International trade requires that all import and export commercial transactions be declared to the relevant customs authority and that the goods be classified under an appropriate tariff heading.
The classification of goods operates as part of the international Harmonized Commodity and Coding System, under the WCO Harmonized System Convention. The correct tariff classification of goods is, therefore, one of the most basic and important principles of international trade.
In South Africa, tariff is at the forefront of the customs risk engine, along with valuation and origin. It is against these three pillars that customs will validate a declaration which is then released, queried, detained or stopped. The tariff heading declared determines the general rate of duty applicable, which is most often calculated against the value, and the rate of duty applicable relative to the country of origin (in terms of trade agreements), and it is for this reason that tariff classification is of vital importance.
It is of equal importance to understand that tariff classification is not just related to the rate of duty, but to several other key functions. The HS Code determines the statistical quantity to be declared, e.g. the number of units or the net mass. This is not only for customs purposes, but it is important to the department of trade, industry and competition (dtic), which collects trade data. This allows the dtic to know what is being imported/exported, how much of that commodity is being traded during a specific period, and between which countries. It is for this reason alone that the correct HS Code must be declared for exports, even though there are no duty implications.
In addition, the HS Code determines whether there is a trade agreement in place or not, whether a rebate facility is available or not and, crucially, whether a commodity is prohibited or restricted. An incorrect classification may result in a lower rate of duty, but the goods may then require a permit, and this is the reason why goods should never be classified based on the rate of duty. To classify a commodity incorrectly to either avoid the correct rate of duty or prohibited and restricted requirements is a contravention of the Customs and Excise Act and is considered a serious offence in terms of the Penalty Guidelines.
In addition to the rate of duty applicable in terms of Schedule 1 of the Tariff Book, the HS Code also prescribes rates of duty applicable in terms of Schedule 1, Part 2A (excise duty), Schedule 1, Part 2B (as valorem duty), Schedule 2, Part 1 (anti-dumping duty) and Schedule 2, Part 2 (countervailing duty). There are also various environmental levies applicable to specific commodities, and when classifying a product, a basic rule is to ensure that all schedules of the Tariff Book have been checked to ensure duty-related compliance.
Tariff classification is one of the most complex and contentious issues within the Customs and Excise Act as, unless a Tariff Determination has been issued (a binding ruling), tariff classification is only an opinion based on information at hand, the Chapter and Section Notes, the Explanatory Notes, and the General Rules of Interpretation. In the second part of this column, I will provide detailed insight into the actual skill of tariff classification.
