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HSN Code: Meaning, Importance, and How to Find?
HSN Code or Harmonized System of Nomenclature (HSN) Code is developed by the World Customs Organization (WCO). It serves as the backbone of international trade, ensuring smooth movement of goods across the borders. Understanding HSN Code is of utmost importance. Whether you are a small business owner looking to enter into exports, an experienced trader, or simply curious to know how goods are classified internationally.
In this article, we will break down the fundamentals of HSN Code in an easy manner, throwing light on its purpose, structure, and why it is so important in trade and taxation.
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Introduction to HSN Code
HSN Code or Harmonized System of Nomenclature (HSN) Code serves as a Universal language for categorizing products. The World Customs Organization (WCO) developed the HSN Code in 1988, to simplify the classification of commodities traded across the world. Today HSN Code is used by 200 countries and economies, making it an essential component of global trade operations.
Meaning and Origin of HSN Code
The HSN Code is a multi-purpose international product nomenclature
useful in categorizing goods in a logical and systematic manner. The nature of goods are identified using a 6 to 8 digit HSN Code, thereby facilitating global standardization and identification. HSN Code’s origin can be traced back to the requirement of a common classification system for supporting international trade by reducing discrepancies and misunderstandings related to product descriptions.
Purpose and Importance of HSN Code in Global TradeI
In international transactions, HSN Code is of vital importance:
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Standardization: HSN Code establishes a standardized system of names and numbers to classify the goods that are traded. Thus, it reduces confusion and increases clarity in international trade.
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Simplified Customs Procedures: Since HSN Code is universally adapted, the Customs authorities are easily able to identify products. Thus, this makes it convenient for them to apply the appropriate tariffs, taxes, and regulations.
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Analysis of Trade Data: Because of HSN Code it is easy to collect and compare statistics of international trade. This helps governments and businesses to analyze the market trends and make an informed decision.
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Compliance and Efficiency: Correct usage of HSN Code ensures businesses are complying with the regulations of global trade. Also, streamlining the process of shipping goods across the international boundaries.
Overview of HSN Code Structure
The HSN Code consists of 6 to 8 digits, with detail at each level adding
clarity to the classification.
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The first two digits represent the product’s chapter.
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The next two digits are used to specify the chapter heading.
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The following two digits represent the product’s sub-heading.
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The seventh and eighth digits are used for further breakdown and country-specific adaptations for more detailed classification.
For instance the HSN Code for fresh apples is as follows:
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08 (Chapter: Edible Fruit and Nuts; Peel of Citrus Fruit or Melon)
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08 (Heading: Fresh apples, pears and quinces)
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05 (Subheading: Apples)
Therefore, the 6-digit HSN Code for fresh apples becomes 080805.
Countries are also having the option to add additional digits for a more
detailed classification.
HSN Code and GST in India
To bring uniformity in classification of goods and services across India, the Harmonized System of Nomenclature (HSN) Code was adopted by the Goods and Services Tax (GST) regime. This integration promoted transparency and efficiency in the tax administration system. Here is a detailed look at how the HSN Code will be implemented under GST, its benefits, and mandatory business requirements:
Implementation of HSN Code under GST
The manner of implementation HSN Code under GST is as follows:
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Unified Classification: HSN Code provides a systematic classification of goods and services that is acceptable worldwide. Thereby, the application of GST rates across states and industries also becomes easier.
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Tax Invoice Compliance: Businesses are required to include HSN Codes on their GST invoices, thereby standardizing the invoicing process for identifying the product and taxing the same.
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GST Returns: Using HSN Codes in GST returns simplifies the process of filing returns since it allows accuracy in reporting of goods sold or services provided.
Benefits of HSN Code Integration in GST
Following are the benefits of integrating the HSN Code in GST:
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Simplified Tax Structure: With the introduction of HSN Code, the tax structure has been streamlined under GST. Thereby, making it easier for the businesses to easily determine the tax rates on different products or services.
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Enhanced Transparency: The classification system reduces confusion and disputes over categorization of the product, thereby enhancing transparency in the transaction process.
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Ease of Doing Business: Since HSN Codes are recognized internationally, it simplifies the cross-border trade practices. The harmonization supports the expansion of business globally.
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Efficient Administration: The standardized system facilitates easier monitoring, auditing, and collection of taxes for the tax authorities.
Mandatory Requirements for Businesses Regarding HSN
Following are the mandatory requirements regarding HSN for businesses:
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Turnover-based Compliance: Based on the turnover of the preceding financial year, the HSN Codes are required to be specified on the GST invoices:
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Businesses with turnover up to INR 5 Crores are required to mention HSN Codes up to 4-digits.
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Businesses with turnover in excess of INR 5 Crores are required to mention HSN Codes up to 6-digits.
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Import-Export dealers must mention 8-digits HSN Codes on their GST invoices irrespective of their turnover limit.
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Accurate Reporting: Businesses must ensure that HSN Codes are accurately reported while filing the GST returns to avoid penal consequences and facilitate proper Input Tax Credit claim.
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Updating and Maintenance: Based on the changes in the product lines or tax laws, the HSN Codes must also be updated on a regular basis.
Determining the Right HSN Code
Following is the step-by-step process to find the right HSN Code and how to avoid common mistakes during the classification process:
Step-by-Step Process for Finding Correct HSN Code
To find the correct HSN Code, follow the below steps:
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Understanding the structure of HSN Code: It is important to understand the structure of the HSN Code before beginning to find the correct code. The first two digits denote the chapter, the next two digits represent the heading, and the last two digits represent the sub-heading.
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Identify the category of the product: Understand the nature and function of the product. This will help to identify the category into which the product will fit.
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Make use of official resources for HSN: Use official resources such as the GST portal, the CBIC (Central Board of Indirect Taxes and Customs) website, and the World Customs Organization (WCO) handbook for getting accurate information.
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Check the description of the product: Read the product description in the HSN manual or online carefully. To find the best match of the HSN Code, make a comparison of the characteristics of the product to the descriptions provided.
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Use alphabetical index: Use the alphabetical index of HSN’s manual. This will help to locate the appropriate section or chapter of the product.
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Use the composition of the product: For goods made from multiple materials, consider the composition of the material to determine the primary component, which dictates the classification.
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Get expert assistance: Consult a tax professional in case of a confusion or a customs expert. The experts can provide clarity and ensure correct selection of the HSN Code.
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Cross-check with peers or industry associations: Often discussion with the peers or industry associations can offer practical insights for classification of HSN Code more appropriately.
Common Mistakes to Avoid in HSN Code Classification
Following mistakes should be avoided while classifying the HSN Code:
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Overlooking updates: Failing to stay updated with the latest HSN Codes and GST rates may result in incorrect classification of the HSN Code.
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Misinterpreting descriptions: If the exceptions and specifics mentioned in the HSN manual are ignored while matching the product description, it may lead to an incorrect classification of the HSN Code.
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Ignoring composite goods rules: Incorrect classification also happens even when the rules for classifying the composite goods are ignored.
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Incorrect use of residual headings: In the absence of any specific residual heading for the product, the product can be classified under ‘Other’ headings.
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Neglecting documentation of the process: If the process and the reason for selecting a specified HSN Code is not documented, it will be difficult to answer if the classification is challenged by the GST authorities.
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Relying solely on software: Automated tools and software can be helpful while making HSN Code classification. However, blind reliance should not be placed on such tools.
HSN Code Compliance and Reporting
Complying with the HSN Code system under the GST regime is more than simply identifying the correct HSN Code for products or services. Let’s see what businesses should look into for HSN Code Compliance and Reporting:
Documentation and Record-Keeping for HSN Code
Following are the HSN Code compliance with respect to documentation
and record-keeping:
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Maintain a detailed record of the product: It is important to maintain a comprehensive record of all products and services with their respective HSN Codes. The list should be updated on a regular basis to incorporate the changes in the line of product and revisions in the HSN system.
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Invoice preparation: All GST invoices should include correct HSN Code according to the GST mandate. The level of detail required with respect to the number of digits of the HSN Code depends on the annual turnover and the nature of transactions whether domestic or international.
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Record of updates and revisions: Any changes in the HSN Codes due to changes in the nature of products or services or updates in the classification system should be documented. This document would be useful during audits or reviews by the GST authorities.
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Supporting documentation: Maintain all the supporting documents that support the reason for classification of HSN Code based on each product or service. These documents may be in the nature of: manufacturer’s notes, product specifications, expert opinions, and relevant legal interpretations.
Filing GST Returns with HSN Codes
The another compliance with respect to HSN Code is with respect to return filing:
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Accurate reporting: While reporting the HSN Code in the GST return, it is essential to ensure that the HSN Codes match with the products or services of the reporting period. Accurate reporting is essential for tax compliance audit readiness.
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Summary of supplies: In addition to detailed invoices, a summary should be provided under each HSN Code, especially while furnishing GSTR-1. This helps aggregation the data for tax analysis.
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GST-compliant software: Using the GST-compliant software can simplify the process to incorporate the HSN Codes in invoices and returns. Many softwares automatically update HSN codes and the rate of GST, thereby reducing the errors.
Penalties for Non-Compliance with HSN Coding System
Following are the consequences of non-compliance with HSN Code:
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Monetary fines: Businesses that fail to comply with the requirement of HSN Code like: incorrect or missing HSN Code on invoices and returns, may face fines and penalties.
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Delayed refunds: Incorrect HSN Codes can lead to delay in processing GST refunds, affecting the cash flows of the business.
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Audit and scrutiny: Errors or non-compliance in the reporting of HSN Code increases the chances of getting selected for GST audit and scrutiny.
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Legal repercussions: Repeated non-compliance or significant discrepancies while using the HSN Code may trigger legal actions including prosecution in certain extreme cases.
Chapter-wise Distribution of Goods using HSN Code
The chapter-wise distribution of goods using the HSN Code is presented below:
Updating and Revising HSN Codes
Understanding how HSN Codes are updated both internationally and in India is important for knowing the impact of these updates and revisions on businesses:
How are HSN Codes Updated Internationally?
The HSN Codes are updated internationally through the following process:
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World Customs Organization (WCO): The WCO is responsible for maintenance and administration of Harmonized Systems. Every 5 years it conducts a comprehensive review of the HSN Codes. This process is essential to reflect the changes in technology, trade structures, and environmental issues.
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Proposal submission: Member countries and industry stakeholders can make proposals for changes. These changes could be with respect to adding new codes, revising existing ones, or removing the obsolete ones. The Harmonized System Committee then reviews the proposals.
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Adoption and implementation: Once the proposals are reviewed and agreed upon, the WCO publishes amendments.
How are HSN Codes Updated in India?
The HSN Codes are updated in India through the following process:
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GST Council and CBIC: In India, the GST Council oversees HSN Code updates under the GST regime. The implementation of the council’s notification is made by the Central Board of Indirect Taxes and Customs.
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Notification of changes: The CBIC informs about the updates to the HSN Codes via notifications. These updates may include additions, deletions, or modifications, to align with the WCO revisions or to reflect changes in the Indian economic environment.
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Implementation period: Businesses get a transition period to adjust to the new or revised HSN Codes. During the transition period they are allowed to update their invoices, accounts, and GST filing system.
Impact of HSN Code Revisions on Businesses
The revision of HSN Code has the following impact on businesses:
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Compliance requirements: To comply with the provisions of GST, businesses must remain cautious and update their systems to incorporate new or revised HSN Codes. Failure to comply may result in misclassification of goods and incorrect application of GST rates.
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Training and software updates: A revision in HSN Code may necessitate training for finance, procurement, and sales personnel so as to become familiar with the changes. Moreover, the businesses will also need to update their ERP and accounting systems to reflect changes of the revised codes.
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Supply chain and pricing adjustments: Changes in the HSN Code may require changes to be made in the tariff rates. It may increase the cost of goods necessitating changes in the pricing strategies and supply chain logistics.
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Audit and legal implications: Using outdated HSN Codes may result in tax audits, disputes and penalties. The records of the transition of HSN Code must be maintained with the businesses for future purposes.
Frequently Asked Questions
Q
Explain HSN Code in GST.
A
HSN (Harmonized System of Nomenclature) Code is a 6-digit uniform code that classifies products in a standardized manner across the world. It helps in identifying the goods under the GST regime, thereby facilitating international trade in a standardized manner.
Q
Explain the importance of HSN Code for GST taxpayers.
A
HSN Code simplifies the taxation process by identifying the goods in a standardized manner. They are important for invoicing and filing the GST returns. Thereby ensuring compliance and facilitating smooth administration of GST.
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How to determine the correct HSN Code for the product?
A
The HSN Code for the product can be determined using the HSN Code list published by the CBIC (Central Board of Indirect Taxes and Customs) or the GST portal. The HSN Code is categorized based on the nature of goods.
Q
Are all businesses required to use HSN Codes?
A
Yes. All businesses involved in the supply of goods must use HSN Code. However, the requirements to mention the HSN code on the invoices depends on the annual turnover, with different levels of digit codes for different turnover slabs.
Q
What is the consequence of using the incorrect HSN Code?
A
Using an incorrect HSN Code leads to incorrect filing of GST return, thereby resulting in interest and penalties. It may also lead to delay in the credit of refunds or credits. It may lead to audits or inspections by the tax authorities.
Q
Is there a penalty for not using the HSN Code on GST invoices?
A
Yes. Failure to mention the HSN Code on GST invoices even when it is mandatory may result in penal consequences under the GST law. It is considered as a violation of GST invoicing rules and may also lead to compliance issues.
Q
Can there be a change in HSN Codes? How often does it change?
A
Based on the revisions of World Customs Organization (WCO) or amendments by the GST Council, the HSN Codes can be changed. These changes are informed in advance to the taxpayers to give time to comply.
Q
How many digits of HSN Code should be used?
A
The number of digits to be used in the HSN Code depends on the annual turnover:
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Businesses with turnover up to INR 5 Crores are required to mention HSN Codes up to 4-digits.
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Businesses with turnover in excess of INR 5 Crores are required to mention HSN Codes up to 6-digits.
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Import-Export dealers must mention 8-digits HSN Codes on their GST invoices irrespective of their turnover limit.
Q
Explain SAC. How is it different from HSN Code?
A
Services Accounting Code (SAC) is a system for classification for services under GST. Unlike HSN codes for goods, SAC codes are used to classify services. However, both HSN and SAC ensure uniformity in the classification of goods and services.
Q
How to find SAC for the services?
A
The SAC for the services can be found on the GST portal or in the CBIC list. The SAC is similar to the HSN code. It is a standardized code used to identify services for tax purposes.
Q
What should be done if there is no exact match of service in the SAC list?
A
If there is no exact match of service in the SAC list, select the code that best describes it. If there is any confusion, obtain clarification from the GST practitioner or tax authorities to ensure compliance and avoid penal consequences.
Prachi Jain
Chartered Accountant
Prachi Jain is a Chartered Accountant with a passion for simplifying finance and tax-related matters through her insightful and informative blogs. With a background in finance and a deep understanding of tax regulations, Prachi has established herself as a trusted source of financial wisdom. Prachi is committed to empowering her readers with the knowledge they need to make informed financial decisions. Her expertise and dedication shine through in every blog post, helping her audience navigate the intricacies of finance and taxes with confidence. Follow Prachi Jain's blog for practical insights and guidance on managing your finances effectively.
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