“In order to minimize errors while filing GST returns, it’s important to know the right HSN code for the product or service you are selling.”
Well, wondering what are HSN codes or if you are supposed to follow any HSN obligations, then we are here to your rescue. Via this article, we seek to explain the concept of HSN codes whilst answering the basic questions like what is HSN, who all have to follow it, what are its benefits and where will it be required.
Do read: Ultimate Guide to GST Terminology
What is HSN?
Harmonized System of Nomenclature(HSN) is an internationally recognized system of codifying and classifying the products traded around the world. It came into effect in 1988 and has since been developed and maintained by the World Customs Organization (WCO). These set of defined rules are used for taxation purposes in identifying the tax rate applicable to a product in a country.
HSN standardizes the classification of merchandise under sections further rolled down into chapters, which are further classified into headings and subheadings. This results in a six-digit code for a commodity (two digits each representing the chapter, heading, and subheading). India, a member of WCO, has been using HSN codes since 1986 to classify commodities for Customs and Central Excise by adding two more digits to make it more precise, resulting in an eight-digit classification.
Under the new indirect tax regime which has engulfed a plethora of indirect taxes, the GST Council has classified goods and services into 5-tier rate structure (nil, 5%, 12%, 18%, 28%) based upon Harmonized System of Nomenclature (HSN) codes. Traders are not likely to face hardship in classifying the goods under the HSN as the goods emanate either from manufacture or from imports. Traders usually don’t change the nature of goods. The classification, in general, will be in continuity from the HSN declared by the manufacturer or importer both of whom have been using the system in the past also.
Who should follow HSN?
The Central Board of Excise and Customs, on the recommendations of the Council, has notified that a registered person having annual turnover in the preceding financial year as specified in the Table below shall mention the digits of Harmonised System of Nomenclature (HSN) Codes in a tax invoice issued by him under the Central Goods and Services Tax (CGST) Rules, 2017:
|Annual turnover in preceding financial year||Number of digits of HSN codes|
|Up to rupees one crore fifty lakhs||NIL|
|More than rupees one crore fifty lakhs and up to rupees five crores||2|
|More than rupees five crores||4|
Notes to the table:
- Turnover during the first year will be taken on self-declaration basis and in the subsequent year, the turnover of the preceding year will be used.
- Incase of imports/exports, HSN codes of eight digits shall be compulsory.
The following dealers are exempt from the use of HSN Code in the Invoices:-
a) In order to keep the compliance burden low for small taxpayers, dealers with a turnover of less than ₹1.50 Crore are kept outside the mandatory use of even 2 Digit HSN Code.
b) Small Dealers opting for Composition Scheme are not required to mention the HSN Code in their Invoices.
Why is HSN required?
Following are some of the benefits of using HSN codes:
- HSN reinforces international trade and commerce by providing a common understanding of the goods being traded irrespective of the national boundaries.
- The taxpayers are not required to submit a description of goods while filing the return as the same will be obtained from invoices which are made on the basis of HSN codes.
- A systematic and logical way of classification will reduce the chances of any misinterpretation.
Where is HSN applicable?
The HSN Code will be required at the following levels:-
- At the time of Migration/ Registration to GST, the dealer will be required to carefully mention/ select the HSN Code of the commodity.
- At the time of generation of Invoices under the GST Regime, the dealer will be required to mention the HSN Code of his commodity. For all B2B transactions (Interstate and Intrastate) invoice level specified details will be uploaded i.e. every invoice issued by the taxpayers will form part of GST return. For all B2C transactions, it will be mandatory to upload invoice wise information if it exceeds ₹2,50,000/-.
- At the time of filing GST returns, HSN Codes shall be automatically picked up from the registration details of the dealer and will reduce the efforts thereon.
To put it briefly, it is of utmost importance for a dealer to carefully select the HSN Code of his commodity at the time of migration and/or fresh registration under GST. This will directly affect the tax rate applicable for his product. To help businesses find the HSN code applicable for various commodities under the GST regime, CBEC has launched on its website a search option by which they can find out the code by just typing the name of the product.
You can also check Harmonized System of Nomenclature (HSN) Codes here for GST enrolment/registration purposes.
What are your views on the HSN coding being adopted in GST? Do share in the comments below!