CLASSIFICATION OF IMPORTED AND EXPORT GOODS

1. Meaning of Classification

Classification means determining the appropriate Heading/Sub-heading of the

Customs Tariff under which a particular good is covered.

2. Need for Classification

Classification is important for:

1. Determination of Rate of Duty

o Customs duty depends on the tariff classification of goods.

2. Determination of Eligibility for Exemption

o Most exemption notifications refer to specific tariff headings/sub-

headings.

o Correct classification is necessary to claim exemptions.

3. Relevant Time for Classification

Classification is determined at the time of import or export of goods.

Customs Tariff Act, 1975

Purpose

The Customs Tariff Act, 1975 provides:

 Classification of goods.

 Rates of customs duties.

Schedules under the Act

First Schedule (Import Tariff)

Contains goods chargeable to import duty.

Structure:

Section

 Group of chapters relating to a particular class of goods.

Chapter

 Each section is divided into chapters.

 Each chapter covers a class of goods.

Chapter Notes
  Given at the beginning of each chapter.

 Form part of the statute and have legal force for classification.

Heading

 Chapters are divided into headings.

Sub-heading

 Headings are further divided into sub-headings.

Memory Flow:
Section → Chapter → Chapter Notes → Heading → Sub-heading

Second Schedule (Export Tariff)

Contains goods chargeable to export duty.

Five Column Headings in Customs Tariff

Column Particulars
No.

1 Tariff Item

2 Description of
Goods

3 Unit

4 Standard Rate of
Duty

5 Preferential Rate of
Duty

Customs Duty Rates (Exam Point)

 Basic Customs Duty (BCD) rates generally: 5%, 7.5% and 10%

 Highest general BCD for most non-agricultural goods: 10% (subject to

exceptions)

 General duty on baggage: 35%

 No additional customs duty on baggage.

Social Welfare Surcharge (SWS)

 Introduced w.e.f. 02-02-2018

 Levied at 10% of customs duties (excluding specified duties).

Effective Rate Example:

 BCD = 10%

 SWS = 10% of BCD = 1%

Therefore:

Effective Customs Duty = 10% + 1% = 11%

HSN (Harmonised System of Nomenclature)

Meaning

HSN is an internationally accepted product classification and coding system.

Developed by:

 Customs Co-operation Council (now World Customs Organization), Brussels.

Purpose:

 Forms the basis of classification under the Customs Tariff Act, 1975.

Explanatory Notes to HSN

1. Official Notes

Issued by the Customs Co-operation Council, Brussels.

2. Clarify Scope of Headings

They explain:

 Scope

 Coverage

 Extent of each HSN heading

3. No Legal Backing

Unlike:

 Section Notes

 Chapter Notes

HSN Explanatory Notes do not have statutory force.

Hence, they are only persuasive in nature.

4. Used Only When Ambiguity Exists

If tariff entry is clear:

 Follow Customs Tariff entry.

If ambiguity exists:
  HSN Explanatory Notes may be referred to for guidance.

Judicial Position on HSN

General Rule

Since Indian Customs Tariff is based on HSN:

 Classification disputes should generally be resolved with reference to HSN.

Exception

If Customs Tariff and HSN are inconsistent:

 Customs Tariff prevails.

 HSN cannot override the specific wording of the Indian Tariff.

Customs Tariff – Interpretative Rules & General Explanatory Notes

Purpose of Interpretative Rules

The Customs Tariff contains 6 General Interpretative Rules (GIRs) and 3

General Explanatory Notes to ensure correct classification of goods.

Purpose

 To provide guidance on interpreting tariff nomenclature.

 To give statutory force to Interpretative Rules and Explanatory Notes.

 To ensure uniform classification of goods.

Exam Point: Interpretative Rules are an integral part of the Tariff Schedule.

Rule 1 – Headings & Notes Prevail

Principle

 Section and Chapter titles have no legal force.

 Classification shall be determined according to:

o Terms of headings

o Relevant Section Notes

o Relevant Chapter Notes

Rule 2(a) – Incomplete/Unfinished Goods

Principle

Reference to an article includes:

1. Incomplete or unfinished article having essential character of finished

article.

2. Complete article presented unassembled/disassembled.

Essential Character Test

Allowed:

 Minor adjustments only.

Not Allowed:

 Major processes like turning, grinding, broaching, heat treatment, surface

treatment etc.

Examples

 Railway coach without seats → Railway coach.

 Car without seats → Car.

 Unassembled bicycle imported in parts → Bicycle.

Memory Trick

"Essential Character = Finished Goods Treatment"

Rule 2(b) – Mixtures & Combinations

Principle

Reference to a material/substance includes:

 Mixtures of that material.

 Combinations with other materials.

 Goods wholly or partly consisting of that material.

If goods contain more than one material → Apply Rule 3.

Examples

 Coffee includes coffee mixed with chicory.

 Natural rubber includes mixture of natural and synthetic rubber.

Rule 3 – Goods Classifiable Under Multiple Headings

Applicable when Rules 1 and 2 fail.

Rule 3(a) – Most Specific Description

Principle

Specific heading prevails over general heading.

Example

 Heading 8215 – Forks, spoons, ladles.

 Heading 7323 – Household articles of iron & steel.

Steel fork:

✅ Heading 8215 (more specific).

Rule 3(b) – Essential Character Test

Principle

For:

 Mixtures

 Composite goods

 Goods made of different materials

 Retail sets

Classification based on component giving essential character.

Example

Hair dressing set containing:

 Hair clipper

 Comb

 Scissors

 Brush

 Towel

Main function from hair clipper.

✅ Classified under heading of hair clipper.

Rule 3(c) – Latter the Better Maxim

Principle
If Rules 3(a) and 3(b) fail:

Choose heading appearing last in numerical order among equally applicable

headings.

Example

Possible headings:

 4010

 5910

Both equally applicable.

✅ Choose 5910 (appears later).

Rule 4 – Akin Rule

Principle

If goods cannot be classified under Rules 1–3:

Classify under goods to which they are most akin (most similar).

Example

Plastic film used on window panes to reduce sunlight.

No direct heading available.

Closest item: Plastic blinds.

✅ Classified with plastic blinds.

Rule 5 – Cases, Containers & Packing Materials

Rule 5(a) – Special Cases/Containers

Specially shaped containers normally sold with goods are classified with the goods.

Examples

 Camera case

 Musical instrument case

 Gun case

 Necklace case

Exception:
❌ Not applicable if container gives essential character.

Rule 5(b) – Packing Materials

Packing materials and containers presented with goods are classified with goods if
normally used for packing.

Exception:
❌ Not applicable when clearly suitable for repetitive use.

Example

 Cardboard box → with goods.

 Reusable gas cylinder → separate classification.

Rule 6 – Sub-heading Classification

Principle

Classification at sub-heading level shall be determined:

 According to sub-heading terms.

 Related sub-heading notes.

 Applying Rules 1–5 mutatis mutandis.

Important Point

Only sub-headings at the same level are comparable.

Memory Trick

"Compare Equals with Equals."

General Explanatory Notes

Note 1 – Meaning of Dashes

Symbol Meaning

- (Single
Sub-classification under heading
Dash)

-- (Double
Sub-classification under single dash
Dash)

Sub-classification under immediately

--- / ----
preceding dash

Note 2 – Meaning of "%" Rate

When duty rate is expressed as %, duty is charged as a percentage of the value of

goods under Section 14 of Customs Act.
Note 3 – Preferential Rate Not Specified

If no rate is shown in preferential duty column:

✅ Standard tariff rate applies.

Standard Unit of Quantity (SUQ)

Meaning

Standard unit prescribed in Column 3 of Tariff Schedule for:

 Collection of trade statistics

 Comparison of data

 Analysis of imports/exports

Examples

 Kg

 Gram

 Cm

 Cc

 Metric tonne (MT)

Objective

Maintain uniformity in trade data.

Project Imports (Heading 9801) – CA Final Notes

Meaning / Need for Project Imports

 Large projects require import of several machines, equipment and

components over a period of time.

 Assessing each import separately is cumbersome and increases compliance

burden.

 Hence, Project Import Scheme under Tariff Heading 9801 allows eligible
imports for a project to be assessed under a single heading.

GST Aspect: Imports under Project Import Scheme are classified under Heading
9801 and IGST is leviable @ 18%.

Scope of Project Imports

The following imports for initial setting up or substantial expansion of a project

are covered:
  Machines

 Instruments

 Apparatus

 Appliances

 Components

 Raw materials required for manufacture of the above items

Substantial Expansion = Increase in installed capacity by more than 25%.

Spares required for maintenance of the plant/project are also eligible, but only up
to 10% of the value of goods imported.

Eligible Projects

1. Industrial Plant

2. Irrigation Project

3. Power Project

4. Mining Project

5. Oil & Mineral Exploration Project

6. Any other project notified by the Central Government

Minimum Investment Criteria

No minimum investment criterion has been prescribed.

Construction Equipment

 Construction equipment required for initial setting up or substantial

expansion of a registered project can also be imported under Project Import
Scheme.

 After completion of the project, such equipment may be transferred to

another registered project under Heading 9801 on recommendation of the
sponsoring authority.