Policies, Codes & Other Documents
The Goods and Services Tax (GST) system, introduced in India in July 2017, aimed to streamline the country's indirect tax structure. Under the GST regime, businesses are required to classify goods and services appropriately to determine the applicable tax rates. This is where the HSN code plays a crucial role. The full form of HSN code is Harmonised System of Nomenclature and it is a globally recognised system for classifying goods, and it has been adopted in the Indian GST system to facilitate uniformity and clarity in tax administration. Let’s understand what HSN code is and delve into the significance, structure and implementation of the HSN code in the GST framework.
HSN code is an internationally accepted system for categorising goods in a structured and systematic manner. Developed by the World Customs Organization (WCO), it is used for customs tariffs, trade statistics and various other purposes globally. The HSN code is a numeric representation of goods, with each code representing a specific category or product. In simpler terms, all the goods that are of the same type and category will be represented by a common code known as the HSN code.
In the context of the GST regime, the HSN code serves as a basis for determining the tax liability of goods. A particular GST tax rate is assigned to each HSN code. It helps in the proper identification and classification of products, making it easier for businesses and tax authorities to understand the nature of the goods and apply the correct tax rate.
Like goods, services have also been categorised for simpler reference. While the HSN code deals with the classification of goods, the Services Accounting Code (SAC) pertains to the classification of services under GST. The SAC system was introduced to ensure a uniform method of service classification for taxation purposes.
The structure of the SAC code is similar to that of the HSN code, with a series of numbers assigned to specific services. Like the HSN code, the SAC code is used in the invoicing process to indicate the type of service provided and to determine the applicable tax rate. This distinction between HSN and SAC codes ensures that both goods and services are adequately accounted for in the GST system.
The HSN code follows a systematic structure that enables easy identification and classification of goods. The code comprises six–eight digits, grouped as follows:
First Two Digits: The first two digits represent the HSN chapter.
Next Two Digits: The next two digits signify the HSN heading.
Subsequent Two Digits: The subsequent two digits denote the HSN sub-heading.
Last Two Digits: The last two digits signify the tariff items.
The level of detail in the classification increases with each additional digit. The more digits present, the more specific the product classification becomes. This hierarchical structure aids in determining the applicable GST rate accurately. You can easily find the HSN code relevant to your product from the HSN code list. You can also use the HSN code finder to help identify the correct HSN code for your goods and services.
Under the GST law, businesses are obligated to mention the HSN code for goods and the SAC code for services on invoices generated during transactions. The disclosure of these codes is crucial for the following reasons:
Tax Calculation: The HSN and SAC codes play a vital role in computing the GST liability of a business. It can be used to classify 5000+ goods. Correctly identifying the HSN/SAC code for goods and services ensures implementing the correct GST rate and making accurate tax calculations. You can use the HSN code list or HSN code finder for correct identification of the HSN code.
Input Tax Credit (ITC) Claims: Suppliers and recipients of goods and services rely on the HSN/SAC codes to claim Input Tax Credit. Accurate disclosure of these codes in the invoice ensures smooth ITC claims.
Government Compliance: GST authorities use the HSN/SAC codes for statistical and analytical purposes. Proper disclosure in invoices enables the government to monitor and analyse trade trends effectively.
Trade Facilitation: The HSN/SAC codes are used globally for international trade. Proper identification and classification facilitate seamless import and export procedures.
Earlier, the HSN code disclosure requirement in GSTR-1 followed a three-tiered system. However, with effect from 01 April 2021, the three-tier system was replaced with the following requirements:
|Sl. No.||Aggregate Turnover in the Preceding Financial Year||Number of Digits in the HSN Code to be Disclosed|
|1||Up to Rs. 5 crores||4|
|2||Above Rs. 5 crores||6|
As per the earlier three-tier system, HSN codes were exempted for businesses with a turnover of up to Rs. 1.50 crores. However, it can be seen from above that the requirement to mention the HSN code has become mandatory for all businesses irrespective of the turnover limits. However, registered persons having aggregate turnover of up to Rs. 5 crores in the previous financial year are not required to mention the HSN code in the tax invoice issued for supplies to unregistered persons.
The HSN code in GST serves as a standardised classification system for goods, promoting transparency and uniformity in tax administration. By adopting the globally recognised HSN code, India aligns its taxation structure with international trade practices. Additionally, the inclusion of SAC codes for services ensures that both goods and services are adequately accounted for under the GST regime.
Businesses must be diligent in correctly identifying and disclosing the HSN/SAC codes on invoices to comply with GST regulations. This not only ensures accurate tax calculation but also enhances transparency in trade practices. As the GST system continues to evolve, a robust understanding of HSN and SAC codes will remain crucial for businesses to navigate the complexities of the tax framework efficiently. For more such insightful information, check out TATA Capital blogs.
Policies, Codes & Other Documents