Understanding the HSN Code under GST

The World has been thriving ever since International Trade and Commerce came into picture. There are thousands of products being transacted around the World, some specific to a country and some relating to most of the countries. It has thus become imperative to have a common understanding of the goods being traded and countries speaking the same language, irrespective of their national boundaries. Hence came the inception of HSN Codes, which are an integral part of International trade and commerce today.

In this article, we’ve explained what is HSN code, what is SAC? Format of HSN code and how to use HSN under GST in India.

What is HSN Code in the first place?

Harmonized System of Nomenclature, or HSN, was conceived and developed by the World Customs Organization (WCO) with the vision of classifying goods from all over the World in a systematic and logical manner. It is a six digit uniform code that classifies more than 5,000 products and is accepted worldwide. These set of defined rules is used for taxation purposes in identifying the rate of tax applicable to a product in a country. It is also used to determine the quantum of product exported or imported in and out of a country. It is a crucial feature to analyze the movement of goods across the World. It is a combination of different sections, further drilled down to chapters, which are further classified into headings and sub-headings. The resultant figure is the six-digit code.

HSN is widespread and is adopted in more than 200 countries, covering a staggering 98% of goods in the World. It is by far, the best logical system of classification and identification adopted in International Trade. It has helped in reducing efforts and costs related to complex procedures of International Trade.

HSN in India

Now that we have been through the concept of HSN, we now move on to understanding HSN from the Indian context.

India is all set to have its very own Goods & Services Tax or GST, which applies to all goods and services alike. It shall subsume many indirect taxes and reduce the burden on the end consumer. India has already been using HSN system since 1986 in the Central Excise and Customs regime. It is a much more detailed classification that added another two digits to the 6-digit structure. Indian manufacturers under GST shall be required to follow a 3-tiered structure of HSN.

·         Those with a turnover of less than INR 1.5 Crores need not follow HSN

·         Those with a turnover exceeding INR 1.5 Crores but less than INR 5 Crores shall be using the 2 digit HSN codes

·         Those with a turnover exceeding INR 5 Crores shall be using the 4 digit HSN codes

·         Those dealers who are into imports or exports shall mandatorily follow the 8 digit HSN codes

Understanding the digits of HSN Code

The HSN structure contains 21 sections, with 99 Chapters, about 1,244 headings, and 5,224 sub-headings. The commodity’s manufacturing and technological complexity define the section or chapter to which it belongs. As such, all natural commodities like vegetables, animal produce, etc. belong to the earlier sections, whereas industrial machinery is seen at the later stages.

For e.g. – Processed cotton appears later whereas uncombed, normal cotton appears earlier.

The sections are categorized on a broader perspective. Chapters, on the other hand, have a much more specific categorisation. Like Section 11 covers all kinds of textiles and textile articles, whereas Chapter 62, which falls under Section 11 is expressly for accessories for men and women.

Going further down the chain, chapters have been sub-classified into headings and sub-headings. The headings focus on specific types of products under the Chapters. Continuing with the above example, Chapter 62, heading 13 covers all kinds of handkerchiefs, whereas heading 14 covers scarves and shawls of different types. These headings have a product attached to it.

In the above example, handkerchiefs made of other textile materials are under the heading 13 under Chapter 62. The HSN code for the product is 62.13.90, where 90 is the product code for handkerchiefs made of other textile materials. For a deeper classification, Indian GST has 2 more digits to these commodities. Where the handkerchiefs are made from a human-made fibre, then the HSN code becomes 62.13.90.10. Similarly, 62.13.90.90 belongs to handkerchiefs made out of silk or waste from silk.

When a classification of a product takes places in the above structure, the General Interpretation Rules have to be applied. The trade parlance of the product must be checked first while classifying the product and not its technological manipulation. Where the product is classified on the very first level, then there is no need to drill down further in the strata below.

Service Accounting Codes (SAC)

Similar to the International HSN Codes, India has adopted a Service Accounting Code (SAC) for all its services. GST will subsume the service tax, which covers all kinds of services at a national rate of 15%, apart from other rates in some cases. Since GST is a combination of goods and services both, an equable classification for services is also required. SAC will remain the same under the GST regime.

Here is a list of SACs announced by Government.

Top 5 FAQs on HSN

1) Is HSN Code is mandatory for all the dealers?

A:    HSN codes shall not be used mandatorily in the following cases:

·         Dealers who have an annual turnover of less than INR 1.5 Crores

·         Dealers registered under the Composition Scheme of GST are exempted from the usage of HSN Codes

2) Why is it necessary to follow HSN Codes and SAC Codes?

A:    HSN codes are internationally recognized system of codifying and classifying all the products in the World. It will make GST compliant with the international standards and ensure proper levy of taxes. HSN gives a systematic and logical way of classification, thereby reducing the chances of any misinterpretations. Further, a common structure enables governments of countries to collaborate data of purchases and sales of commodities and analyze the same. Post this analysis, they can decide on macro-economic policies relatable to important commodities.

3) Has the Government notified HSN Codes and Service Accounting Codes?

A:    Yes. HSN Codes and SAC are available on the Ministry’s website. They are controlled by the ACES website, which was earlier used by the Central Board of Excise and Customs (CBEC) for its operations.

4) How can I find the product in HSN list and its relevant HSN Code?

A:    ACES or other websites have the functionality of searching your product or service and its relevant HSN / SAC Codes. Gst Suvidha kendra by EL Ventures offers a way to allocate right HSN code to the product by using a database search through our efficient software.

5) Why are HSN Codes important at the time of filing GST returns?

A:    Since GST returns are completely automated, it will be hard for the dealers to upload the description of the products being supplied. Hence, HSN Codes shall be automatically picked up from the registration details of the dealer and will reduce the efforts thereby. Dealers have to be careful in choosing the correct HSN/SAC code while migrating to GST or making a fresh registration.

Way Forward..

In order to minimize errors while filing GST returns, its important to know the right HSN code for the product or service you are selling. Right from creating invoices in GST format to filing GST returns through GST Suvidha kendra by EL Ventures,Irinjalakuda.