What is HSN code in GST? A complete guide for your business

The acronym HSN stands for Harmonised System of Nomenclature. This was introduced in 1988 by the World Customs Organization (WCO) for a systematic classification of goods at both national and international levels. HSN code in GST is usually a 6-digit code that classifies various products. It is mandatory for both B2B and B2C tax invoices on the supplies of Goods and Services.

The Indian Ministry of Finance has mandated the use of the HSN code in GST for all businesses having a turnover of Rs 5 crore and above. It has been made necessary for supplies of taxable goods and services from April 1, 2021.

Understanding HSN Code

The HSN code in GST contains 21 sections, which are further subdivided into 99 chapters and about 1244 headings. This system of classification helps in making GST simpler and globally accepted. The original 6-digit HSN codes are used to classify commodities for Customs and Central Excise. The codes prescribed in the Customs tariff are also used for GST purposes.

The HSN codes in GST can help in efficiently gathering and analyzing data to understand foreign and domestic trades. This data helps the government in deciding policies related to the trade of these commodities.

The need for HSN Code

The main objective of HSN is to provide a uniform classification for goods from all parts of the world. This uniform and systematic manner of classification is very useful in simplifying international trade. Almost 98% of all merchandise in international trade is listed in terms of the HSN. Most manufacturers, importers, and exporters in India have been using HSN codes since the pre-GST times. Importers and exporters mention these codes in their import and export documents, while traders usually supply HSN codes in the GST invoices issued to them by the manufacturer or supplier.

This system of classification is widely used for taxation purposes also. HSN code in GST helps to identify the rate of tax applicable to a specific product under review.

Classifications of HSN Code

In India, the Central Board of Indirect Taxes and Customs (CBIC) reports GST rates on the basis of HSN classification of goods. Hence, in order to determine the GST rate of a product, it is important for the business to first identify the correct HSN Code. From 1st April 2021, the CBIC has mandated the use of the following HSN codes for GST purposes -

•  If the aggregate turnover in the preceding year is upto 5 cr - Required to mention 4 digit HSN Code
• If the aggregate turnover in the preceding year exceeds 5 cr - Required to mention 6 digit HSN Code

Since it is important to mention the correct HSN code in GST, online calculators assist in an HSN code search to identify the correct codes. Essentially, there are four types of HSN codes, and these are  -

The 2-digit HSN Code- The first 2-digit define the Chapter

The 4-digit HSN Code- At the 4-digit level are the Heading

The 6-digit HSN Code- At the 6-digit are the Subheadings and

The 8-digit HSN Code- At the 8-digit level are the Tariff items

HSN Codes in India

In 1986, HSN codes were first introduced in India to classify commodities for Customs and Central Excise. HSN codes apply to Customs as well as to GST. The codes used in the Customs tariff are the same as those used for GST purposes. Currently, HSN codes are used all over the world. There are different HSN codes for different commodities. The biggest advantage of the HSN code in GST is that it removes the need to upload a detailed description of the goods. This saves time and facilitates the process of filing GST returns.

HSN Code in GST - Working

HSN code in GST is usually a six-digit code that classifies more than 5000 products. It is used to arrange these products in a legal and logical structure. To maintain uniform classification, the HSN is supported by well-defined rules and is accepted worldwide.

HSN classification is greatly used for taxation purposes by helping to identify the rate of tax applicable to a specific product. Another use of HSN codes is that it helps determine the quantity of all goods imported or traded through a country.

Classifying goods under HSN

India has been using the HSN system since 1986 under Central Excise and Customs. This system was expanded to add two more digits to the 6-digit structure. According to the latest rule, the classification of code is:

• The first two digits represent the chapter number for a product
• The next two digits represent the heading number
• The last two digits represent the product code

The purpose for using HSN Code in GST

HSN codes are used globally in as many as 200 countries. This high usage rate can be attributed to the benefits of HSN, which include:

•  To collect more data on international trade statistics
•  HSN codes provide a rational basis for Customs tariffs
•  It is a uniform classification that is accepted globally

HSN codes exist for each commodity in all countries, and these codes remain the same for almost all goods. However, in some countries, HSN numbers may show small variations, because they are entirely based on the nature of the items classified.

What are SAC Codes?

SAC stands for Services Accounting Code which is a classification system for services instead of goods. It was developed by the Service Tax Department of India. Using the GST SAC code, the GST rates for services are divided into five categories which are - 0%, 5%, 12%, 18%, and 28%.

Difference between HSN & SAC codes

All services generally begin with the number 99, differentiating the code as a SAC and not HSN. Another difference between the two is the number of digits in the code - HSN code has 8 digits, while SAC has 6 digit codes.

The benefits of HSN Code in GST

•  It provides a uniform, global system for classifying goods for Customs and Central Excise
• It provides a uniform global taxation system
• Increases the ease of doing business internationally.
• It is also used in filing returns, invoices, etc

To mention, businesses with GST registration can significantly benefit from their purchases. Shopping from an online wholesale marketplace like Amazon Business can get customers up to 28% savings on their final invoices. One can make the savings through claim input tax credit.

The importance of HSN under GST

The current system of GST HSN codes in India is uniform throughout the country and in sync with the global standards of classifications. HSN code significantly reduces the chances of errors made during inter-state trade. Before this uniform system was implemented, every Indian state had its own code for each product for both purchase and sale of products. It resulted in errors and omissions during trading between the states.

Steps to find your HSN Code

To find an HSN code for a product-

1. Start by selecting  the Chapter
2. Next select Section and
3. Filter the subheading to get the product code.

Here is an example - The  HSN code for Roasted Chana is 19.04.10.90, where 19 is the Chapter, 04 is the Section, 10 is the subheading, and 90 is the product code.

HSN Sections

The HSN contains 21 sections, with 99 Chapters, around 1,244 headings, and approximately 5,224 subheadings. Each Section is divided into Chapters, and each Chapter is further divided into Headings and each Heading is Subdivided into Subheadings. While the Section and Chapter describe the broad categories of goods, the headings and subheadings describe the product in detail.

Conclusion

The system of HSN code in GST is not only helpful for Customs agents, but it also has important implications for tax collection.  It helps in making the GST universal and systematic. The use of HSN code in GST eliminates the need to upload a detailed description for each good falling under the Goods and Service Tax. This facilitates the automation of GST returns, saving time and money for the tax authorities.

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