The GST system in India relies on a Harmonized System of Nomenclature (HSN) to classify over 5,000 categories of goods. This HSN code helps streamline global trade and tax collection, ensuring smoother transactions. Whether you’re a business owner or a tax professional, understanding the HSN code is essential for managing GST compliance and avoiding misclassifications that could lead to penalties.
In this blog, we will explore the HSN code, its structure, implementation, and role in ensuring GST compliance, all while helping businesses streamline operations.
Overview of HSN Code
India has been a member of the World Customs Organization (WCO) since 1971, which developed the HSN for the systematic classification of goods in international trade. Initially, India used six-digit HSN codes to classify goods for Customs and Central Excise duties. In order to enhance the accuracy of these classifications, the Customs and Central Excise authorities later expanded the system to an eight-digit HSN code. This globally recognized system offers a standardized structure for taxation and trade documentation. It ensures accurate tax calculations and compliance with international trade regulations while also facilitating efficient cross-border transactions.
Now, let’s take a closer look at the structure of the HSN code, which offers a detailed and systematic framework for classifying goods.
Structure of HSN Code
The HSN code follows a hierarchical structure to ensure precise classification of goods. It consists of 21 sections, each covering a broad category of goods. These sections are further divided into 99 chapters, each representing different product categories. Within each chapter, 1,244 headings provide more specific classifications. Finally, each heading is further subdivided into 5,224 subheadings, offering detailed product-specific information. This organized structure ensures the efficient identification and classification of goods for international trade and taxation purposes.
In order to facilitate a clearer understanding of the structure, the HSN code can be outlined as follows:
- Chapter: The first two digits represent the chapter, which categorizes goods into broad groups. For example, 01 refers to “Live animals” under Chapter 1.
- Heading: The next two digits (3rd and 4th) represent the heading, which further narrows down the classification within the chapter. For example, 0101 refers to “Live horses, asses, mules, and hinnies” under Chapter 1.
- Sub-heading: The next two digits (5th and 6th) represent the sub-heading, which further specifies the goods. For example, 010121 refers to “Live horses” under heading 0101.
- Tariff Item: In India, an additional two digits (7th and 8th) are used for more specific classification of goods under national customs codes. For example, 01012100 refers to “Live horses, purebred breeding animals”.
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The structured HSN code system facilitates accurate classification; on that basis, let us explore how these classifications are applied under the HSN code declaration rules under GST in India.
HSN Code Declaration Rules under GST
As per CGST Notification No. 78/2020, dated 15th October 2020, the HSN code declaration rules were updated, effective from 1st April 2021, based on the Annual Aggregate Turnover (AATO) of a business. For businesses with an AATO of up to ₹5 crore, declaring a 4-digit HSN code is mandatory for B2B tax invoices and optional for B2C tax invoices. However, businesses with an AATO exceeding ₹5 crore are required to declare a 6-digit HSN code for all invoices, whether B2B or B2C. The turnover of the previous financial year is used to determine the HSN code declaration requirement. Additionally, for exports and imports, it is mandatory to declare the full 8-digit HSN code to comply with international trade standards.
As per the Advisory on HSN Validation, taxpayers must report a minimum of 4 or 6 digits of the HSN Code in Table 12 of GSTR-1, depending on their AATO from the preceding financial year. These changes are being implemented in a phase-wise manner on the GST Portal, with Phase 2 having been implemented effective from 1st November 2022.
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Moving ahead, let’s explore how HSN codes become essential for ensuring smooth compliance and seamless operations under the GST framework.
Importance of HSN Code under GST
The HSN Code under GST provides a standardized system for classifying goods, ensuring that they are accurately categorized for correct tax application. This uniformity aids in efficient customs clearance, import/export documentation, and inventory management. By determining applicable tax rates and promoting transparency, the HSN Code helps prevent tax evasion and ensures compliance. Businesses must use the correct HSN Code while filing GST returns to minimize the risk of discrepancies and maintain accurate categorization of products.
Moreover, proper HSN Code application also plays a crucial role in maintaining reliable financial records, which are essential for audits and reporting. By ensuring clear and accurate tax documentation, businesses can build trust with stakeholders and tax authorities. Additionally, as industries evolve, businesses that stay aligned with the correct classifications can streamline operations, improve supply chain efficiency, and enhance cross-border trade processes.
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Now, let’s see how to locate the correct HSN code for your product to ensure accurate tax application and compliance.
Finding HSN Code for Your Product
Locating the right HSN code can be accessed through official government platforms. The process involves the following steps:
Step 1: Visit the official GST Portal.
Step 2: Go to the “Services” > “User Services” > “Search HSN Code”.
Step 3: Use the search bar to find the HSN Chapter by Code.
Step 4: The applicable HSN code will be displayed. You can now use this code for GST purposes. This process helps ensure the correct HSN code is identified for your product.
Now that we’ve explored the manual process of finding the right HSN code for your product, let’s take a closer look at how Pazy’s automation can simplify this task and streamline your GST compliance efforts.
Simplify Search of HSN Code with Pazy’s Automation
Pazy is a comprehensive financial management platform that simplifies the challenges of HSN Code management. Our expert tools and guidance ensure accurate tax classification, seamless GST compliance, and efficient invoicing. With Pazy, businesses can easily manage these critical aspects, maintain transparency, and avoid costly penalties.
- Automated GST Reconciliation
Pazy’s automated GST reconciliation ensures that all transactions are matched accurately, eliminating manual errors and saving valuable time. It streamlines the entire process, making it faster and more efficient for businesses.
- Reduced Tax Leakage
By identifying discrepancies early in the process, Pazy helps businesses capture the full tax credit, minimizing tax leakage. Its automated system ensures that all eligible tax credits are accounted for, optimizing your financial operations.
- Real-Time Error Alerts
Pazy provides real-time alerts for any discrepancies or errors in your HSN code classifications, ensuring that issues are addressed promptly. This proactive approach reduces the risk of costly mistakes and ensures accurate GST filings.
Pazy provides customized solutions to meet diverse business needs. It simplifies GST management for small to medium-sized businesses, automates reconciliation for finance teams, and ensures sector-specific compliance. For entrepreneurs and startups, Pazy offers cost-effective tools to streamline compliance and maintain tax accuracy.
Conclusion
Understanding the HSN code is essential for businesses to comply with GST regulations and ensure proper tax classification. This structured system simplifies taxation, reduces invoicing errors, and enhances global trade consistency. Accurate application of HSN codes is vital for businesses to avoid penalties and ensure seamless GST compliance.
Pazy offers an innovative approach to managing HSN codes efficiently. With its advanced search features and automated classification tools, Pazy ensures precise tax calculations and effortless compliance with GST laws.
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FAQs
1. Do service providers need to use HSN codes under GST?
No, service providers use SAC (Services Accounting Code) instead of HSN under GST.
2. Are HSN codes the same across all countries?
The HSN code is standardized globally, but countries may have slight modifications to fit their tax systems.
3. Do all goods need to have an HSN code?
Yes, all goods sold under GST require an HSN code, but some exemptions apply.
4. Can HSN codes be modified after the assignment?
No, once assigned, the HSN code cannot be changed for a product unless the product classification changes.
5. What happens if I use the wrong HSN code?
Incorrect HSN codes may result in penalties or disputes during GST audits.
6. Is HSN code required on GST returns?
Yes, businesses must mention HSN codes for goods in their GST returns, depending on turnover.
7. What is the role of HSN in customs duties?
HSN codes are essential for determining the customs duties for goods imported or exported.
8. What is the relationship between HSN codes and GST slabs?
HSN codes help categorize goods into different GST slabs based on their classification.
9. Are there any exemptions for HSN codes under GST?
Some goods, like certain agricultural products, may not require an HSN code based on exemptions.
10. Can the HSN code affect my GST return filing?
Yes, incorrect or missing HSN codes can lead to errors during GST return filing.