The implementation of the Goods and Services Tax (GST) in India revolutionized the country’s taxation system, introducing various reforms to streamline processes and enhance efficiency. Among these reforms, the adoption of Harmonized System of Nomenclature (HSN) codes played a crucial role in standardizing the classification of goods and services. This comprehensive guide aims to provide a detailed understanding of HSN codes under GST, their significance, structure, implications for businesses, compliance requirements, enforcement mechanisms, and global perspective.
1. What are HSN Codes? HSN codes are numerical codes assigned to goods and services to facilitate their classification for taxation purposes. Developed by the World Customs Organization (WCO), HSN codes provide a systematic and uniform method for identifying products during trade across borders. They serve as a universal language for classifying commodities, enabling seamless exchange of goods and services internationally.
HSN Codes in GST India is the first country to adopt the HSN codes at 8 digits and also classify services. The HSN codes for Services start with 99 series, and they are 6 digits.
2. Importance of HSN Codes Under GST: In the GST regime, HSN codes serve as a cornerstone for the tax structure, enabling uniform classification of goods and services. They play a vital role in simplifying tax calculations, promoting compliance, and enhancing transparency in tax administration. By accurately assigning HSN codes to their supplies, businesses can ensure consistency in tax reporting and minimize the risk of errors or disputes.
3. Background and Evolution of HSN Codes: Prior to the introduction of GST, the classification of goods posed a significant challenge, especially in the Value Added Tax (VAT) regime. With different states following varied classification systems, discrepancies arose, leading to litigations and complexities in trade practices. However, the adoption of HSN codes under GST eliminated these challenges, providing a standardized framework for classification.
The HSN system, governed by the International Convention on the Harmonized Commodity Description and Coding System, is globally recognized and utilized by over 220 countries. It encompasses more than 5000 items, with classifications updated every five to six years to accommodate evolving trade practices.
4. Implementation of HSN Codes in GST: Under GST, businesses are required to utilize HSN codes for reporting their supplies in various documents, including invoices, returns, and registrations. The HSN codes are derived from the Customs Tariff Act, 1975, and are essential for determining the applicable tax rates for goods and services.
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5. Mandatory HSN Codes on GST Invoices: The display of HSN codes on tax invoices is conditionally mandatory under GST. However, the number of digits required varies based on the aggregate turnover of the taxpayer. While penalties may be levied for non-compliance, certain relaxations are provided for small businesses.
As per CGST notification 78/2020 dated 15th October 2020, HSN code must be mandatorily declared as follows from 1st April 2021
| Aggregate Turnover | Required HSN Code Length |
|---|---|
| Above ₹5 Crores | 6 digits |
| Up to ₹5 Crores (B2B) | 4 digits |
| Up to ₹5 Crores (B2C) (optional) | 4 digits |
> All 8 digits of HSN code is mandatory in case of export and imports under the GST.
Atleast 6 digit HSN will be mandatory in e-Invoices, for taxpayers whose AATO is 5Cr and above, from 15th of December 2023.
Click here to know HSN and SAC according to Goods and services
6. Structure of HSN Codes: The structure of HSN codes follows a hierarchical format, with each digit representing a specific level of classification. HSN codes in India comprise 8 digits for goods and 6 digits for services, with the former starting from 1 and the latter from 99.
7. Interpreting HSN Codes: Interpreting HSN codes involves adhering to six General Rules of Interpretation (GRIs), which provide guidelines for classifying goods based on their characteristics, composition, and usage. These rules aid in accurately determining the appropriate HSN code for a particular product.
8. Compliance and Enforcement: Compliance with HSN code requirements is essential to avoid penalties under the CGST Act, 2017. The correctness of HSN codes is verified during inspections, audits, and scrutiny, with incorrect classifications potentially leading to revenue implications and penal actions.
How to Interpret/read the HSN Codes?
There are 6 General Rules for interpreting the tariff codes, and they are known as the General Rules of Interpretation.
Rules one to four are related and must be applied in sequence. Rules five and six stand on their own to be applied as needed.
Rule 1: heading are for reference only
Rule 2(a): article in an entry includes CKD-SKD
Rule 2(b): articles in an entry includes mixtures
Rule 3(a): speci ic description to be preferred
Rule 3(b): material that gives essential character
Rule 3(c): later-is-better
Rule 4: akin goods
Rule 5: cases-packaging classi ied with article
Rule 6: entries at the same level comparable
What is the HSN Structure for Services ?
HSN Code for services starts with 99 Series, and it is only 6 digits.
What can penal provisions be levied if the HSN code is not printed or shown on the Tax Invoice?
A penalty can be levied under Section 122(1)(i) of the CGST Act 2017.
During the audit or assessment or scrutiny,what could be done if the wrong classi ication is found?
Suppose any wrong classi icationis found during the audit or assessment, or scrutiny. In that case, notices can be issued under Section 73 or Section 74 of the CGST Act, and penal provisions can be initiated.
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