HSN code is short for Harmonized System of Nomenclature, a universally adopted coding system with standardized commodity descriptions.

Over time, trading has expanded from local markets beyond national borders. The global market allows traders to expand their reach and offer their products and services to every part of the world. Nevertheless, to maintain trade on a large scale, it was crucial to standardize goods and services.

The GST system implemented in 2017 is built on the concept of standardization and relies on HSN Codes, SAC, and UQC.

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What is the HSN Code?

HSN refers to the "Harmonized System of Nomenclature" and is utilized for organizing goods in an orderly fashion. Created by the World Customs Organization (WCO), this is the worldwide standard for naming products. The 6-digit standard code can categorize over 5,000 items and is systematically utilized for tax classification.

In India, the HSN Code is made up of 8-digit codes (which are 6 digits internationally). It is an essential categorization system for items that have been put into place within the GST system, simplifying tax processes and aiding in global trade through the use of a standard code for goods. They play a vital role in the operations of businesses and global commerce.

The DGFT (Directorate General of Foreign Trade) is responsible for making any alterations, creating new codes, or adding provisions to HSN Codes. Periodic updates to product descriptions, eliminating expired codes, adding new codes, etc., are all part of the continuous process of improving HSN Codes.

Importance of HSN Code

The main aim of the HSN code is to create an organized method of categorizing and organizing goods according to their attributes, like material, purpose, source, etc. This aids in simplifying the compilation and examination of trade data, as well as in enforcing customs duties and other trade regulations.

The HSN code helps in standardizing the classification of goods internationally, minimizing potential disagreements and mistakes in trade deals. The HSN code can be customized to meet the unique requirements and preferences of each country by allowing the addition of extra digits to the original six-digit code, enabling the creation of additional product subcategories.

In India, the HSN code was first implemented with a length of six digits. Nevertheless, it was later upgraded to include eight digits to provide a more accurate categorization of products. This was carried out to comply with the GST system, which mandates the inclusion of the HSN code in the invoices and returns of taxpayers.

Small taxpayers in India can benefit from the HSN code by being exempt from including it in their invoices and returns if their annual turnover is under Rs. 15 million. Yet, if their revenue surpasses Rs. For 15 million, they need to specify the two-digit HSN code. Likewise, in case their revenue surpasses Rs. When mentioning 5 crores, the four-digit HSN code must be included.

Structure of HSN Code

Initially, comprehending HSN trading codes may appear complicated. Nevertheless, you can make it easier by dividing the six numbers into three pairs of two-digit sequences.

Firstly, it is important to understand certain World Customs Organization terms that pertain to the categorization of products.

• Sections: Product categories listed by the WCO, totalling 21, do not make up the HSN code.
• Sections contain different types of products, with a total of 99 chapters.
• Sub-divisions: These are further divisions of products within chapters, totalling 1,244 sub-divisions.
• Subcategories: These define the items directly, totalling 5,244 subcategories.

Every six-digit HSN code provides the customs authority with information on the chapter, heading, and subheading of a product listed by the WCO.

• The first two digits indicate the chapter.
• The middle two numbers indicate the direction.
• The last two numbers indicate the subcategory.

How Does HSN Code Work?

HSN is a standardized system used for naming and categorizing products in international trade. More than 200 countries utilize it, encompassing approximately 98% of global goods.

The importance of HSN code in GST lies in its six-digit code which distinguishes a particular product or category. The chapter is indicated by the first two digits, the heading is shown by the next two, and the subheading is represented by the last two. An illustration would be the HSN code of coffee beans which is 0901.11.

The HSN codes are categorized into around 5,000 groups of commodities, each varying in level of detail and specificity. It relies on a legal and logical framework that upholds consistent product classification globally.

The HSN system operates under a series of guidelines that outline the principles and techniques of categorization. These guidelines assist in maintaining uniformity and precision when assigning HSN codes. They also assist in addressing any disagreements or uncertainties that could occur when interpreting the codes.

HSN code is important not just for tax purposes but also for different business calculations. HSN codes can be used to determine benefits under trade agreements like duty drawbacks, export incentives, or preferential tariffs. These codes can also aid in simplifying the gathering and examination of trade data, including import and export quantities, prices, and patterns.

HSN Code and GST

Previously, HSN Codes were only required for Central Excise and Customs, but now due to GST, businesses must include them in tax invoices and report them in GST returns. Moreover, CBIC has disclosed GST rates according to the HSN categorization of products. Therefore, to ascertain the GST Rate for your product, it is necessary for the business to first correctly identify the relevant HSN Code. Previously, the guidelines concerning the HSN Code under GST provided by the Central Board of Indirect Taxes ("CBIC") were as listed below:-

• Annual revenue of Rs 1.5 cr or less - No need to specify HSN Codes.
• Annual revenue between 1.5 cr and 5 cr – Must indicate HSN Code with a maximum of 2 digits.
• Annual revenue of more than 5 crore - must specify HSN Code with a maximum of 4 digits.

The previous notice was updated to require 4/6-digit HSN Codes on tax invoices for goods supply, effective from April 1, 2021.

• Aggregate turnover of up to 5 crore in the previous year - HSN Code of up to 4 digits must be stated.
• Aggregate turnover exceeding 5 crore in the previous year - Must specify HSN Code with up to 6 digits.

Read Our Blog: GST State Code List and Jurisdiction

HSN Code List

The list of HSN codes is divided into 21 sections, with each one corresponding to different product categories according to their technical and industrial features. These categories encompass a diverse selection of items, including live animals, artworks, and antique pieces. Each part contains additional subdivisions.

• Animals that are alive and products that come from animals
• Food items made from vegetables
• Fats, oils, and related products derived from animals and plants.
• Ready-to-eat items, drinks, alcohol, acidic condiments, cigarettes, and replacements.
• Products that are mineral-based
• Chemical goods and related sectors
• Plastic and rubber items
• Raw animal skins, leather, and associated items
• Types of materials like wood, cork, straw, and similar items
• Products made of pulp, paper, and paperboard
• Fabrics and items made of fabric
• Shoes, hats, and similar accessories
• Materials such as glass, ceramics, stone, and their related items.
• Valuable metals, gemstones, and accessories.
• Base metals and their corresponding items
• Machinery, electrical appliances, and components
• Cars, planes, and related machinery
• Instruments that are used for optics, photography, medicine, and precision purposes.
• Weapons, bullets, and associated items
• Various items
• Art pieces, collectibles, and vintage items

Understanding the HSN code list is crucial for correctly assigning the code to your manufactured product when filing GST returns.

Summary of Supplies made by HSN Code

How Can Businesses Implement HSN Codes in Their Process?

• After analyzing them, Categorize your product or service offerings based on their characteristics and nature.
• Get familiar with the structure of the HSN code list in GST and its components to assign codes to your products accurately.
• Educate relevant department and staff members about the significance of HSN codes, their role in GST compliance, and the process of assigning them to products. This will ensure consensus on HSN code usage.
• Ensure seamless implementation and automated coding by integrating GST HSN code into your Enterprise Resource Planning (ERP) systems. This integration will reduce the likelihood of human error and improve efficiency.
• Stay updated on GST rate revisions and modifications to HSN codes to align your systems and procedures accordingly.
• Include GST HSN code rates on invoices for all supplied goods and services to ensure compliance with GST regulations.
• Foster collaboration across various departments such as finance, sales, and IT to ensure a cohesive approach to implementing HSN codes.
• Regularly evaluate and scrutinize the implementation of your HSN codes for GST to pinpoint any discrepancies or areas needing improvement.
• Maintain accurate documentation of HSN codes assigned to products and services for future reference and auditing purposes.

Conclusion

Utilizing the HSN Code system and HSN finders greatly simplifies the GST return filing process for taxpayers in India. Businesses can guarantee adherence to tax regulations and simplify transactions by correctly assigning HSN codes to their products. By gaining more knowledge on using and applying HSN codes effectively, taxpayers can improve their efficiency in GST reporting and help simplify the overall tax administration process.