriptions. In 1929, a second version of the
nomenclature was introduced. In India the British introduced, on the basis of the “Auowa Trade
Agreement” an amending Act in 1932 and gave effect to the same by enacting the “Indian Tariff
Act”, 1934 and amended it from time to time.

After the Second World War, changes were made rapidly in technology and production on one-side
and transport techniques on the other. The international trade felt that taking into account the latest
changes, a more detailed and rational nomenclature should be evolved, which, with the fixed broad
description of the goods, which would cover additional specific descriptions to avoid any
misunderstanding and litigation in the international trade.

After independence in 1947, and the implementation of Industrial Planning Programme, the need to
define the commodities in conjuncture with other countries of the world, was increasingly felt.

On the international front UN was established and one of its wings started working onto bringing the
Customs Authorities of the world together and nearer to an understanding of a language of describing
the goods, in a particular understanding. This body devised a common Nomenclature acceptable
to the major trading partners of the world. This Nomenclature was known as “Brussels Tariff
Nomenclature” (BTN) and was introduced in many countries. India introduced the BTN

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based nomenclature in 1965. This work was much appreciated and this body now known as
Customs Co-operation Council (CCC) went further in details and brought out an agreed revised
version of tariff Nomenclature known as CCCN, which was introduced in India by “The
Customs Tariff Act. - 1975”.

The specialised UN agency on Customs, known as “Customs Co-operative Council” (C.C.C.) decided
to evolve an elaborate nomenclature. Their efforts culminated in developing a new system of
nomenclature known as “Harmonised Commodity description and Coding System”
(Harmonised system or HS). India being a part of C.C.C. and having realised various advantages
offered by this new HSN, acceded to this convention and was the first country in the world, to
introduce this HSN by amending the “Customs Tariff Act, 1975” and substituting its first schedule
with the new HSN schedule, making it operative from 29.2.1986. By now, C.C.C. was renamed as
World Customs Organisation (W.C.O.).

TARIFF
• A tax imposed on imported goods, export goods and services.
• Used to restrict trade, as they increase the price of imported goods and services, making them more
expensive to consumers.
• Provide additional revenue for governments and domestic producers at the expense of consumers
and foreign producers.
• Are one of several tools available to shape trade policy.

TARIFF TYPES
• A specific tariff is levied as a fixed fee based on the type of item (e.g., Rs. 1,000 per unit of a product)
• An ad-valorem tariff is levied based on the item’s value (e.g., 10% of the car’s assessable value)

WHY TARIFF?
• To protect domestic jobs. If consumers buy less-expensive foreign goods, workers who produce that
goods domestically might lose their jobs.
• To protect infant industries. If a country wants to develop its own industry producing a particular
good, it will use tariffs to make it more expensive for consumers to purchase the foreign version of
that good. The hope is that they will buy the domestic version instead and help that industry grow.
• To protect consumers. If a government thinks a foreign good might be harmful, it might implement a
tariff to discourage consumers from buying it.

CUSTOMS TARIFF ACT 1975

• It provides the classification of the goods and rates of duties of customs. It comprises of 2
schedules:
• First schedule: In this schedule goods chargeable with import duty are listed. It is known as
import tariff which consists of 98 chapters grouped under 21 sections.
Second schedule: In this schedule goods chargeable with export duty are listed. It is also known as
export tariff.

TOPIC II: AUTHORITY TO LEVY DUTY:

Duty cannot be levied unless the law authorises such a levy. Our constitution permits the Central
Govt. to levy duty on goods imported into or exported out of India. This authorisation has been made
effective under the Customs Act 1962. Sec. 12 of the Customs Act, 1962 gives effect to the
constitutional authority.

Meaning of Levy of duties [Section 12 of Customs Act, 1962]:

(a) "Except as provided in this act, or any other law for the time being in force, duties of
Customs will be levied at such rates as may be specified under the Customs Tariff Act, 1975,
or any other law for the time being in force, on goods imported into or exported out of
India.

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(b) The provisions of sub-section (1) will apply in respect of all goods belonging to
Government as they apply in respect of goods not belonging to Government."

What this Section 12 means is that -

(1) All goods imported into India or exported out of India are chargeable to duty.
(2) The rates of duty leviable will be as specified in Customs Tariff Act, 1975, or any other law
for the time being in force.
(3) Even Govt. goods are chargeable to duty as in the case of Non-Govt. goods.

Thus, Section 12 is the charging Section and levy of duty would be as provided in CTA, 1975 and
any other law in force.
It is therefore, imperative to study CTA, 1975 since it is the primary law to determine the amount
of duty.
Customs Tariff Act gives the authority to the Govt. to determine the nomenclature, the rates of
duties, and other methods to levy duty on goods imported or exported.

Amongst other provisions CTA prescribes,

S No Type of Duty Section CTA 1975
1 Levy of duty on import at rates as per Schedule I Sec 2
2 Levy of duty on export goods at rates as per Schedule II Sec 2
3 Levy of Additional duty (equal to Central Excise duty in force) Sec 3(1)
4 Calculation of CVD and SED Sec 3(2)

5 Special CVD Sec 3(3)

6 Levy of special additional duty Sec.3(5)
7 Calculation of SAD Sec 3(6)
8 Levy of IGST Sec 3(7)
9 Calculation of IGST Sec 3(8)
10 Levy of GST Compensation Cess Sec 3(9)
11 Calculation of GST Compensation Cess Sec 3(10)
12 Levy at preferential rate of duty Sec 4
13 Levy at lower rate when there is an agreement with other country Sec.5
14 Levy Protective duties Sec.6
15 Duration of such Protective duty Sec.7

16 Increase or imposition of duty on any goods for export Sec.8

17 Emergency powers to increase the duty on Import goods Sec.8A
18 Levy of safeguard duty Sec.8B
19 Levy of countervailing duty on subsidized goods Sec.9
20 Levy of Anti dumping duty on dumped goods Sec.9A
21 Refund of anti dumping duty Sec.9AA
22 Not to levy duty under 9 or 9A in certain cases Sec.9B
23 Appeals in case of duties under rules 8 or 9 Sec.9C
24 Such rules to be put before Parliament Sec.10
25 Power to alter duties under certain circumstances Sec.11
26 Powers to amend First Schedule Sec.11A
27 Repeal and Saving Sec.12
23 Consequential amendment Sec.13

Thus, all imported goods are leviable to duties as specified in schedule I, and all exported goods are
leviable to duty as per schedule II. Schedules I & II together form “Customs Tariff”.

DUTIES OF CUSTOMS:
Duties of Customs become payable when there is import into India. Accordingly, customs duty would
be levied on such goods and the amount of duty has to be determined. There are several types of
duties leviable on import and there are prescribed methods of computation of duties. It is useful to
consider the following steps in determining the amount of duty payable.
(1) Obtain the Tariff Classification of goods.
(2) Compute the (i) Basic Customs Duty,
(ii) Social Welfare Surcharge
(iii) IGST
(3) Determine if there are any additional levies under different statutes

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(4) Whether there are concessions and exemptions (tariff notifications) available on the item.

As we have seen each of the sub-headings (8 digits) shows a corresponding rate or rates of duty.
The tariff covers two types of duties:
(a) Standard (Basic) and
(b) Preferential (Basic),

The normal rate of duty is Standard or Basic; however, certain specific areas are notified as
preferential areas and for them a Preferential duty rate is prescribed.

These rates of duties could be either on percentage bases i.e. on value, or on specific bases i.e. on
quantity.

In the Tariff Schedule, over the years, a systematic effort has been done to unify rates on similar
products to achieve economic rationality and reduction in the scope of classification disputes. As far
as possible, similar goods are subjected to uniform duty rates. Various class goods are also levied
to different ‘Slabs of rates of duty’. These slabs have also been reduced progressively. There are
four different duty slabs in general and these are 5%, 15%, 25% & 35% at present.

Goods are also chargeable to other duties under CTA, 1975 such as:
(a) Additional duty.
(b) Special additional duty.
(c) Protective duty.
(d) Safeguard duty.
(e) Countervailing duty on Subsidised goods &
(f) Anti-dumping duty.
Other duties are leviable under other laws in force, which are
(g) Cess: Various allied acts.
(h) Special Excise duties imposed by different acts. & Surcharges thereon through
Finance Act.
(i) State Excise duty: State Finance Acts, (Alcohol Liquids, opium, narcotics.)

SOCIAL WELFARE SURCHARGE

The Union minister for Finance and Corporate Affairs proposed to abolish the education cess and
secondary and higher education cess on imported goods and in its place impose a social welfare
surcharge in the budget 2018-19 in Parliament.
Social welfare suircharge is leviable at the rate of 10% of the aggregate duties of customs, on
imported goods, and helps in providing social welfare schemes of the government.
Goods which were exempted from education cess and secondary and higher education cess will
continue to be exempted from this surcharge.
In certain cases SWC will be applicable at the rate of 3% of aggregate duties of customs.
SWC will be levied on the goods specified in the first schedule to the customs tariff act 1975.
Purpose:
SWC is levied to fulfill the commitment of the government to provide and finance education, health
and social security. The central government may after the appropriation made by the Parliament
utilize such sums of money of the SWC levied for the purpose of education, health and social
security
SWC will not be levied on:
The safeguard duty as per Section 8B & 8C of CTA 1975
The countervailing duty as per Section 9 of CTA 1975
The anti-dumping duty as per Section 9A of CTA 1975
The SWC on imported goods levied.

SWC shall be in addition to any other duties of customs or tax or cess chargeable on such goods
under the CA 1962 or any other law for the time being in force.

Our Constitution states, “No tax will be collected except by authority of law”. Article -246 bifurcates
such authority by prescribing list I for union and List II for state.

POWERS TO GRANT EXEMPTION FROM CUSTOM DUTY

• Section 25 of the Customs Act 1962 empowers the CG to issue notification granting exemption
from customs duty partially or wholly on any goods.
• Exemptions can be general or specific.
• Exemptions are granted subject to fulfillment of certain conditions.

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Sec 2 of CTA 1975 - Basic Customs Duty (BCD):

• Section 2 of the Customs Tariff Act provides that the rates of duties of customs are specified in
the First and Second Schedules. These are commonly referred to as basic customs duties. The First
Schedule relates to import duties and the Second Schedule relates to export duties.
• BCD is applied directly on Assessable Value.

EXPORT DUTY:
• Schedule II of CTA in Section 2 covers a list of 26 articles on which export duties are chargeable.
Most of the articles are chargeable to duty on export tariff values fixed by the Govt. Some are
chargeable at specific rates on quantity and some on the value of the goods which as against
CIF in imports is based on the FOB value - less duty i.e. FAS value. However, for export (for
Customs purposes), the value will be on FOB basis.
•
• Though, there are 26 items in the list chargeable to duty in fact 18 of them are exempted under
Sec. 25(1) and effectively only few item are chargeable to export duty.
•

Sec 3(1) of CTA 1975 - Counter Vailing Duty (CVD)

• If like article produced or manufactured in India - CVD equivalent to Excise duty.

• If like article not so produced or manufactured, - CVD equivalent to the excise duty leviable on
the class or description of articles to which the imported article belongs.
• If Excise duty is leviable at different rates – CVD will be equivalent to the highest rate of excise
duty leviable.

Sec 3(3) of CTA 1975 – Special CVD:

• To counter balance the excise duty leviable on any raw materials, components and ingredients of
the same nature as, or similar to those, used in the production or manufacture of such article.

Sec 3(5) of CTA 1975 – Special Additional Duty (SAD):

• To counter balance the sales tax, VAT, local tax or any other charges leviable on sale or purchase
or transportation of like articles or class or description of articles – SAD will be levied at a rate not
exceeding 4%.

Sec 3(7) of CTA 1975 – Integrated Goods and Services Tax (IGST):

• IGST as per Section 5 of IGST Act 2017 at a rate not exceeding 40% is leviable on like article on its
supply in India.

Sec 3(9) of CTA 1975 – GST Compensation Cess:

• GST Comp Cess as per Section 8 of GST (Compensation to States) Cess Act 2017 is leviable on like
article on its supply in India.

Sec 4 of CTA 1975 - PREFERENTIAL RATE OF DUTY

• CG has the power to declare certain areas as preferential areas, the imports where from are
chargeable to preferential rate of duty.
• Importer/owner of the goods must claim that the article is chargeable with a preferential rate of
duty.

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• Importer/owner must also claim that such article has been produced or manufactured in a
preferential area.
• Such preferential area being a country or territory must be notified as a preferential area by the
CG
• Origin of such article(i.e. identification whether such article is a produce or manufacture of
notified preferential area) must be determined in accordance with rules made in this behalf.

Sec 5 of CTA 1975 - LOWER RATE OF DUTY UNDER A TRADE AGREEMENT

• Trade Agreement between GOI and Government of a foreign country or territory.
• Importer/owner of the goods must claim that the article is chargeable with a lower rate of duty.
• Importer/owner must also claim that such article has been produced or manufactured in the
country where trade agreement exists.
• CG has the discretion to decide in case the trade agreement ceases.

ADDITIONAL DUTY:

Under Section 3(1) of C.T. Act, 1975 additional duty is leviable as Customs Duty. This additional duty
is equal to the Central Excise duty leviable on like goods if produced or manufactured in India, or if
a like article is not manufactured, the excise duty, which would be leviable on a class or description
of goods to which the imported articles belongs to and where such duty is leviable at different rates,
at the highest rate.

Such a rate of excise duty would be subject to any exemptions if applicable to Indian goods.
Even where a state excise is leviable (e.g. on alcohol) the Central excise duty is also leviable too.
However, if the goods are exempted from duty of Central Excise or State Excise no additional duty
is chargeable except by a special notification issued in this behalf under Section 3(1).

Except in the case of levy on MRP based articles the additional duty will be calculated on the
assessable value under Section 14 plus the basic or any special duty if leviable viz Surcharge on duty,
or Auxiliary duty or Regulatory duty etc. if any – Viz.

Value Basic Basic Value for Excise Excise Amt Tot Duty
Rate% Amt Addl Duty Rate%
Rs.100/- 25% 25/- 100+25=125 16% 16% on 125/- = 20/- 25+20 = 45/-

MRP BASED EXCISE DUTY:

Further, if the goods imported are like the goods on which Central Excise is leviable on MRP Maximum
Retail Price) as notified under Section 4A(1) of Central Excise Act. The additional duty will be on the
value so calculated on Maximum MRP less the amount of abatement if any (as per Section 4A of
Central Excise Act 1944) [Section 3(2) proviso].
In the case of MRP based goods the value for additional duty will be on the maximum MRP shown if
there are more than one- less the abatement in the value as prescribed under Section 4A of Central
Excise Act.

Thus if the MRP is Rs. 100/- and

Abatement is 40% - the value
On which additional duty leviable
Would be Rs. 100/- less 40% = Rs. 60/- and if the rate of excise duty is 16% plus surcharge than
the duty @ 16% + 16% Surcharge i.e. 32% would be leviable on Rs.60/- only and the effective
additional duty will be Rs. 19.20/- only.

SPECIAL ADDITIONAL DUTY:

Any article imported into India will in addition be liable to a duty, which will be levied at a rate to be
specified by the Central Govt. by Notification, having regard to the maximum sales-tax, local-tax or
any other charges for the time being leviable on a like article on its sale or purchase in India.

(a) The value for the Spl. Addl. duty will be calculated as:

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Value Basi Basic Value Excis Excise Amt Val + SAD % SAD Tot
c Amt for Addl e duty amt Duty
Rate Duty Rate
% %
Rs.100/- 25% 25/- 100+25= 16% 16% on 125/- = 100+25 4% on 5.80 25+20+
125 20/- +20 = 145/- 5.8 =
145/- 50.8/-

(b) The value for the Spl. Addl. duty in case of MRP will be calculated as: (considering the above
MRP example)
Basic Duty = Rs.25/-
Additional Duty (MRP) = 19.20/-
Spl Addl Duty = 4% (100+25+19.20) = 4% of 144.20 = 5.768/-
Total effective Duty = 25 + 19.20 + 5.768 = 49.968/-

Sec 6 of CTA 1975 - PROTECTIVE DUTY:

This duty is levied by the CG on the recommendation of the Tariff Commission when CG is satisfied
that under the existing circumstances immediate action is necessary for protection of the interests
of any industry established in India. For imposition of this duty, a notification is made in the Official
Gazette.Protective duty, if imposed, shall for the purposes of Customs Act, be deemed to be the
“Basic Customs Duty (BCD)”.

Sec 8B of CTA 1975 - SAFEGUARD DUTY:

Is that duty which is imposed by CG when the CG is satisfied that any article is imported into India in
such increased quantities and under such conditions so as to cause or threatening to cause serious
injury to domestic industry. This duty is imposed by notification in the Official Gazette. If CG feels
that imports of any article have increased to such extent that it is causing or threatening to cause
injury to domestic industry, then CG may impose this duty to safeguard domestic industry. Once
imposed, this duty shall be applicable on all imports of that goods into India, irrespective of the
country from which they are coming. In other words, this duty is applicable on non-discriminatory
basis (it does not differentiate imports of that goods is from which country). The only imports which
will remain protected from imposition of this safeguard duty are:
i) Import of article which has originated from a developing country and the share of import of that
article does not exceed 3% of the total import of that articles into India;
ii) Import of article which has been originated from more than one developing country and the
aggregate of import from “developing countries each with less than 3% import share does not
exceed 9% of the total import of that articles into India;

Provisional safeguard duty cannot remain in force for more than 200 days from the date of imposition.
Will continue to be in force till the expiry of 4 years from the date of imposition unless revoked earlier.
CG can extend the duration further under sufficient causes but total period (including extension)
cannot be beyond 10 years from the date of its imposition.

In relation to increased imports from China, the special provisions have been made under section 8-
C for imposition of safeguard duty.

Sec 9 of CTA 1975 - COUNTERVAILING DUTY ON SUBSIDIZED ARTICLES:

In case the government of any foreign country or territory gives any subsidy (fund transfer, grants,
loans, equity infusion, fiscal incentives, benefits) directly or indirectly; upon the manufacture or

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production, transportation or exportation of such article into India, then CG on recommendation of

anti-subsidy authority levy countervailing duty not exceeding the amount of such subsidy.

The duty is also known as anti-subsidy duty

Sec 9A of CTA 1975 - ANTI-DUMPING DUTY (ADD):

• Duty is levied on dumped articles.

• Amount of anti-dumping cannot exceed the margin of dumping.
• ADD not exceeding the margin of dumping is imposed when imported goods are exported by
exporting country/certain exporters at price below the prices which it normally charges on the
same goods sold in its domestic market.
• In other words, it is imposed when goods are exported at price lower than its normal price. It is
intended to protect the domestic industry from unfair competition from the foreign suppliers.

• Margin of dumping – difference between the export price and its normal value.
• Export price – price of the article exported from the exporting country.
Normal value – Comparable domestic sale price of the like article quoted for consumption in the
exporting country.

National Calamity Contingent Duty (NCCD):

• It is levied on import of pan masala, chewing tobacco & cigarettes at different rates as
applicable. It is levied @1% on PFY, motor cars, multi utility vehicles and 2-wheelers and Rs.50
per ton on crude oil vide section 169 of Finance Act, 2003.
• Value for NCCD is on the sum of AV + BCD

CESS:
Imposed under different laws in force in India and on locally manufactured or produced goods.
Short form of “Assess” i.e. tax or levy. Also leviable on export of some specific goods. Comparison –
Duty is for general revenue purposes while Cess is for a definite purpose (production, export, etc)
and are disbursed to boards of the export commodities for development. Is recoverable as excise
duty.

Many items are chargeable to “Cess” (short form of Assess - i.e. tax or levy) in accordance with the
different laws in force such as-

(a) Agricultural produce Cess Act of 1940.

(b) Agricultural & Process Food Products Export Cess Act, 1985.
(c) The Produce Cess Act, 1966.
(d) The Coffee Act, 1942.
(e) The Mica Mine Labour Welfare Act, 1946.
(f) The Coil Industrial Act, 1953.
(g) Iron ore Mines, Manganese ore mines, and Chrome Ore mines Labour Welfare Act- 1976.
(h) The Tobacco Cess Act, 1975.
(i) The Jute Manufacture Cess Act, 1947.
(j) The Rubber Act 1947.
(k) The Marine produce Cess Act.
(l) The Marine Products Export Development Authority Act, 1972.
(m) The Indian Cotton Cess Act, 1923.

All these Acts have specifically authorised Customs to collect of Cess as per their schedule of rates.

To whom cess is distributed:

This collection does not form part of Customs revenue, but on collection, the same is to be disbursed
to the boards of the export commodities for development in their fields. Rules for refund of Customs
duty are equally applicable to this duty too, as per Customs Act, 1962.

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We have thus seen that for collection of duty or taxes or charges, the goods when imported or
exported have to be correctly classified and charged to duty at rates specified in / schedules I, II or
schedules of Allied Acts.

In addition, in the case of Customs duty, these rates are subject to the exemptions, which may be
granted under Section 25 of CA, 1962 to the good, through Exemption notifications or
Exemption orders. In all the such cases the standard and the other rates of duty is reduced to

the rates as specified by the exemption notification, and thus the final duty chargeable would be the
“Effective rate” of duty so arrived at.

One very important Principle of Tariff is that goods have to be classified in the condition in which
they are imported. Their post import use, which could vary with various importers, has no
consideration in assessment, except where exemption is granted by a notification. Even in such a
case, the classification has to be of the goods in the condition imported, subject to Interpretative
Rules, the Section notes, the Chapter notes, the heading notes and the sub-heading notes.

CUSTOM DUTY CALCULATION

• Step 1 – FOB + Freight + Insurance = CIF = AV
• Step 2 – AV x BCD% = BCD i.e. a
• Step 3 – (a) x SWC% = Surcharge i.e. b
• Step 4 – (a + b + AV) x IGST% = Integrated Goods & Service Tax i.e. c
• Step 5 – a + b + c = Total Customs Duty

TOPIC III: EXEMPTIONS:

These exemptions and concessions can be granted in a number of ways.
Some of these exemptions are briefly discussed below: -
Exemption by Notification: The Central Government may notify by publication in the Official
Gazette certain exemptions and concessions. Such exemptions or concessions may be
conditional or absolute.
There are general exemptions given to a variety of items imported under certain
conditions These include exemption of imports for promotion of exports, import by UN
bodies, defence imports etc. There are also exemptions, which are unconditional and are
applicable across the board. There are other exemptions based on conditions of end use.
To ascertain the applicable rate of duty, one has to refer to the Tariff rates of duties along with
exemption notification, if any.

TOPIC IV: THE TARIFF:

A Tariff is a list of descriptions (nomenclatures) of goods, grouped and arranged in an orderly
manner, specifying the rates of duty applicable to each article or a group of articles. Such a tariff is
essential for-

(1) Describing an article in the International trade without ambiguity.

(2) Applying uniform policy decisions in GATT or general trade agreements effectively.

(3) Collecting correct revenue, at the same time, taking due care that duty is not evaded by
vagueness of description.

(4) Having uniformity in application of duty.

(5) Specify the types of rates i.e. basic, preferential, ad valorem or specific on articles of
similar description.

(6) Collecting and supplying “data” on the international trade, which can be used nationally or
internationally.

It is because of these factors that HSN is being accepted by most of the countries in the world so
that the “Same Language” and understanding of the description of the goods is maintained. Only
schedule I for imports is based on HSN. Schedule II for export has 26 items only, while rest of goods
being free of duty on exports, are not listed.

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Understanding The Tariff:

Tariff Classification is a highly specific area that involves multi-levels of item classification. Making
use of the correct tariff classifications requires accurate and detailed knowledge, not only of the
item being classified but also of the classification system itself.

The following information outlines the importance of tariff classification and a description of the
purpose of the Harmonized System of Tariff Classification. There are also very specific rules of
interpretation for classifying your goods under the Harmonized System.

The primary division of goods in the Tariff is into Sections and Chapters. There are 21 Sections in
all, comprising 98 Chapters. The Harmonized System is a global classification system where

products are grouped according to what they are, what they are made of, and how they are
manufactured or processed. These sections and chapters are accompanied by both Legal Notes
and Explanatory Notes. Legal Notes define the precise scope and limits of each Chapter, Section,
Heading or Subheading. Explanatory Notes are included to aid in the understanding of the
classification.

Within each Chapter, goods are listed according to a hierarchical classification system, broken
down into finer and finer categories. The lowest breakdown level is called the Classification
Number. This is the number that must be used on the Customs documents. There is a
Classification Number for every product that anyone could ever wish to import. The proper
classification of items can be complicated and specific item descriptions apply. The following
Tariff Resources can help you to understand and make sense of the multi-level Harmonized
System of Tariff Classification.

The Importance of Tariff Classification:

All goods imported must be classified in order to have duties and taxes assessed. Tariff
classification enables governments to identify goods imported into the country for purposes of
duty and tax collection, as well as gathering statistical information for economic planning, trade
negotiation, and the enforcement of national and international laws.

A global "Harmonized System" for the description and classification of goods was created in 1988,
and soon after adopted by nations around the world. The broad, core specifics and structure of
Harmonized System classifications is universal, with each participating country eligible to add and
define specific detail items, and to create and assign rates of duty in any required categories for
all classifications.

For an importer, correct classification of goods is a legal responsibility, and also often saves money on
both duties and taxes. In some countries, it also speeds customs release. When examining a company's
past imports, customs consultants nearly always find that overall, too much duty has been paid,
indicating that the importer (or their broker) did not take full advantage of provisions in the Tariff.
Making use of these provisions requires a precise and thorough knowledge of the product to be
classified, as well as knowledge of the Tariff and the principles of classification.

How goods should be classified can depend on minute technical details of their composition and
manufacture. Whether they are eligible for any of the special provisions of the Tariff that allow for
lower duty rates usually depends on the use or purpose for which they are being imported, or on
the availability of certificates of origin. The importer is in the best position to know these facts,
and increasingly importers are becoming aware of this and choosing to classify their own goods, or
verify the work of third parties (in particular, their customs broker).

Importers who use custom brokers should not leave classification of their goods entirely up to the
broker. By understanding how the tariff classification process works, they will be able to work
together with their broker to ensure that their goods are classified correctly. Brokers, on the other
hand, should insist on getting complete, accurate product descriptions, including intended use,
from the importer.

Notes 3 DC Page 10
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TOPIC V: The Harmonized System of Tariff Classification:

All imported goods must be properly classified using the Harmonized System of Tariff
Classification. Tariff classification enables governments to identify goods imported into the country
for purposes of duty and tax collection, as well as gathering statistical information for economic
planning, trade negotiation, and the enforcement of national and international laws.

The Harmonized System of Tariff Classification is used worldwide. The core specifics and structure
of tariff classifications are universal, with each participating country eligible to define specific detail
items and assign applicable rates of duty to any required category.

The Harmonized Commodity Description and Coding System was designed to meet the
following goals:

• The systematic classification of all goods found in international trade.

• Classification of all goods on a uniform basis in the tariffs of all countries adopting
this Nomenclature.
• The adoption of a common internationally accepted Customs language.
• Simplicity and certainty of meaning in the negotiation, application and interpretation
of trade agreements.
• An internationally uniform basis for the collection of trade statistics.

The HSN as applicable is divided into 21 Sections (broad based description of goods covered),
covering 97 chapters (Specific broad based description of article or a group of articles). No signatory
to this convention “Can” change a word, a phrase, a description or the code no. in these 97 chapters.
Chapter 77 is kept blank for any future addition. Only the World Customs Organisation (WCO), which
is the new name of CCC can do any change, additions, or deletions in the nomenclature.

However, each country has been authorised to add two chapters without disturbing the original 97
chapters. We, in India, have added one chapter.

Chapter 98: Covers specific imports, such as Projects, Laboratory Chemicals, Baggage, imports
through Post or Air and Stores, etc.

Presently chapter 99 has been deleted.

Secondly, each signatory has been authorised to divide further a description without changing the
original. We, in India, have just done this exercise.

HARMONIZED STRUCTURE (HS)

• Sections, Chapters, Headings, Subheadings, notes, etc.
• Used by multiple countries that are members of the World Customs Organization (WCO)
• 21 sections
• 97 chapters
• Chapter 77 is reserved for future use
• 98 & 99 are reserved for national use by individual countries.
• Only WCO can do any change, additions or deletions in the nomenclature.
• The more numbers, the more descriptive.
• India HS number is 8 digits.
• The world HS number is 6/8/10/12 digits long.

The broad structure of the Sections in this HS is

Notes 3 DC Page 11
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SECTION CATEGORY SECTION CHAPTER NAME CHAPTER

NUMBERS NUMBERS
AGRICULTURAL PRODUCTS I Live animals, animal products 1 to 5
II Vegetable Products 6 to 14
III Animal & Vegetable fats & oils, etc 15
IV Prepared foodstuffs, beverages, spirits, 16 to 23
vinegar, tobacco and tobacco products.
MINERAL PRODUCTS V Mineral Products 17 to 27
CHEMICAL AND RELATED VI Products of chemicals and allied industries 28 to 38
PRODUCTS
VII Plastics and articles thereof, Rubber and 39 to 40
articles thereof.
NON-CONSUMABLE ANIMAL VIII Raw hides and skins, leather, foreskins and 41 to 43
AND PLANT PRODUCTS articles thereof, saddlery and harness, travel
goods, handbags and similar containers,
articles of animal gut (other than silk worm
gut)
IX Wood and articles of wood, wood cleared, 44 to 46
cork and articles of corks, manufactures of
straw of experts or other plaiting materials
wicker works.
X Wood pulp and fibrous cellulosic materials, 47 to 49
paper paperboard and articles thereof
TEXTILES AND APPAREL XI Textile and textile articles 50 to 63
XII Footwear, headgears, umbrellas, prepared 64 to 67
feathers, artificial flowers, articles of human
hair.
NON-METALLIC MINERAL XIII Articles of stone, plaster, cement, asbestos, 68 to 70
PRODUCTS mica, ceramic products, glass and glassware.
METALS AND XIV Natural or Cultural pearls, precious or semi- 71
MANUFACTURED ARTICLES precious stones, precious metals, metals clad
MADE MOSTLY OF METAL with precious metal and articles thereof,
imitation jewellery, coin.
XV Base metals and articles of base metals. 72 to 83
XVI Machinery and mechanical appliances. 84 to 85
Electrical equipments.
XVII Vehicles, air crafts, vessels and associated 86 to 89
transport equipment.
XVIII Optical, photographic, cinematographic, 90 to 92
measuring checking precious, medical of
surgical instruments and apparatus, clocks
and watches, musical instruments parts and
accessories thereof.
XIX Arms & Ammunitions, parts and accessories 93
thereof.
OTHER HIGHLY XX Miscellaneous Manufactures Articles: 94 to 96
MANUFACTURED AND Furniture, Bedding, Mattresses, Supports,
SPECIAL-PURPOSE GOODS Customs and similar stuffed furnishings,
lamps and light fittings not elsewhere
specified or included, illuminated signs,
illuminated name plates, and the like
prefabricated buildings.
XXI Works of Art pieces and antiques, project 97 to 98
imports, baggage, personal importations,
ship stores, sera, plasma, artificial kidney,
specimen models, postage stamps, paper
money, etc.

Notes 3 DC Page 12
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(a) These broad descriptions, through separate chapters, describe group of commodities, which
include specific types of articles; by general description using commonly used terminology,
except where technical terms are essential.
(b) The grouping pattern covers from raw materials to semi-finished to finished articles, in a
Section / Chapter.
(c) Each of Section / Chapter by its notes, spells out its scope of coverage exclusions,
inclusions, definitions, clarifications and technical analysis, wherever needed.
(d) Since no nomenclature can be all pervasive in this progressive world, in-cases of doubt to
determine the correct classification, Interpretative Rules, too have been prescribed,
(e) The headings of the Sections and the Chapters are only for guidance to locate a specific
description. They have no legal status.

ARRANGEMENT OF HSN
• Raw Materials
• Un-worked products
• Semi-finished products
• Finished products

Chapters:
Each Section covers one or more Chapters with specific general description of commodities. Each of
these general headings has been given a code for ease of application and understanding, in the
international trade. Each of the chapters particularly Chapter 1 to Chapter 81 has been arranged on
the main principle i.e. from raw material, to unfinished, to finished articles. While Chapter 82 onwards
the articles have been arranged based on their functions, principal usage, material from which such
articles are made and specific / general utilities.

Headings:
Each heading has a 4 digit code, e.g. Chapter 1 has six headings, 0101 to 0106, and similarly Chapter
84 has headings 8401 to 8485.

Sub-headings:
Some headings where ever necessary are sub-divided and each sub-division have a six digit code.
viz. heading 0101 into 0101.10, 8401.10, 8402.90.

ONE DASH - Sub-Headings:

The pattern of sub-heading is to divide the heads by 10, 20, 30, 40 etc. Such main sub-headings are
termed as, one dash - sub-heading e.g. -3703.10,
Photographic paper rolls, -3701.10 films for X-Ray, -3701.20 Instant Print films, -3701.30 other plates
& film with side exceeding 255 mm.

The main sub-divisions viz 10, 20, 30 etc are with an intention that, if needed in future, they can be
sub-sub divided.

TWO DASH - - Sub-Sub-Headings:

When these main one-dash sub-headings are further divided, they become two dash--, sub-sub-
headings. e.g. --846221, --3701.91, -- 3701.99, --8462.29 etc.
In these cases of two dash sub-sub divisions figures, .10, .20, .90 are not used but .11, .19, .91, 99
are used to describe the goods making these entries more specific.
Government has now accepted that Customs Tariff, I.T.C. (H.S) classifications and Revised Indian
Trade classifications (R.I.T.C.) all should have same nomenclature and with 8 digit codes. Central
Excise Tariff will also follow suit.

THREE DASH - - - Sub-Sub-Sub-Headings:

Thus heading 0101 will have 4 digits.
Sub-heading 0101.10 will be a one dash 6 digit code; heading 3701.91 or 8462.21 will have a two
dash 6 digit code, while if the two dash codes are further Sub-Sub-Sub divided. They will use a 3
dash 8 digit Code viz. 846229.10, 346239.10 etc.

Residual sub-heading for Parts etc.:

In a heading even after a few sub or sub-sub-headings there could be other residual items that are
described as “others” usually by digit 8 say 8481.80, or by digit 9 viz. 7313.19. Parts of the articles
covered in a heading are usually shown by 9 digit viz. 8419.90 or 8421.91, 8421.99.

Notes 3 DC Page 13
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It is also a condition that the classification for levy of duty will be its six or eight digit heading or its
sub-headings, if given. The four-digit heading is only for describing the articles in that group.

However, if for some reason a heading is not sub-divided, to become a classification it has to become
an eight digit classification by addition of ‘00’ e.g. 18010000.

Further, the rates of duty applicable are shown only against the sub or sub-sub-headings. Thus, the
correct classification and its rate of duty are determined only by or the eight digit sub-headings. E.g.
0808.1000 @ 50% or 0808.2000 @ 35%.

The Classification Number:

Within each Chapter, goods are listed according to a hierarchical classification system,
broken down into finer and finer categories. The lowest breakdown level is called the
Classification Number. This is the number that must be used on the Customs documents.
There is a Classification Number for every product that anyone could ever wish to import.

The Classification Number is put together in a very logical manner. Consisting of 10 digits, each
digit provides specific data used to systematically produce an increasingly accurate description
of the item. Because the Harmonized System was designed to be used on a global basis, the
first 6 digits fulfil the international requirements while the last 4 have been designated for
Country-specific Tariff and statistical purposes.

Example: 0406.20.90.20 Cheese, as an animal product, is found in Section I: Live Animals;

Animal Products. Classification down to the 10-digit level can be reached as follows:

04 is the Chapter designation indicating that the item belongs to Chapter 4: dairy
produce; birds' eggs; natural honey; edible products of animal origin not elsewhere
specified or included. 04.06 is the Heading within Chapter 4, creating a more
specific description of the type of dairy product: Cheese and Curd.

0406.20 is the Subheading indicating the type of cheese or curd: grated or powdered
cheese of all kinds. Note that the decimal in between the first two digits and last two
digits of the Heading level moves to after the first four digits in the Subheading level
and below.

0406.20.90 is the Tariff Item, describing the variety of grated or powdered cheese:
other than cheddar and cheddar types. The Canadian duty rate is assessed at this
level. The official unit of measurement is assigned, where applicable, at this level when
the Statistical Suffix is 00.

0406.20.90.20 is the Classification Number, specifying the exact type of grated or

powdered cheese other than cheddar: Romano. The classification number is built by
adding a two digit code, the Statistical Suffix (in this case 20) to the Tariff Item. Note
that all Classification Numbers belonging to a given Tariff Item will have the same duty
rate. As well, the official unit of measurement is assigned, where applicable, at this level
when the Statistical Suffix is other than 00.

The classification of an item can be somewhat more complicated than this. Often, the digits at a
given level are filled in with zeros indicating that no further breakdown is required at that level.
For example, look at 8502.20.00.00 the Classification Number for "Generating sets with spark-
ignition internal combustion piston engines."

Note that the digits for the Tariff Item and Classification Number levels are zeros. This indicates
that no further breakdown beyond the Subheading is required and that the Subheading, Tariff
Item and Classification Number levels are all encompassed by the same number. It is quite
common for the last 2 digits of the Classification Number to be filled in with zeros to indicate that
the duty rates and statistical classification are to be determined at the same level of detail.

Notes 3 DC Page 14
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In many versions of the Tariff, the actual number would not be shown, only the description so that
the portion of the Tariff page shown above would appear as follows:

8413.30.90 Other
Fuel pumps 10
For marine engines 11
For locomotive engines 12
For aircraft engines 13
For engines for motor vehicles of Chapter 87 14
For other engines 19

Similarly, there can be first and second level Subheadings and first and second level Tariff Items.

Another important feature of the Tariff is the dash or series of dashes preceding the Subheading
and Subheading description lines. The following table shows, which dash lines, correspond to
which tariff classification digit.

Tariff Classification Digit

# of Dash
lines - 5th
-- 6th
--- 7th
---- 8th

When classifying, you must always classify within like description categories that have the same
number of dashes. The minimum number of dashes is one; the maximum is 6. [Note: The
exceptions to this rule occur when a Heading, Subheading or Tariff Item has no further
divisions. That is, a 6-digit item may have a single dash or an 8-digit item may have 2 dashes.]

Example: The product you are classifying is pasta: fresh spaghetti. Using the stylized Tariff
page below, the steps involved to arrive at the correct Classification Number (1902.19.90.10) is
as follows:

1. First you must decide whether or not you pasta product is uncooked pasta, stuffed pasta
or other pasta. (The Headings with a single dash.)
2. Determine that your product is uncooked pasta. From here, you must determine
whether or not the pasta contains eggs or falls in the Other category. (The Headings
with 2 dashes.)
3. Your product does not contain eggs so it falls in the Other category. From here, you must
determine whether or not it is macaroni and vermicelli, containing flour and water only, or
Other. (The Headings with 3 dashes.)
4. Since your product is spaghetti, it falls in the Other category. From here, you
must determine whether or not the product is fresh, frozen or dried.
5. Your spaghetti is fresh so you select Classification Number 1902.19.90.10.

Tariff Item SS Description of Goods

19.02 Pasta, whether or not cooked or stuffed (with meat or other substances) or otherwise
prepared, such as spaghetti, macaroni, noodles, lasagne, gnocchi, ravioli, cannelloni,
couscous, whether or not prepared.
-Uncooked pasta, not stuffed or otherwise prepared:

1902.11.00 --Containing eggs

10 ----- Fresh
20 ----- Frozen
30 ----- Dried

1902.19 --Other

1902.19.10 ---Macaroni and vermicelli, containing flour and water only

10 ----- Fresh
20 ----- Frozen
30 ----- Dried

1902.19.90 ---Other

Notes 3 DC Page 15
PGDCCFF PAPER I - Tariffs SEM I

10 ----- Fresh
20 ----- Frozen
30 ----- Dried

1902.20.00 -Stuffed pasta, whether or not cooked or otherwise prepared

10 ----- In air-tight containers
90 ----- Other

1902.30 -Other pasta

1902.30.10 ---Without meal

10 ----- In air-tight containers
90 ----- Other

Tariff Item Details:

At the Tariff Item and Classification Number levels can be found important information needed in
order to calculate the duty payable on an imported item and complete the Customs accounting forms.
The following example refers to 3204.17.10.12 the Classification Number for quinacridone violet.
A stylized tariff page is shown to illustrate the type of information found at the Tariff Item and
Classification Number levels.

3204.17 Pigments and preparations based thereon

3204.17.10 Quinacridone pigments and preparations based
thereon Standard Rate 10% Preferential Rate 5%

Description of Goods — is an explanatory statement verifying the characteristics of the item. Often
the descriptions for a few levels above the Classification Number must be examined in order to
verify that the description associated with the Classification Number really refers to the product in
question. In this example, we need to look at the following three descriptions:

Quinacridone pigments and preparations based thereon:

Pigments
Violet

These are the descriptions for the Tariff Item, the first level Classification Number and the
second level Classification Number respectively.

Unit of Measure Code — indicated by abbreviated units measuring the item by volume/capacity,
weight, area, number, etc. The unit of measure is used to determine the value for duty on
goods, which have a specific or compound rate of duty.

For example. KGM—Imported quantities of Quinacridone Violet are measured by weight

in kilograms.

Trade Agreements and Associated Duty Rates — the rates of duty imposed upon the item
according to tariff agreements in effect with the country of origin are shown here. Duty is
calculated in the following ways: on an ad valorem rate (which is a percentage of the value of the
goods), on a specific rate per measure, or on a compound rate (which is a combination of both).

For example. If this commodity was being imported from a country where the Preferential
Tariff applies and provided all the conditions are met, duty is assessed on an ad valorem
rate of 5%.

TOPIC VI: Terminology:

Certain principles are of help in interpreting the terminology of the Tariff. First, it is essential to
remember that because the main body and structure of the Tariff is based on the international
Nomenclature, a lot of the wording used will not match the type of terminology commonly used in India,
but will often sound a bit more British. Second, the updating of the Tariff tends to lag behind
technological innovation. The descriptions of some products, especially those of a technologically

Notes 3 DC Page 16
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sophisticated nature, might seem a little old-fashioned or out of date. For example,
"computers" are referred to as "automatic electronic data processing machines".
In addition, certain phrases and punctuation patterns have very specific uses and meanings.
These are detailed in the following sections.

Terminology in Tariff Item Descriptions:

Punctuation: Punctuation is important in interpreting the wording of the Tariff. Semi-colons,

colons and commas are used for very specific purposes.

A semi-colon in a Tariff Item indicates a full stop and that the portions of the Tariff Item
divided by means of a semi-colon are separate and distinct from each other. Take, for example, a
description such as that given for heading 84.21:

Centrifuges, including centrifugal dryers; filtering or purifying machinery and apparatus,

for liquids or gases.

This description refers to two separate product groups’ centrifuges and filtering or purifying
machinery and apparatus. The qualifying phrase, including centrifugal dryers refers only to the
first product group, whereas the qualifying phrase for liquids or gases refers only to the second.

Colons are used to indicate that additional information follows which pertains to the goods
specified. Most commonly, it means that the product being described at one level is further
divided at the next level down by some characteristic such as the material it is made of or whether
it includes a certain part or performs a certain function. For example, the text for Subheading
8501.30 is worded Other DC motors, DC generators:. It is further divided into a second level of
Subheadings that describes various types of motors and generators i.e. 8501.31, Of an output not
exceeding 750 W, 8501.32,Of an output exceeding 750 W but not exceeding 75 kW, etc.

Commas are used to separate a list or series of goods within the product groups delineated by
the semi-colons. At the end of a product group, a comma is used to separate the descriptor phrase
from the list of goods to which it applies.

And/Or: And is used in the same way as a comma, to connect items in a series which are all to be
included together. And may also be used when there is more than one condition which pertains to
an item as in footwear with outer soles of leather and uppers of canvas. This means that the
footwear must satisfy both conditions in order to be classified here.

The word Or is generally used to show that alternatives exist. For example, in heading 73.20,
Springs and leaves for springs, of iron or steel, the product in question can be made of either metal
in order to be classified in that Heading.

Other: The word Other is very important in the Tariff and can be a little tricky. It can occur on any
level. At each level of the Tariff, the product in question is divided into groups. Typically, the first
few groups on a given level are described specifically, with products that don't fit into any of these
groups put into an Other category. For example, the Heading 73.20 refers to Springs and leaves
for springs, of iron or steel. It is divided at the six digit level into 7320.10.00, Leaf springs and
leaves therefor, 7320.20, Helical springs and 7320.90, Other. The Other refers to springs that do
not fit into the other two groups. However, 7320.90 is also divided further, into 7320.90.10, Disc
springs of a kind used in machine tools for working metal and 7320.90.90, Other. Note that the
digits 90 at every level are reserved for the Other category.

Notes 3 DC Page 17
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TOPIC VII: Legal Notes:

In the Harmonized Tariff, some of the Sections and Chapters are preceded by Notes. These are
known as Legal Notes because they have legal force as an integral part of the Harmonized
System. Section Notes, Chapter Notes and Subheading Notes are included in the international core
of the Harmonized System Nomenclature. The international Legal Notes define the precise scope
and limits of each Chapter, Section, Heading or Subheading. Specifically, they perform the
following functions:

1. Define the limits of a Heading.

2. Provide lists of goods included in a particular Section, Chapter, Heading or group
of Headings.
3. Provide lists of goods excluded from a particular Section, Chapter or Heading.
4. Direct the user to the appropriate Section, Chapter or Heading for a particular product.
5. Subheading Notes specifically define what is to be included in or excluded from
given Subheadings after classification to the Heading level has taken place.

Terminology in the Legal Notes :

Special terminology is also sometimes used in the Legal Notes portions of the Tariff.

Throughout the Nomenclature: One commonly used phrase is throughout the nomenclature.
This is used in case in which words or expressions are defined in the notes for a specific Chapter or
Heading, but the definition will apply throughout the whole Tariff. On the other hand, if these
words are not used in a definition given in the notes for a particular Section or Chapter, the
definition should be taken as applying only to that Section or Chapter.

Inter Alia: This means "among other things". Typically it is used with a list of similar objects to
indicate that the list is not exhaustive, and the classification is not restricted to just what is listed.

Mutatis Mutandis: The literal definition is "making due alteration for detail". When this wording
is found in the Tariff, it allows an individual to make alterations for small specific details in order
to complete classifying the item being imported.

Context: The phrases Except where the context otherwise requires and Unless the context mean
that in those cases in which the Chapter or Section Notes are incompatible with the
Heading/Subheading Notes or the text of Headings and Subheadings, the lower level notes and
text will prevail.

Note on how tariff works:

From the above we can now deduce how the code works: The first two digits refer to the chapter
next two digits refer to the heading in the chapter, and the last four refer to the sub or sub-sub
heading determining the classification. In spite of this massive exercise of grouping homogeneous
commodities into a section or a chapter, it is quite possible that because of the advancement of
technology, inventions and changing pattern of manufacturing some commodity may not directly fit
under specific headings of goods even expanded from 4 digit specific headings. To overcome such a
situation the classification can be determined by the application of Interpretative Rules, which form
the part of the schedule. There are such six interpretative rules, and they are an integral part of the
first schedule. Rules one to four are related and must be applied in sequence. Rules five and six
stand on their own to be applied as needed.

TOPIC VIII: General Interpretative Rules:

These Interpretative rules serve three purposes:

Notes 3 DC Page 18
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(a) They give clear directives as to how the nomenclature in the schedule is to be interpreted
in order to bring about uniformity in classification of goods.

(b) Normally guidelines are issued by local administrative instructions which some times do
create interpretative disputes. Through the process of interpretative rules, the classification
to be adopted has been given the statutory stamp of authority. These provisions of
interpretative rules in the statute itself are designed to curtail a number of classification
disputes.

(c) These interpretative rules are a legal and integral part of the Customs Tariff and they
must be applied appropriately, while classifying the goods under Schedule I.

Not only this WCO has created machinery within itself, which when needed, would study, consult,
research and arrive at generic or specific heading, on doubts about any commodity, when it is
referred by any signatory member.

Rule 1:
“The titles of Sections, Chapters and Sub-chapters are provided for easy reference only. For legal
purposes, classification will be determined according to the terms of the headings and any relative
Section or Chapter notes, provided such headings or notes do not otherwise require, according to
the following provisions”. [that is, GIRs 2 to 6]: Explanation: This is the first Rule to be considered
in classifying any product. For practical purposes, this means that the Section and Chapter titles can
be used as guidelines to point the way to the area of the Tariff in which the product to be classified
is likely to be found. However, articles may be included in or excluded from a Section or Chapter
even though the titles might lead one to believe otherwise. Thus in order to classify a product, one
must carefully check the Notes associated with any Sections and Chapters under consideration to
see if the product is mentioned specifically as being included or excluded. Then it is necessary to go
down to the Heading level and find a Heading that is worded in such a way as to include the product
in question. Many goods should be correctly classifiable by reference to Rule 1 alone. If the results
of this process are ambiguous, then Rule 2 should be applied.

Examples:
1) Titles such as Sec.XV “Base Metals and Articles of Base Metals” only is for guidance to search an
appropriate description of an article of metal but has no legal force to determine the classification. Only the
terms of headings and relevant Section and Chapter notes are legally relevant for the purposes of the
classification.
2) If you were importing Christmas tree candles, it would seem logical to classify them with
Classification Number 9505.10.00.90: Other, articles for Christmas festivities. However, when reading
the Notes to Chapter 95, it clearly states this Chapter does not cover Christmas tree candles. In fact, we
must classify them with the Classification Number 3406.00.00.00: Candles, tapers and the like.

Rule 2:
Rule 2(a)
This rule states that any reference in a heading to an article will be taken to include a reference
to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished
article has the essential characteristics of the complete or finished article. It shall also be taken to
include a reference to that article complete or finished (or falling to be classified as complete or
finished by virtue of this Rule), presented unassembled or disassembled.
Explanation:
Rule 2 (a) deals with the classification of unfinished, incomplete, unassembled or disassembled goods.
Unfinished and incomplete goods can be classified under the same Heading as the same goods in a
finished state provided that they have the essential character of the complete or finished article. As
well, unassembled or disassembled goods may also be classified the same as the complete finished
product. If a complete article or finished article presented is incomplete but with recognisable
characteristics, it should be considered as complete article. This rule does not apply if the text of the
Heading or the relevant Legal Notes exclude the unfinished or unassembled product in question.
Examples:
(i) An automobile missing only its wheels would be classified the same as if it were complete.

Notes 3 DC Page 19
PGDCCFF PAPER I - Tariffs SEM I

(ii) Forging: “Blanks” having requisite shape and outline of a finished article or component, which
can be used after minor operations, like grinding, drilling, polishing etc.
(iii) Forged rough of a “Piston” which after a little grinding, drilling polishing would be marketable
or usable as “Piston”.
(iv) Bicycle with frame but without saddle or tyres should be classified as complete
Bicycle under heading 871200.
(v) If a complete article is imported in CKD (Completely Knocked Down) condition i.e. unassembled
or SKD (Semi Knock Down) i.e. disassembled condition, for the purposes of transport or
otherwise, it should be classified as a complete article e.g. a ‘Water pump’, motor and pump
packed separately.

Rule 2(b)
Any reference in a heading to a material or substance shall be taken to include a reference to
mixtures or combinations of that material or substance with other materials or substances. Any
reference to goods of a given material or substance shall be taken to include a reference to goods
consisting wholly or partly of such material or substance. The classification of goods consisting of
more than one material or substance shall be according to the principles of Rule 3.
Explanation: Rule 2 (b) lays the groundwork for dealing with products, not classifiable through
the use of Rule 1 or Rule 2 (a), which are composed of a mixture of materials or substances. It
basically states that a Heading referring to a given material or substance includes mixtures of that
substance with others. Similarly, a reference to a product composed of a given material or
substance includes products composed either wholly or partly of the material or substance. This
means that a mixed product may seem to be eligible for classification under two or more Headings.
However, a given product can legally only be classified under one Heading. Rule 3 must be used to
decide between alternate Headings.
Examples:
(i) If you were importing dicalcium citrate, the Tariff does not specifically state this compound.
However, it is a compound containing more than one material and its essential character is that
of a salt of citric acid. Therefore, dicalcium citrate qualifies as Classification Number
2918.15.90.19: Salts and esters of citric acid, Other.
(ii) Mixtures and combinations will fall under a heading referring to the article or substance e.g.
Coffee with chicory, or natural rubber with synthetic rubber, would be covered as Coffee and Natural
rubber respectively since these articles, primarily retain the characteristics of the main items.
(iii) Milk with vitamins classified as Milk 0402.2990.
(iv) Cork with wax cover would be classified as cork 45.03.10.00.

If, in spite of the above, goods cannot be classified, follow Rule 3.

Rule 3:
When by application of Rule 2 (b) or for any other reason, goods are, prima facie, classifiable under
two or more headings; classification shall be effected as follows:
Rule 3(a)
The heading, which provides the most specific description, will be preferred to headings providing a
more general description. However, when two or more headings each refer to part only of the
materials or substances contained in mixed or composite goods or to part only of the items in a set
put up for retail sale, those headings are to be regarded as equally specific in relation to those goods,
even if one of them gives a more complete or precise description of the goods.
Explanation: Rule 3 (a) states that where 2 or more Headings seem to apply, the one, which
provides the most specific description of the product in question, should be used. This means that a
Heading which names the actual product should be used in preference to one which only names a
category to which the product could belong. Similarly, a Heading that describes the whole product
should be used in preference to one, which describes part of it. However, where two Headings both
only describe part of the product, this rule cannot be used to tell which one to use
even if one seems more specific or detailed than the other.

Examples:

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(i) Mint tea is not stated specifically, as a product, in the Tariff. Although the product descriptions
available are mint and tea, the importer must classify mint tea under the appropriate tea Heading
because it provides the most specific product description and mint is only the flavour of the tea.
(ii) If Specific, forget generic, e.g. “Kitchen Fork”, made of stainless steel. Heading 72.23 describes
- Table, kitchen or other household articles, while heading 82.15 describes Spoons, Forks, and
Skimmers etc. 73.2393 being a generic description as against 82.15, which specifies “Forks”. The
classification will be 82159900.

Rule 3(b)
Mixtures, composite goods consisting of different materials or made up of different components,
and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be
classified as if they consisted of the material or component which gives them their essential
character, insofar as this criterion is applicable.
Explanation: Rule 3 (b) applies to mixtures, composite goods and sets that cannot be
classified by use of the previous Rules. These should be classified as if they consisted of the
material or component, which gives them their essential character. If an article is made of more
than one substance, then the heading referring to each substance or material or component is
equally specific to that component
Examples:
(i) An importer bringing in "liquor gift sets" (that include the bottle of liquor and glasses) must
classify the goods under the appropriate liquor Heading. The essential character of the item is
the liquor itself and not the glasses contained within the set.
(ii) A Radio with clock = Radio - 8527, clock - 9103. Both these classifications would be justifiable
unless there is a specific classification such as Radio with clock = 8527.3200 but if such a situation
is not there then Rule 3(b) be followed i.e. Mixtures, composite goods consisting of different
materials or made up of different components, and goods put up in set for retail sale, which
cannot be classified by reference to 3(a), will be classified as if they consisted of the material or
component which gives them their essential character;
(iii) Mixture containing 70% wheat and 30% Barley - would be covered by heading
10.019020 as wheat.
(iv) Lead pencil with eraser at back. Both lead pencil and eraser fall under different headings. Yet
the essential character of the article is given by lead pencil and hence it would be classified under
heading 9609.1000.

Rule 3(c)
When goods cannot be classified by reference to 3(a) or 3(b), they shall be classified under the
heading which occurs last in numerical order among those which equally merit consideration.
Explanation: Rule 3 (c) is for use in cases in which a good seems to fit in more than one Heading
and the essential character cannot be determined. In this case, the product should be classified
under the Heading, which occurs last in numerical order among those, which equally merit
consideration. To classify under this Rule, there must be minimum two or more components or
ingredients
Examples:
(i) A gift set which includes socks (Heading number 6115) and ties (Heading number 6117) cannot
be classified by the previous rule since neither item gives the gift set its essential character. The
gift set must be classified under the Heading number for ties, which is the Heading that occurs
last in numerical order.
(ii) A conveyer or transmission belting made up of top layer of rubber, central layer of textiles
(canvas) and bottom layer of plastic. There are two specific headings available 40.10 conveyer
or transmission belting. (Of rubber), and 5910 transmission conveyer belts or belting of textile
material, whether or not reinforced with metal or other material. Since 59.10 is the last heading,
such conveyer belting would be classified under 59.1000.90.

Rule: 4
Goods, which cannot be classified under rules (1) to (3) above, will be classified under the heading
appropriate to goods to which they are most “akin”.

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Explanation: Akin means like - i.e. the likeness could be functional, composition or utility It is
difficult to give more examples of “Akin” since not many have been recorded. This is a "last resort"
rule, most often used with new products.
Example:
(i) Currency notes counting machine. Applying rule 4 it is most akin to coin counting machine
under heading 8472 and would be classifiable so.

Rule: 5
In addition to the foregoing provisions, the following Rules shall apply in respect of the goods
referred to therein:

Rule 5(a)
Camera cases, musical instrument cases, gun cases, drawing instrument cases, necklace cases and similar
containers, specially shaped or fitted to contain a specific article or set of articles, suitable for long-term use
and presented with the articles for which they are intended, shall be classified with such articles when of a
kind normally sold therewith. This Rule does not, however, apply to containers which give the whole its
essential character;
Explanation: Rule 5 specifies how to classify containers. Rule 5 (a) deals with containers which:

-term use,

Containers, which have these characteristics, can be classified with the products, which they contain.
However, in cases where the container gives the product its essential character, it would be the
container, which would have to be classified.
Examples:
(i) Flute cases as flutes are normally sold with their cases (due to their specific shape) and are intended
for long-term use.
Exception: A hamper containing a Silver tray containing toffees : Here, though the silver tray is a
container, it gives the character to "hamper" rather than Toffees and the classification of this hamper
would be as silver under heading 71141110.

Rule 5(b)
Subject to the provisions of Rule 5 (a) above, packing materials and packing containers
presented with the goods therein shall be classified with the goods if they are of a kind normally
used for packing such goods. However, this provision does not apply when such packing
materials or packing containers are clearly suitable for repetitive use.
Explanation: Rule 5 (b) deals with other types of containers and packing materials. These should
be classified with the goods they contain if they are of a kind normally used for packing such goods
and are not suitable for repetitive use. Packing and packing materials, (Cartons, boxes, wrappers
etc.) which when presented with article as normal trade packing will be classified with the goods.
However, if such packing materials or packing containers are clearly suitable to repetitive use they
will be assessed on their merits and not with goods.
Examples:
(i) An importer bringing in goods and using Styrofoam chips for padding fits well into Rule 5 (b).
Styrofoam chips are normally used for the padding and insulation of many goods, however they are
rarely reused and are therefore classified with the goods when they enter Canada.
(ii) Compressed “Gas Cylinders” since these are capable of repetitive use they will be assessed
separately as containers under heading, 73110090 and NOT with the gas they contain.

Rule: 6
For legal purposes, the classification of goods in the subheadings of a heading shall be
determined according to the terms of those subheadings and any related Subheading Notes and
mutatis mutandis, to the above Rules, on the understanding that only subheadings at the same
level are comparable. For the purpose of this Rule the relative Section and Chapter Notes also
apply, unless the context otherwise requires.
Explanation: Once goods have been classified to the Heading level by the use of international
Rules 1 to 5, then classification to the Subheading level can now take place by repeating

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international Rules 1 to 5 and taking into account any related Legal Notes. Thus, comparison
for alternate classification would be of each such sub-heading and at the same level i.e. sub-
heading with a sub-heading or a sub-sub-heading with a sub-sub-heading, but not with a
heading (4 digits).

Besides this, the WCO has also done a very voluminous exercise in explaining the terms, conditions
for each heading in the nomenclature, and has provided for classifications of approx. 18000 articles.
They are given in the explanatory notes to the HSN in 4 volumes. Though, they do not have a legal
value they have a lot of persuasive and practical value in deciding classification of many more article
than the 5019 articles in the schedule.

Explanatory Notes:
As an aid to in-depth understanding, the international version of the Harmonized System has
Explanatory Notes associated with it. The Notes are arranged in the same order as the Tariff itself.
They can be used to assist in classification but have no legal force. They typically contain more
detailed descriptions of the products or groups of products to be included in a given area of the Tariff
often including detailed accounts of the manufacturing processes to be used.

Taking all these factors into consideration, it would be easy, if the following basic questions/issues
are kept in mind to determine a correct classification.

(a) Whether the article is specified?

(b) What is material or materials of which it is made?
(c) What purpose does it serve? Functionally, principally,
(d) What are its essential characteristics?
(e) What heading would it attract?
(f) What sub-heading would it attract?
(g) To what the article is Akin (similar) to?

Tariff compliance…….why?
• Necessary to establish the custom duty.
• Applicability of various duty exemption notifications.
• Identification of applicable incentives for exports.
• Determining eligibility under a trade agreement.

Risks of non-compliance
• Low profitability due to increased penalties and recovery.
• Delays shipment clearance.
• Local customs authority may flag the company as needing extra scrutiny resulting in delaying the
import and export process.
• Cancellation of the company’s Accredited Client Programme (ACP) status and also in extreme
cases Importer Exporter Code (IEC).
• Disqualification from Risk Management System (RMS) Clearance
• Over/underpaid customs duty
• Under-claimed duty drawback and other export incentives
• Eligibility for export, import and licensing requirements
• Missed Other Government Agencies (OGA) requirements

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