The introduction of the tax reforms, the Goods & Services Tax Act (GST) has left business owners, big and small, a little overwhelmed and confused.
Well, the confusion of most business owners in India isn’t without reason. The new Tax Act comes with an entirely new set of rules and regulations that need to be kept in mind. It consists of a number of things that vary from business to business and even across industries.
The HSN code is one of them.
So we decided to dive into understanding the GST Act ourselves, explaining what we learned as we go. This will also help you calculate the GST rate on invoices you raise going forward. So make sure you know the HSN codes of the products you sell for the tax invoice you generate.
What is the HSN code?
HSN stands for Harmonised Commodity Description and Coding System.
As intimidating as the HSN full form seems, the HSN code is fairly easy to understand.
HSN is a global coding system designed to assign codes to products and commodities universally. It is an internationally recognised coding system that allows the classification of products throughout the world.
When it comes to trade management policies, each country or continent will have a different set of standards that are followed by their nomenclature. This creates confusion for those across the continent unless they are well versed with the codes at both ends.
For example, a simple product/ item like a lentil can be described as both a food item and a seed. It may vary based on different cultures and how it is used by the people.
HSN aims to simplify this. It standardises these different representations by using a hierarchy-based 6 digit code (4 to 8 digits, generally 6).
Understanding the HSN code
The HSN code has different parts to it. So as you go through this section, make sure you take notes carefully. This will help you identify as well as know what HSN codes are relevant to the products you sell.
Let’s start with an example HSN code from section 2 which refers to vegetable products: 1006.30.
A section is the broadest level of classification - here it is that of vegetable products.
Note: Although this isn’t a part of the HSN code directly, each HSN code belongs to a section.
The first two digits in the code represent a chapter. A chapter is the second-highest classification in terms of hierarchy in the HSN code. In this example, it is 10 - which is the chapter on cereals.
Now as you know, cereals are of many kinds. There is wheat, barley, rice, etc. So the next two digits after chapter 10 represent the sub-heading (here it is 06) which means rice.
Rice is further classified into Basmati rice, polished rice, whole grain rice, and brown rice. To represent that the next two digits after the period (.) are used.
30 here is for semi-milled or wholly-milled polished or unpolished rice.
So when you share the HSN code 1006.30 with someone, they will know it refers to this specific type of rice.
Creating your HSN code
You don’t create your own HSN code. Instead, you just need to refer to the HSN codes directory.
There are 21 sections under the GST Act. Each of these contains around 99 chapters. The chapters are further divided into 1244 headings, and 5244 subheadings.
You can find all of these in the context of GST here for the HSN code list India uses.
The thumb rule to remember as you browse through the HSN code list is that it MUST represent the details of a product.
For example, you have specific HSN subheadings for organic produce. You cannot use the code of another product that might seem similar to it.
Anything that is of relevance to the customs should also be included in the HSN code.
Naturally, sometimes certain aspects of a product are relevant only within a nation. But you can and should also include the localised aspects of the product in the HSN code. You can do this using an 8 digit code from the list.
For example, agarbattis and lobans are represented with the 3307 41 00 HSN code.
You can find the HSN codes for practically any product this way. Right from crocheted goods, citrus fruits, floor coverings, fur skins, precious metals, recorders, wickerwork products, wood charcoal, confectionery items, basket ware, travel goods, and others. You just need to pay close attention to the steps above.
How does the HSN code work?
When trade takes place between two parties, including two nations, the contractual obligations and policy compliances are extremely tight-wound and come with a number of regulations that need to be followed.
This is where the Harmonised System of Nomenclature (HSN codes) comes into play to ensure there is no ambiguity during the trade.
HSN code is a logical representation of products that is understood on all fronts.
For instance, a UK-based business owner might not understand what you mean when you say “dhoop” or “agarbatti” but can easily look up 3307 41 00 to find out a standard meaning for it, which in this case is “incense”.
However, this is only a very small aspect of the HSN code as they are used today.
What are HSN (Harmonised System of Nomenclature) codes used for?
HSN codes for services and products are predominantly used to determine the taxation slab of each product or service, accurately.
In India, this is the Goods and Services Tax, which is applicable for the central and state governments.
Even when it comes to trading, buyers are interested in the taxation applied by governments on different products for trading purposes. This can easily be referred to through national HSN code and Tax data as provided by different governments.
HSN was developed by the World Customs Organization (WCO) for seamless trading and is now used in about 200 countries.
The HSN code covers 98% of the goods sold across the world. With the intensity and complexity of international trade today, these codes are bringing in uniformity for seamless processes.
Why is the HSN code important and required?
1. Enables proper taxations and exemptions
The international trade system isn’t based on a set of laws provided by one government. Since there are multiple parties involved at different stages of the trading cycle, one needs to factor in multiple rules and regulations.
In such cases, HSN codes remove any room for misinterpretation. It ensures precise classification, as well as the tariff, levied on the products.
HSN codes in GST usage give business owners an advantage because the taxation is completely automated.
A standard, internationally recognised system becomes imperative to enable businesses to file for taxation and exemptions if any.
2. Makes it easy to understand products/ services
Further, with the HSN code, every trader in the world essentially has the ability to be on the same page as everyone else.
When an Indian says chilli and an American says chilli, it means two entirely different things.
However, the Indian chilli powder can be described by using 09042020, which in other words can be called the pepper of genus piper or dried, crushed, and ground fruit of genus of pimenta pepper for those in America.
HSN codes are easy to use, easy to apply and understand.
If you feel overwhelmed looking through the list of HSN codes in India, you can Google them. Since the codes are standardised, you will find the answers easily.
3. Supports statistics in trading
Another very important aspect of the HSN code is its support for statistics in trading.
As we know it, data collection is a huge part of trading, and not having a standardised approach to logging can create confusion as well as miscalculations.
With every individual item categorised so efficiently, it becomes extremely easy to record, and sort data in a systematic manner.
Further, this data can be used to assess the ongoing trading and make predictions for the future.
4. Automates taxation across all industries
The agreed-upon structure of the HSN code in GST is why the government has made it mandatory in India.
The government’s goal is to automate the entire system of taxation. The logical categorisation provided by the HSN codes enables that.
However, if you are running a business under the Composition Scheme, i.e. you are a taxpayer with less than 1.5 crore rupees as turnover, then you are exempt from using the HSN code.
In this case, you are exempt from multiple GST formalities. You pay GST at a fixed rate.
HSN code in India
HSN code was officially adopted in full force in India after the introduction of the well-researched taxation reforms, the Goods and Services Tax Act.
However, the Central Excise and Customs Regime has been using it since its inception (1988), as India has been a member of the World Customs Organization since 1971. This was the 6 digit code.
With GST, the government came up with different applications of the HSN system. Adding 2 more digits to the code for further classification, localised to the demands of the products here. This is standard practice, as permitted by the World Customs Organization.
In India, as mentioned above, businesses with a turnover of 1.5 crore rupees or less need not use the HSN code.
Businesses with a turnover of more than 1.5 crore rupees and less than 5 crores are required to use the 2 digit HSN code for services and goods.
Taxpayers with a turnover of more than 5 crores are mandated to use the 4 digit HSN code.
The only groups mandated to use the 8 digit HSN code are those involved in international trading, both export and import.
This clearly classifies the nature of business and products for the government, making it a straightforward process of taxation for authorities.
The government mandates that the HSN code be clearly mentioned on the invoice being prepared for GST taxations.
The HSN code brings every Indian trader at par with the international scheme of things. Ensuring a smooth transaction, and exchange of goods, commodities, and services internationally.
The importance of HSN under GST
With the Goods and Services Tax Act, the government aims at bringing trade taxation to an automated digital systematic module.
The HSN code follows suit in this initiative by the Government of India to ensure accurate taxation of commodities within the country.
In line with this, the compulsion on the inclusion of the HSN code on each invoice prepared for GST taxation is extremely useful. This makes tax returns an inherently quick, efficient, and simple process.
Also, in a country like India, where there is no dearth of tax fraud, and the percentage of taxpayers is minuscule, the HSN codes help put them on the map.
With the rules mentioned above, the government also aims at including localised goods and putting them on an international scale.
For example, goods like handkerchiefs in all their categories like silk, man-made fibre, silk waste, and other nuanced versions can be classified using the 8 digit HSN code.
This requires the application of General Interpretation Rules.
Regardless, everything the nation has to offer in terms of goods and commodities gets international recognition.
How to find your HSN code
The easiest, most efficient way of looking up the HSN code for a product is to Google it. But you can also follow these steps:
- Go to the official GST website: www.gst.gov.in/
- Toggle over to the SERVICES on the menu, and further click on USER SERVICES. Remember to CLICK on USER SERVICES, toggling over it will not show you the desired result.
- As you click, another page will open up, here you shall find an option Search HSN / Service Classification Code. (You can simply use this link)
- Click on the HSN code, if you already have the code and want to know the service or product for it.
- Click on the Service Classification Code to find out the HSN code for a given product or service.
- In both of the options, you need to mention the category of Tax from IGST, CGST, SGST, CESS.
- After you fill in the details, a small captcha will pop up, answer that and click on search.
- There you have it!
If you are not comfortable navigating through government websites, you can use this free GST HSN code finder. This will help you identify the classification of goods you sell.
Or refer to this list.
When is the HSN code mandatory in GST?
For the taxpayers whose aggregate turnover is more than INR 5 crores in the preceding Financial Year, the 6 digits HSN code is mandatory. For both B2B and B2C txt invoices.
In the case of taxpayers whose turnover is above INR 1.5 crore but below INR 5 crore, you need to use 2 digit HSN codes.
Lastly, for taxpayers whose turnover is below INR 1.5 crore, you need not mention the HSN code in your invoice.
Remember, this will also be required for filing GST returns.
We’ll be sharing more details about the new rules and regulations for upcoming businesses in the blogs going forward. If there’s anything you’d like us to cover or address, feel free to reach out to us with questions.
In the meantime, we hope this blog has helped you get a better hold of what HSN codes are.
Please note: HSN codes are different from a SAC code. The SAC code is similar to how the nomenclature works in HSN but is used for services.