What is HS Code and why are businesses not happy with it?

The HS Code has lately been in discussion a lot. 

Earlier this month, leaders of the country's apparel sector raised allegations that customs authorities harass them during the process of importing raw materials for export goods and listing them in bond licences, which is known as the Harmonised System (HS) Code.

Faruque Hassan, the outgoing BGMEA President, recently said in a meeting with NBR at its headquarters that although the National Board of Revenue (NBR) issued a letter to address the issues related to the HS code, "It is not being implemented at the field level." 

The crux of the problem essentially lies in having new products added to the export item, and a cumbersome process of adding the raw imported materials to the bond licence. 

A bond licence is required for importing duty-free products. There are various types of bond licences including exporter, manufacturer and commercial licences. The RMG exporters import products – basically raw materials – for export items under the bond licence. 

When businesses apply to the customs authorities for the imported materials to be added to the bond licence, "they don't grant us the approval. Maybe, only five items are approved out of 20 [items to be imported]," the president added. 

In response to Faruque Hassan, NBR Chairman Abu Hena Md Rahmatul Muneem asked them to be more specific, instead of saying they were being harassed, "Inform us where the harassment is happening on a case-by-case basis." 

What is HS Code? 

All customs bodies around the world follow the World Customs Organisation (WCO) for uniform coding of products. Instead of particular names, the codes are used as their uniform identities.  

"We follow eight-digit code, which is a global uniform coding system. For example, I will import a particular commodity, say cement, and this cement will be known to the world by a particular code, instead of only by name," said Raich Uddin Khan, First Secretary of Custom Automation at the NBR. 

"We preserve the product specifics nationally and internationally based on this code. The importance of HS code is high in preserving information like how much has been imported in a particular HS code, or how much value has been imported in this particular code," he said. 

In the coding system, you can accommodate all types of products.  All products don't have a specific code but it is possible to accommodate them under a code of a similar product. 

"This is very scientific and updated regularly," Raich Uddin explained. 

HS Code is important for tax. It is a worldwide generalised code, based on which the taxes or supplementary duties are determined.

Let's take batteries for example. You may bring a battery for charger lights, solar panels or electric cars. Now, the tax on a pencil battery and a car battery cannot be the same. So what the HS code does is categorise the different types of batteries with different digits – assigning them different taxes, from zero to a very high range of duty. All of this depends on the product type and its usage. 

What issues do businesses face? 

We reached out to several BGMEA leaders to understand the harassment they face. Several spoke about facing bribery demands, delays in entry for newer products, and subsequent hassles and demurrage as a consequence.  

All kinds of products - buttons, badges and other accessories - change over time. Let's start with what happens when a product changes over time.  

"Every time a product changes, we have to make an entry to the customs where different types of clarifications are necessary. The customs create various problems for us to secure entry of the new HS code.

Releasing these products from customs often requires huge amounts of bribes. We have to do this, there is no other way around it," said a BGMEA director requesting anonymity. 

"You may ask why won't I work within the system. But if I stay within the system, I will have to wait six months to release my products. If we wait this long, our shipment date will expire. 

Another senior BGMEA leader – also requesting anonymity – cited an embroidery product as an example. Over the course of shipment, due to atmospheric conditions, one or two centimetres of the product may shrink. Then the product falls under a different HS code. 

"But whenever they find a difference, they impose a fine on us," the business leader said. 

Another often cited scenario is when the RMG industry brings in new technologies. For instance, foam dying – which uses air instead of water to carry dye onto the fabric – is a new technology  in textiles, as opposed to traditional dyeing which works with water, dye, and chemicals. Foam dyeing requires new machinery.  

"What happens is when we import these items [machinery used for foam dyeing] they cannot trace this in HS code and they enter this as the closest available code, but give it a manual entry. 

When they give it a manual entry, I cannot bring it duty-free. I have to pay duties then [products enlisted under the HS code in the system are duty exempted]," he said. 

In case the business decides to argue with the customs, it often results in prolonging the release time. 

"When we bring the products in bulk through ports, suppose there is an argument over HS code, what they will do is they will hold back the product at the port. I have brought the spare parts because there is a problem with my machinery and I have an urgency." 

Not just delays; more issues come into play here. "Secondly if a component is stolen when left there, it will not serve the purpose of why I imported it. 

"Besides, there is a demurrage charge [the charge that the merchant pays for the use of the container within the terminal beyond the free time period]. Suppose I have over Tk2 lakh demurrage charge, so I think even if I have to pay Tk1 lakh in bribe, it is still less than what I will incur as a demurrage charge. So, we pay bribes instead," the senior leader said. 

The business leaders, however, also admitted that the businesses sometimes misuse the scope of the HS code. Suppose someone needs to import elachi as a food item, which has a high tax. But if someone imports this as a raw material for the farming industry, the tax is very low. 

When asked about the harassment allegations, First Secretary Raich Uddin Khan said he wasn't aware of this. NBR Chairman Abu Hena Md Rahmatul Muneem was unreachable over the phone. 

The first vice-president of the BGMEA, Syed Nazrul Islam, in an earlier interview said that the complexity involving the NBR's HS Code is a key issue that needs to be addressed soon if Bangladesh wants to achieve product diversification. 

The challenge the RMG businesses face is you need new materials to make new products, he said.  This backward linkage hasn't quite developed in Bangladesh yet, so, RMG owners have to import these products and while doing so, they face HS Code complications while clearing the raw materials at customs. 

What is the solution? 

According to BGMEA leaders, all HS Code-related issues should be automated. An integrated system could ease the problems. The improvement of the system is essential so that it detects the changes of certain machines automatically without human involvement. 

"We know the garments oriented HS Codes – button, zipper, or any type of attachment. They don't need to wait until someone applies for it to include a new product. Rather, they should keep their eyes open and include the new items in their system on their own," said the senior BGMEA leader. 

""What they do instead is they question and complicate it and prolong the process," he added. 

Another BGMEA leader said, "There is no solution but the willingness of NBR officials.  

Former NBR Chairman Abdul Mazid said that there are loopholes at both the customs and business side. 

"There is weakness in the business's approach, but there is a fault in the NBR system as well," he said. "We have three problems. The laws are created for those who dodge the law. But then what happens? The people who these laws are made for are given a free pass with under-the-table ways. Then innocent businesses bear the brunt. And this creates a price distortion in our market." 

He further said, "Now that BGMEA or others are raising the issue, why don't they reach out to the right authority? The aggrieved should file a petition and bring it to the attention of the Prime Minister and parliament."