The HSN code is a classification system created by the World Customs Organization (WCO) and implemented universally for all goods. In India, the HSN code plays a vital role in the Goods and Service Tax (GST) regime, harmonizing the classification of products, ensuring appropriate tax rates, and facilitating trade, both domestic and international. Familiarity with HSN codes is important for cognitive businesses to maintain tax compliance, prevent mistakes and make their operations more efficient.

This blog provides an in-depth look at the HSN code, the relevance of this code in the GST system in India and how it is operationalized. We will cover the structure of the HSN code, real-world examples, and how it applies to businesses based on turnover. Additionally, we will explore the 8-digit HSN code list, explain how businesses use the HSN code in GST, and the common mistakes to avoid. Finally, we will answer frequently asked questions about the HSN code in the Indian GST context.

What is HSN Code?

The HSN code stands for “Harmonized System of Nomenclature.” It is a system, with a global reach, that is meant for classifying the different types of goods. It classifies in excess of 5000 such items by grouping them into a hierarchical structure within sections, chapters, headings and subheadings. The fundamental aim of the HSN code is to help in formulating a simplified customs process along with a tax system for different areas that apply these codes. HSN code performs a very important function in international trade, which is consistency in the application of tariffs, and taxes by classifying and putting restraints on the movement of products.

This practice is multilateral in character as more than 200 countries have their customs and trade systems integrated with HSN codes. Therefore, there are fewer regulatory challenges and compliance concerns when exporting and importing goods by parties involved in international business. HSN code system brings a higher level of confidence when it comes to international trade and it also assists in the accurate statistics of the international trade system, therefore makes sense both for the private sector and for the state institutions.

HSN Code consists of a classification which is detailed, level and consistent which enhances the smoothness of the trade within the regions facilitating better working of the economies as per the international guidelines.

What HSN Code in GST?

The Harmonised System of Nomenclature (HSN) code is a part of the processes involved in Goods and Services Tax (GST) in India, the purpose of which is to ease the process of tax by classifying goods for tax. Each and every item or service has an HSN code representative of the GST in relation to that product or service. Thus while there are very few complexities in calculating the tax, the system also tends to minimize the variations in overall tax levies within different industries.

Also Read: GST Payment

Classification of Goods

The HSN code helps to design an architecture under which goods can be systematically classified which can in turn allow businesses and tax authorities to easily assess the correct GST that needs to be applied. Without a doubt, this is very important for the taxation purposes of the goods that are sold.

Mandatory Requirements

 Keeping in mind the gross revenue level of businesses reaching more than ₹1.5 crore, incorporating HSN codes on GST invoices becomes compulsory. This is done to prevent any misclassification and tax misapplication. However, incorporating HSN codes is optional for those businesses that are falling under the prescribed limits.

Uniform Tax Structure

 The inherent structure of HSN codes embodies a uniform taxation regime across the Indian sub-continent. This minimizes chances of misclassification and the correct GST rate is applied thereby eliminating any disputes.

Reduction of Errors

HSN codes destroy the chances of mistakes in the calculation since it controls the business rate applied by businesses. This level of accuracy is very important for such that it reduces the risks of non-compliance, laying down the chances of incorporating any auditable fines.

International Trade

 The HSN code system is accepted internationally and assists Indian companies in carrying out international trade by establishing a universal standard. This helps in easy customs clearance and promotes adherence to global standards.

GST Returns Facilitation

Using HSN Codes is instrumental when remitting GST returns. Correct coding guarantees that the right tax rate is applied, simplifying the process of filing tax returns, and minimizing the risk of being in breach of any laws.

Also Read: Types of GST

Structure of the HSN Code in India

The HSN codes are classified into 21 sections based on various commodities. Here is the structure of the sections along with their primary commodities.

Importance of HSN code

The Harmonized System Nomenclature or HSN code is of extreme significance when it comes to the Goods and Service Tax in India. There are various reasons that illustrate its significance, making it an inseparable component of the tax system in the country. Following are some of the key reasons making the HSN code very important:

Encourages Equal Taxation

HSN codes enable uniformity in the classification and hence taxation of goods in the entire nation. In this way, every state comes out with a similar classification, which minimizes differences between states and regions. This uniformity benefits companies in that they can be certain of the tax treatment of their products no matter where in India they are sold.

Helps in Trade Across Borders

As the HSN code is consistent and accepted internationally, it makes international business easy for companies. It calls for a compact approach to explaining and classifying goods within trade borders. Hence, importers and exporters without any problems of identifying, describing and pricing commodities will bring them through customs.

Ensures Tax Compliance

The use of HSN codes included in GST return filing is applicable to the user turnover that exceeds the prescribed limit. In addition, it assists in making the tax return process more organized. Businesses have to apply the appropriate HSN codes to their product categories in order to adhere to GST rules and not face the wrath of the authorities.

Lowers Error and Penalty Incidences

Using HSN codes for the classification of commodities is also instrumental in helping achieve accurate taxation. Mistakes in the classification of products may cause mistakes in tax calculations, which could trigger audits or issues or fines. Caution in the use of the appropriate HSN code by a business ensures incidences of these errors are mitigated and smooth tax processes are observed

Who Should Use HSN Code?

In India and as per its rules, the necessity of using HSN codes charges/depends on the annual turnover of the business:

• With turnover less than ₹1.5 crores: No requirement of HSN code.
• With turnover between ₹1.5 crores to Rs 5 crores: 6-digit HSN code is a must.
• With turnover more than Rs 5 crores: Use of 8-digit HSN codes is mandatory as more specific HSN classification is given.

In addition, as international trade practitioners, the HSN code must be used by importers and exporters, irrespective of their turnover as the same is very important in international dealings.

Also Read: Credit Note in GST

8-Digit HSN Code List in India

As part of the Goods and Services Tax (GST) regime, India has adopted an 8-digit HSN code system to improve the classification of goods within the GST framework. Such an elaborate coding structure is an added advantage for industries that require fine distinctions such as, the automobile sector, electronics, pharmaceuticals, clothing and textiles, etc. The segmentation provided by the last two digits in the 8-digit HSN code encourages businesses to declare their product range even more carefully.

Most 8-digit HSN codes come together with proper classification. A few examples of 8-digit HSN codes can be:

• 87032219: This code appears in relation to passenger vehicles with engine capacity of more than 1500cc. This classification assists in charging the correct GST on higher capacity vehicles which are charged, taking into account the classier vehicle’s costs and its tax perspective.
• 33049910: This code is assigned to beauty products that come under the Ayurvedic umbrella. With the increasing demand on a commercial level for organic or herbal cosmetics, this classification proves handy for producer and seller alike when it concerns paying taxes for such products.
• 34011940: This code covers soap and soap products, specifically those that are not intended for medical use. By distinguishing between medical and non-medical soap, the HSN code helps in the appropriate application of GST rates based on the product’s purpose.

The implementation of 8 digit HSN code in India is useful in promoting favorable tax regimes and reducing the cost of doing business as well as aiding in conformity with the global standards in trade. 

Also Read: Difference between CGST, SGST and IGST

How HSN Code Works in GST

In India, the HSN code plays a major part with regard to goods and service tax. This is because HSN helps businesses in categorizing the goods on sale such that there is no mistake on taxation, and also the businesses are following the existing laws under GST. Below is HSN code in the context of the goods and services tax in detail:

Invoicing

It is mandatory for business entities to affix the correct HSN code in every commercial sales invoice they produce pertaining to the sale of goods subject to GST. This is to enable proper classification of the goods which are being sold so that the appropriate standard GST tax rate will be charged in the course of the transaction. This is necessary to promote reasonable tax compliance irrespective of the region or the industry sector.

GST Returns Filing

Businesses also need to provide an HSN code in respect of each product sold while filing the GST returns for a given period. This is done to avoid any confusion or inaccuracies in the return by including the accurate tax rate, as it is the major objective of the return. Thus, with this code, businesses also ease the process of filing the returns making it fast and accurate.

Determination of Tax Rates

The HSN code is essential to this process since it assists in knowing the different goods that attract different GST rates. Where there lies a range of tax rates in respect to the classification of the product, it is often seen that these taxes are levied within four rates of GST which are 5%, 12%, 18% or 28%. It is crucial that these rates of tax are correctly availed in order to avoid the risks that the business is non-compliant to GST law.

Verification on GST Portal

The proper HSN code of the product and the related GST rate can be confirmed by the businesses via the GST portal. This allows the companies to ascertain that there is no wrong classification of their products which may cause them to incur fines during tax audits or filing errors.

Benefits of Using HSN Code

The adoption of the HSN code system within the GST framework brings several benefits to businesses, ranging from streamlined taxation to improved global trade practices. Below are some of the key advantages of using the HSN code:

Ease of Taxation

Determining the taxation on goods using HSN codes is easy. By dividing goods into different levels based on a global system, it is easy for businesses to calculate tax, minimizing the risks of over/under payment of tax and ensuring less stressful billing.

Reduced Chances of Misclassifying Products

Employing HSN codes lowers the risks of classifying goods in the wrong category. In that appropriate figures use regionally standard codes; these codes can be safely used by the firms to classify their products thus eliminating the risk of wrong application of GST rates. This would also eliminate the risk of potential registration and monetary fines.

Encouragement of Global Trade

Global reach is one of the advantages of HSN code. Abiding with the codes which are widely accepted promotes international exchanges for the companies involved. HSN codes describe the goods in a standard manner which reduces confusion during customs clearance and improves the overall efficiency of international trade transactions

Automated Compliance

Most of the available GST software uses HSN codes as a matter of fact. This feature distances the users from the manual preparation of invoices and even the return documents and thus helps them in keeping their records neat without unnecessary errors. Compliance measures using HSN codes are not only easy but also shorten the working hours for companies.

How to Avoid Mistakes using HSN code

Although using HSN codes can significantly help organizations, certain errors are often common and could lead to compliance challenges. Here are some of the common mistakes that should be avoided while dealing with HSN code by businesses:

Using the Wrong HSN Code

Using an HSN code that does not classify the product correctly may lead to the application of the incorrect GST rate. This may result in tax under-compensation or over-compensation thus risking penalties incidence at tax auditing as well as the tax compliance. Therefore in every sale made, one must make sure he or she has the correct HSN code of the product sold.

Forgetting the 8-Digit Code Obligation

Any business whose annual turnover is more than ₹5 crores is to apply the 8-digit HSN code on its products. For instance, Omission of the 8-digit code in full, may amount to a violation of the GST rules and attract fines. Large-scale operations might not have any choice but to ensure this rule is obeyed in all their invoicing as well as return filing.

Ignoring Product-Specific Codes

There are products that have very precise HSN codes that ought to be adhered to, in order to classify the products properly. For such products, use of a broad or wrong HSN code, can lead to related differences in tax filing or tax auditing. It is very important for the companies in question to establish the right HSN code for the goods on offer, to prevent any possible inconveniences.

Conclusion

Understanding how the HSN code system works and its role within GST is crucial for businesses dealing with goods in India. Appropriate usage of the HSN codes helps businesses determine the correct applicable tax rate, refraining from wrong classifications, and meeting the national and international trade laws. The advantages of HSN codes include ease of taxation, fewer mistakes, and speed up in trade across borders which makes them a necessary component for businesses under the GST system. By following HSN code rules and restrictions, businesses help in easy tax filing, rid of tax compliance challenges and even help in ease of trade across different countries.

FAQs

What is HSN code?

The HSN code is a system designed to classify different commodities around the world for the purpose of taxation and facilitating foreign trade.

Is HSN code compulsory on gst bill?

Yes, The reason is HSN codes are important in supporting input tax credit claims as well as their compliance.

Is HSN mandatory?

All 8 digits of HSN code is mandatory in case of export and imports under the GST.

Can we find the GST rate with HSN code?

Under GST, all goods and services transacted in India are classified under the HSN code system or SAC Code system. HSN Code is for goods and SAC Code is for services. Accordingly, there are five rate slabs in GST viz, NIL, 5%, 12%, 18% and 28% in relation to HSN or SAC code.

What is the difference between a 6-digit and 8-digit HSN code?

The 6 digital HSN code is used for general purposes while the 8 digits HSN involves a specific classification that is usually useful to big corporations.

How do I obtain 8-digit HSN codes?

The 8-digit HSN code list is found in the GST portal and other government websites.

What are the rules for HSN code under GST?

The rules are as follows:

Turnover less than 1.5 crores- HSN code is not required to be mentioned.

Turnover between 1.5 -5 crores can use 2-digit HSN code.

Turnover above 5 crores must use 4-digit HSN code.

What will happen if I enter the wrong HSN code?

Using the wrong HSN code for the right product can attract the wrong tax rate which should not be the case and can also lead to penalties during audits.

How many HSN codes are permitted in GST?

You can add up to five HSN codes or five SAC Codes while submitting a GST Registration application.

How can I verify the correct HSN code for my products?

You can verify the appropriate HSN code using the GST portal or by consulting the official HSN code list.