The Goods and Services Tax (GST) system, introduced in India in July 2017, aimed to streamline the country’s indirect tax structure. Under the GST regime, businesses are required to classify goods and services appropriately to determine the applicable tax rates. This is where the HSN code plays a crucial role. The full form of HSN code is Harmonised System of Nomenclature and it is a globally recognised system for classifying goods, and it has been adopted in the Indian GST system to facilitate uniformity and clarity in tax administration. Let’s understand what HSN code is and delve into the significance, structure and implementation of the HSN code in the GST framework.
HSN Code: Meaning and Full Form
HSN code is an internationally accepted system for categorising goods in a structured and systematic manner. Developed by the World Customs Organization (WCO), it is used for customs tariffs, trade statistics and various other purposes globally. The HSN code is a numeric representation of goods, with each code representing a specific category or product. In simpler terms, all the goods that are of the same type and category will be represented by a common code known as the HSN code.
In the context of the GST regime, the HSN code serves as a basis for determining the tax liability of goods. A particular GST tax rate is assigned to each HSN code. It helps in the proper identification and classification of products, making it easier for businesses and tax authorities to understand the nature of the goods and apply the correct tax rate.
How is HSN Code Different from SAC Code in GST?
Like goods, services have also been categorised for simpler reference. While the HSN code deals with the classification of goods, the Services Accounting Code (SAC) pertains to the classification of services under GST. The SAC system was introduced to ensure a uniform method of service classification for taxation purposes.
The structure of the SAC code is similar to that of the HSN code, with a series of numbers assigned to specific services. Like the HSN code, the SAC code is used in the invoicing process to indicate the type of service provided and to determine the applicable tax rate. This distinction between HSN and SAC codes ensures that both goods and services are adequately accounted for in the GST system.
HSN Code List for GST India
The HSN Code List for GST in India is an organised catalogue that systematically categorises all goods traded within the country under the Goods and Services Tax regime. It includes 21 sections, 99 chapters, 1,244 headings, and 5,224 subheadings. Each section is divided into chapters, chapters into headings, and headings into subheadings. Each section groups related products, making it easier to locate and classify items accurately.
For instance, Section I covers live animals and animal products, including chapters on dairy produce and edible products of animal origin. Section II encompasses vegetable products, detailing chapters on cereals, fruits, and vegetables. Similarly, Section XI deals with textiles and textile articles, including fabrics, apparel, and other related goods. This detailed organisation ensures that every product can be accurately classified within the GST framework.
The HSN code list’s eight-digit codes provide specific classifications, starting with the broader category and narrowing down to detailed descriptions. The first two digits represent the chapter, the next two digits denote the heading within that chapter, and the following two digits specify the sub-heading. For precise identification, the last two digits add further granularity.
Businesses must adhere to these codes for accurate tax calculation and compliance. For example, cotton fabric falls under Chapter 52, with further specific codes defining the exact type of cotton product. This meticulous classification helps businesses determine the correct GST rates applicable to their goods, avoiding misclassification and potential legal issues.
How does HSN code work?
The HSN code uses a numerical system. The first two digits indicate the chapter, categorising broad groups of goods; the next two specify the heading, detailing types within each chapter; subsequent digits provide specific product classification.
Structure of HSN Code in India
The HSN code follows a systematic structure that enables easy identification and classification of goods. The code comprises six–eight digits, grouped as follows:
First Two Digits: The first two digits represent the HSN chapter.
Next Two Digits: The next two digits signify the HSN heading.
Subsequent Two Digits: The subsequent two digits denote the HSN sub-heading.
Last Two Digits: The last two digits signify the tariff items.
The level of detail in the classification increases with each additional digit. The more digits present, the more specific the product classification becomes. This hierarchical structure aids in determining the applicable GST rate accurately. You can easily find the HSN code relevant to your product from the HSN code list. You can also use the HSN code finder to help identify the correct HSN code for your goods and services.
GST Law Requirements Relating to HSN/SAC Code Disclosure in Invoice
Under the GST law, businesses are obligated to mention the HSN code for goods and the SAC code for services on invoices generated during transactions. The disclosure of these codes is crucial for the following reasons:
Tax Calculation: The HSN and SAC codes play a vital role in computing the GST liability of a business. It can be used to classify 5000+ goods. Correctly identifying the HSN/SAC code for goods and services ensures implementing the correct GST rate and making accurate tax calculations. You can use the HSN code list or HSN code finder for correct identification of the HSN code.
Input Tax Credit (ITC) Claims: Suppliers and recipients of goods and services rely on the HSN/SAC codes to claim Input Tax Credit. Accurate disclosure of these codes in the invoice ensures smooth ITC claims.
Government Compliance: GST authorities use the HSN/SAC codes for statistical and analytical purposes. Proper disclosure in invoices enables the government to monitor and analyse trade trends effectively.
Trade Facilitation: The HSN/SAC codes are used globally for international trade. Proper identification and classification facilitate seamless import and export procedures.
Earlier, the HSN code disclosure requirement in GSTR-1 followed a three-tiered system. However, with effect from 01 April 2021, the three-tier system was replaced with the following requirements:
Sl. No.
Aggregate Turnover in the Preceding Financial Year
Number of Digits in the HSN Code to be Disclosed
1
Up to Rs. 5 crores
4
2
Above Rs. 5 crores
6
As per the earlier three-tier system, HSN codes were exempted for businesses with a turnover of up to Rs. 1.50 crores. However, it can be seen from above that the requirement to mention the HSN code has become mandatory for all businesses irrespective of the turnover limits. However, registered persons having aggregate turnover of up to Rs. 5 crores in the previous financial year are not required to mention the HSN code in the tax invoice issued for supplies to unregistered persons.
Summing Up
The HSN code in GST serves as a standardised classification system for goods, promoting transparency and uniformity in tax administration. By adopting the globally recognised HSN code, India aligns its taxation structure with international trade practices. Additionally, the inclusion of SAC codes for services ensures that both goods and services are adequately accounted for under the GST regime.
Businesses must be diligent in correctly identifying and disclosing the HSN/SAC codes on invoices to comply with GST regulations. This not only ensures accurate tax calculation but also enhances transparency in trade practices. As the GST system continues to evolve, a robust understanding of HSN and SAC codes will remain crucial for businesses to navigate the complexities of the tax framework efficiently. For more such insightful information, check out TATA Capital blogs.
1. What is the difference between an HSN code and a SAC code?
HSN stands for Harmonized System of Nomenclature, while SAC stands for Services Accounting Code. The key difference is that HSN codes cover goods and services, whereas SAC codes only specify services.
2. Who needs an HSN code under GST?
Under GST in India, businesses use HSN codes based on turnover: below Rs. 1.5 crores are exempt, Rs. 1.5-5 crores need 2-digit codes, and above Rs. 5 crores need 4-digit codes. Importers and exporters are required to use 8-digit HSN codes.
3. Where should HSN codes be used?
HSN codes are essential for GST compliance and must be included on invoices, Bills of Supply, and in the GSTR-1 return. This ensures proper classification of goods and services for taxation purposes.
4. Is an HSN code 4 digits or 8 digits?
HSN codes are typically 6 digits, but in India, they can be 8 digits. The first two digits represent the chapter, the next two are the heading, the following two are the sub-heading, and the last two are the tariff item.
5. How do I find an HSN code?
To find the HSN code, visit the official GST portal. Go to the services section, where you can search by entering the HSN code or by providing a product description to identify the relevant code accurately.
29 November 2024
7 mins read
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