The word HSN stands for Harmonized System of Nomenclature. It is an internationally adopted coding system and commodity description. To analyze trade statistics and facilitate trade flow, the World Customs Organization developed this coding system.

At present, more than 98 percent of international trade merchandise is labeled under the HSN Code. The HSN is responsible for standardizing the classification of merchandise under chapters, sections, heads, and subheads. 

Considering the universal acceptability of the HSN Code for the classification of goods, the Government of India decided to adopt this system of nomenclature for classifying goods under the Goods and Services Tax (GST) and levy GST. While goods are classified under the HSN Code, services are classified under the SAC Code.

Purpose of adopting GST HSN Code in India

The main object of introducing the GST HSN Code in India is to bring uniformity in taxing merchandise in the country, with other countries already following the HSN. This made the GST taxation standardized and globally accepted. It has also reduced the overhead cost related to international trade by bringing harmonization in the customs and trade procedures.

The application of HSN will enable every taxpayer within the country to know the GST rate of any commodity by entering the HSN code for that particular product, hence simplifying the trade procedures. Therefore, it is mandatory to enter the correct HSN Code during GST return filing.

Who should use the GST HSN Code? 

Under the GST regime, most dealers are required to adopt a two, four, or eight-digit GST HSN Code for trading in commodities, depending on the previous year’s turnover.

  • Dealers having a turnover of less than 1.5 crore rupees in their previous year need not adopt the HSN code for their commodities.
  • Dealers with turnover ranging from 1.5 crores to 5 crore rupees are required to use a two-digit HSN Code for their commodities.
  • Dealers having turnover of more than 5 crore rupees shall be required to adopt a four-digit HSN Code
  • For imports or exports, it is mandatory to have an eight-digit HSN Code, irrespective of the turnover as the GST HSN Code must be compatible with applicable international practices and standards.

Classification of the GST HSN Code

The HSN Code contains about 21 sections which are further classified into 99 chapters. These chapters are further segregated into 1244 heads. The headings contain 5244 different subheads. 

The classification is made based on the degree of manufacture of the product or the technical complexity associated with it. 

For this reason, natural products such as vegetables and animals are listed in the earlier sections while products that are man-made or technologically developed like machinery are listed later.

The code is developed in the following manner – 

  • Every chapter contains a 2-digit HSN number.
  • The 2-digit HSN number is sub-classified into a 4-digit HSN code.
  • The 4-digit HSN code is further sub-classified into a 6-digit HSN code.

For example:

The HSN Code for Nylon Moulding Powder is 39 08 90 10.

  • The first two digits of the code, i.e., ‘39’ refer to the chapter under the HSN Code.
  • The next two digits, i.e., ‘08’ refer to the headings.
  • The adjacent two digits, i.e., ‘90’ refer to the sub-heads. This 6-digit HSN Code is accepted worldwide.
  • The last two digits, i.e., ‘10’ is a sub-classification of the product tariff heading during the export and import of supply. 

Certain rules are governing the classification of the GST HSN Code. 

Rule 1

The titles of chapters, sections, and subsections are for reference purposes only.

Refer to the heads and subheads for legal interpretation of the classification.

Rule 2a

For incomplete or unfinished goods, if the characteristics are the same as that of finished goods, the classification for finished goods is applied.

The heading should also contain unassembled, disassembled, or removed parts.

Rule 2b

For reference to any substance or material, the combination or mixture of the substance or material with other substances or materials is considered.

Any good consisting of multiple materials or substances should be classified as per Rule 3.

Rule 3a 

A specific heading should preferably be chosen over a general heading. 

Rule 3b

Composite goods or mixtures should be classified based on the substance or material that has given them the essential character.

Rule 3c

If any item can be classified under two different headings, consider the last one as per the numerical order.

Rule 4

 If none of the above rules applies to any good, it should be classified under the head to which they are most suited.

Rule 5

Containers sold along with an article and provided for long-term use should be classified along with the article.

Containers and packing materials should be classified along with the goods they are provided, except when such packing is for repetitive use.

Benefits of GST HSN Code

Certain noteworthy benefits have helped taxpayers and professionals in several ways. Some of them are as follows –

  • Using the GST HSN Code eliminates the need to provide a detailed description of every good individually.
  • It allows automation of the entire procedure for GST return, thereby saving money and time for the tax authorities.
  • The HSN system helps Customs agents in identifying goods under specific sections and chapters.
  • Implementation of the code has helped in making GST internationally accepted and systematic.

 Conclusion

The decision to move to the online taxation system and implement the GST HSN Code for the classification of goods liable for taxation has brought about a complete reform in the country’s taxation system. However, the government is trying to make the transition process even more transparent. For this, many goods are being shifted from one slab to another depending on their usage and the trade. Though it may require some preparation work for professionals to effect such transition, there are various automated GST compliance solutions to help with the process. 

FAQs

1.  Why is there a need to follow the HSN Code?

The use of the GST HSN Code allows uniform acceptability and standardization of goods worldwide. All businesses under the GST regime to which the HSN system applies should mandatorily get an HSN code to ensure proper levy of the applicable tax rate in such goods.

2.  To which products are GST HSN Code applicable?

The GST HSN Code applies to any product, including animal products, footwear, plastic articles, machinery, mineral products, arms, and ammunition, etc.   

3.  Is HSN Code required during GST return filing?

Yes, every business to which GST HSN Code is applicable is required to provide the HSN Code during GST return filing.

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