Understand the complexity of HSN System in indirect taxation to be able to accurately classify your goods and services so you can avoid any legal consequences
HSN, or Harmonized System of Nomenclature, was introduced in 1988 by the World Customs Organization. What is HSN? HSN is a code used to classify goods systematically at national and international levels. For example, in India, the HSN code in GST consists of a six-digit code that categorizes many products for taxation purposes.
The HSN Code Structure
The HSN code structure consists of 21 sections, divided into 99 chapters with 1244 headings and 5224 subheadings—each with its characteristics.
Each number of the HSN code represents a specific feature of the product. The first 2-digits define the chapter—the broadest of all categories. The middle two-digit signifies the heading—a specific sub-category inside the chapter. The last two digits of the HSN code structure denote the subheading—a detailed description of the goods.
In the 8-digit HSN code structure, the first two digit outlines the chapter, the four-digit defines the heading, and the six-digit explains the subheading. Finally, when it comes to the last 8 digits, it establishes the tariff items. These 8-digit HSN codes must be documented for all exports and imports under the Goods and Service Tax (GST) regime from April 1st, 2021.
The Requirement for HSN Codes
As mentioned earlier, the HSN codes maintain a consistent classification of products worldwide. This process systematically simplifies international trade. About 98% of goods in foreign trade are listed under the HSN codes. In India, importers, exporters, and manufacturers needed the HSN codes before introducing GST. Exporters and importers needed HSN codes on their documents, while traders needed them on their GST invoices issued by the supplier.
The need for HSN is for taxation purposes as well. For example, these codes in the Goods and Service Tax assist in identifying the rate of tax that applies to a particular product under review.
GST and HSN Codes
Even before GST was introduced, the HSN codes were used mainly for Central Excise and Customs. But with Goods and Service Tax (GST) coming into effect in 2017, all businesses must mention the HSN codes on their tax invoice while informing the same on their GST returns. The Central Board of Indirect Taxes & Customs (CBIC) is responsible for issuing the GST rates under the HSN classification of products. Therefore, businesses must identify the correct HSN code to establish the GST rates of products.
Earlier, the HSN codes under GST reported or issued by the CBIC were as below: –
- Businesses with a turnover of 1.5 crores or less were not required to mention the HSN codes.
- Businesses with a turnover of 1.5 crores and up to 5 crores annually must mention the HSN code up to two digits.
- Turnover above five crores annually must mention up to four digits of the HSN codes.
The above rule was amended with an order to supply 4-6 digit HSN codes on tax invoices. This became applicable from 1st April 2021. Under the new order: –
- Businesses having a total turnover of up to 5 crores in the previous year must mention up to 4 digits of the HSN codes.
- Businesses with a turnover of over 5 crores in the previous year must mention up to 6 digits of the HSN codes.
In addition to the above mandate, the below-given point should also be noted.
The HSN code for B2C businesses with a turnover of up to 5 crores annually must mention that a four-digit HSN code is not mandatory. However, it is compulsory to mention HSN codes for B2B businesses.
Businesses dealing in importing and exporting goods governed by the Foreign Trade Policy and Customs regulation must mention the 8-digit HSN codes on all their documents.
SAC Codes Under GST
Service Accounting Codes or SAC codes under GST are similar to the HSN code. While HSN categorizes products, SAC is used to categorize services. The CBIC issues it to identify services offered.
SAC codes for service-related businesses are mandatory as it allows them to comprehend the tax levied on the services offered and received. Based on Harmonized System of Nomenclature, SAC under GST is a globally recognized system for classifying and organizing all services. Moreover, it allows seamless compliance with GST on foreign standards.
SAC codes under GST have five fixed-rate slabs. It is 0%, 5%, 12%,18%, and 28%. However, if any service is not excluded from GST or if there are no GST rates given, then by default, the rate applied would be 18%.
Create HSN Codes
Usually, you can’t create HSN codes for your products. Instead, you must consult or search the HSN code directory to mention them.
The HSN Code directory lists all the products used in India that comply with the GST. Remember that the HSN codes you search for must be coherent with product detail. For instance, you have a specific HSN code or subheading for product A. You must not use any other code besides the one matching your product or similar.
Additionally, ensure to include all customs-related information in the particular HSN code. However, sometimes the characteristics of a product are only relevant within the country or nation. In this scenario, you can and must include the localized feature of the goods in the HSN code. This can be achieved using the 8-digit code from the directory list.
The directory lists all HSN codes for several different products. The only requirement is to pay close attention when selecting it.
The Importance Of HSN Codes
- Allows accurate taxations and exemptions
A single government doesn’t govern foreign trade law. As there are multiple authorities involved in different steps of the trade cycle, the need for several rules and regulations must be considered.
In this case, the importance of HSN codes comes to play. It removes any occurrence of misinterpretation. A precise classification and tariff are imposed under HSN.
HSN codes in GST make it seamless for business owners as taxation is systematized. Besides, HSN is globally recognized and hence becomes an integral part of taxation and exemption, if any.
- Making Product Understanding Simple
With the help of HSN codes, every merchant remains on the same page, no matter their location. Although the two products may not be similar in terms of pronunciation, with HSN codes, a product can have the same description globally.
- Aids Data Collection in Trading
HSN codes aid in data collection, a significant part of trading. With its standardized approach, it removes any confusion and miscalculations. The way it categorizes products so efficiently that it becomes seamless to record and sort data in an organized manner.
Moreover, with the help of sorting data in a proper manner can help make upcoming trading decisions and forecasts.
- It helps Automate Taxation Across Industries.
HSN codes in GST are being implemented because the government is working towards automating taxation, which HSN allows. However, HSN exemption can only happen if any business has an annual turnover of at least 1.5 crores. Furthermore, this type of business is exempt from multiple GST tax regimes and only requires a fixed GST rate.
Harmonized System of Nomenclature (HSN) is essential to the country’s tax system. The HSN codes help classify goods and services for tax purposes and also assist in determining tax rates for different products. Using the HSN code structure creates complete transparency and reduces tax evasion while streamlining the entire tax system. However, HSN codes can sometimes be complex. Therefore, businesses must accurately classify their goods and services to avoid legal consequences with the authorities. Nonetheless, HSN codes have been a significant step towards reforming India’s tax system, and businesses can and should take advantage of them.