HSN Code: Meaning, Features & Benefits

For any business in India, understanding product classification under the Goods and Services Tax (GST) regime is crucial. This is where the Harmonized System of Nomenclature (HSN) code steps in. HSN acts as a universal language for identifying and categorizing goods.

This comprehensive guide decodes HSN code’s meaning and explores their uses within the GST framework. Read on to know how HSN codes determine tax rates, and enable you to utilize them in GST filings to ensure compliance with the regulations.

What is HSN Code

The HSN code's full form is Harmonized System of Nomenclature — a systematic way to classify goods. First introduced in 1988 and developed by the World Customs Organization (WCO), it is a 6-digit uniform code used by 200+ countries. It is the global standard for naming goods and classifying 5,000+ products for tax purposes. HSN codes are used for various business calculations, including determining eligibility for trade agreements and collecting trade statistics.

Features and Benefits of HSN Code

HSN codes have a unique set of features making them a powerful tool for international trade and domestic tax systems like GST. Their key characteristics include:

Standardized and Universal

Every country adhering to the HSN system uses the same codes for specific products, enabling clear communication between businesses and customs authorities worldwide. This minimizes confusion and reduces the risk of disputes and errors in trade transactions. 

Streamlined Trade Statistics and Policies

HSN codes make collecting and analyzing trade data convenient and fast. Governments can track import and export trends, and make informed decisions on tariffs and trade policies.

Benefits for Businesses of All Sizes

Understanding HSN codes empowers businesses to classify their products accurately. This means determining the correct GST rate and ensuring smooth interactions with customs authorities.

Tailored for GST in India

India initially adopted the 6-digit HSN code, but it was expanded to 8 digits to align with the GST framework. The HSN code is compulsory for taxpayer invoices and returns. The system recognizes the needs of small businesses. 

How HSN Codes Work

HSN codes are arranged in a hierarchical structure that offers enhanced levels of detail with each additional digit. The basic structure includes: 

•  First two digits (Chapter) represent broad categories of goods 
•  Next two digits (Heading) refine the category 
• Optional subsequent digits (Subheading) provide even more specific product identification 

Product Specificity

As the number of digits increases, the HSN code identifies a more specific product, determining the appropriate tax rate under GST for accurate trade statistics.

Flexibility for Domestic Use

While the core structure is standard globally, countries can incorporate additional digits to their HSN codes for further product classification specific to their domestic tax systems. Businesses with a turnover of over Rs 1.5 crore but less than Rs 5 crore must use 2-digit HSN codes in their invoices and returns. Businesses with a turnover of over Rs 5 crore must use 4-digit HSN codes. There are also 8-digit HSN codes used for imports and exports.

Conclusion

HSN codes are crucial in international trade and domestic tax systems like GST. They provide a standardized and efficient way to classify goods, ensuring smooth international trade procedures, facilitating accurate tax collection, and generating valuable data for trade analysis. Understanding HSN codes empowers businesses of all sizes to easily navigate GST compliance. 

FAQs

Q1. How is HSN code different from SAC code in India?

Ans. HSN code forms the initial six digits of the eight-digit SAC (State Accounting Code) used in India. SAC codes provide further product categorization specific to the Indian GST regime.

Q2. Where can one find the HSN code for a product?

Ans. You can find the HSN code for a product by checking the official HSN code list published by the Central Board of Indirect Taxes and Customs (CBIC) or by searching online resources provided by government or tax departments.

Q3. How many digits of the HSN code are needed to mention in GST invoices and returns?

Ans. The number of HSN code digits you need to mention depends on your business turnover. No HSN code is required below Rs. 1.5 crore turnover. Rs. 1.5 crore to Rs. 5 crore turnover, minimum of 2-digit HSN code is required and above Rs. 5 crore turnover, minimum of 4-digit HSN code. 

Q4. What happens if a wrong HSN code is used in GST filings?

Ans. Using the wrong HSN code can lead to penalties and additional tax demands from the authorities. Thus, one must ensure accurate HSN code usage for GST compliance.

Q5. How can a business stay updated on changes to HSN codes?

Ans. The government revises HSN codes periodically. Businesses can stay updated by following official notifications from the CBIC or consulting with a tax professional.