The World Customs Organisation (WCO) established and developed the Harmonised System of Nomenclature (HSN) with the objective of classifying global commodities in a systematic and logical manner.
What is HSN Code?
- It is a six-digit universal code that categorises over 5,000 different items and is recognised worldwide
- This collection of stated rules is used in taxation to determine the tax rate applicable to a product in a jurisdiction
- It is also used to calculate the number of products imported and exported from a country
- It is an essential element for analysing the global movement of products
- It is organised into parts, which are further divided into chapters, which are further divided into headers and subheadings
- The final number is the six-digit code
- HSN is widely utilised and implemented in almost 200 nations, accounting for an incredible 98 percent of the world’s goods
- It is by far the most reasonable system of classification and identification in international trade.
- It has aided in the reduction of efforts and expenses associated with complex international trade procedures.
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April 1, 2021 HSN code reporting became obligatory while preparing the GSTR-1 return on April 1, 2021. The updated declaration requires taxpayers with an annual aggregate turnover of more than Rs. 5 crore to include the HSN code on all tax invoices. |
HSN Code in India
Now that we’ve covered the fundamentals of HSN, let’s look at it in the context of India.
India is poised to establish its own Commodities and Services Tax, or GST, on all goods and services. Many indirect taxes will be absorbed, reducing the load on the end user.
India has employed the HSN system in the Central Excise and Customs administration since 1986. It is a significantly more thorough classification, with two extra digits added to the 6-digit structure. Indian manufacturers subject to GST will be expected to adhere to a three-tiered HSN structure.
- Those having a revenue of less than INR 1.5 crores are not required to subscribe to HSN
- Those who earn more than INR 1.5 crores but less than INR 5 crores must use the two-digit HSN numbers.
- Those with more than INR 5 crores in income must utilize the four-digit HSN codes.
- Those merchants who engage in imports or exports must use the 8-digit HSN codes. Check Here To More About:https://services.gst.gov.in/services/searchhsnsac
Recognizing the HSN Code Digits
The HSN structure includes 21 divisions, 99 chapters, roughly 1,244 headings, and 5,224 subheadings.The part or chapter to which the commodity belongs is defined by its manufacturing and technological complexity. As a result, all natural commodities such as crops, animal food, and so on are found earlier, but industrial machinery is located later.
For example, processed cotton appears later than uncombed, regular cotton.
- The sections are structured broadly. Chapters, on the other hand, are much more precisely organised
- Section 11 encompasses all forms of textiles and textile goods, while Chapter 62, which also falls within Section 11, is dedicated to men’s and women’s accessories
- Chapters have been subdivided further down the chain into headings and subheadings. The headings under the Chapters focus on various types of items
- Continuing with the previous example, heading 13 of Chapter 62 includes all sorts of handkerchiefs, but heading 14 covers all types of scarves and shawls
- These headings are associated with a product
- Handkerchiefs composed of various textile materials, for example, are classified as heading 13 under Chapter 62.The product’s HSN number is 62.13.90, with 90 being the product code for various textile handkerchiefs
- For a more detailed classification, the Indian GST adds two more digits to certain items. When the handkerchiefs are constructed of a man-made fibre, the HSN code is 62.13.90.10. Similarly, 62.13.90.90 is reserved for silk handkerchiefs or silk waste.
The General Interpretation Rules must be observed when a product is categorised in the above framework. When classifying a product, the commodity’s trade jargon must be evaluated first, not its technical manipulation. If the product is classified on the first level, there is no need to drill down deeper into the stratum below.
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Accounting Codes for Services (SAC)
India has established a Service Accounting Code (SAC) for all its services, akin to the International HSN Codes. GST will replace the current service tax, which applies to all services nationwide at a rate of 15%, with some exceptions. Given that GST combines both goods and services, a corresponding classification system for services is essential. Under the GST regime, SAC remains unchanged, ensuring continuity in tax administration. For businesses, understanding these codes is crucial, especially when dealing with processes like new GST registration.
Benefits of Mentioning HSN Codes in GSTR-1:
Incorporating Harmonized System of Nomenclature (HSN) codes in GSTR-1 offers several advantages for both businesses and the government. Firstly, it facilitates a systematic classification of goods and services, allowing for a standardised understanding of the products involved in transactions. This uniformity aids not only in domestic trade but also in international trade, promoting seamless communication and comprehension among trading partners globally. Additionally, HSN codes assist in the analysis of consumption patterns and market trends, enabling businesses to make informed decisions based on the demand for specific products. Furthermore, it enhances the efficiency of tax administration by streamlining the tax assessment process. Accurate HSN code reporting ensures that the correct tax rates are applied, reducing the likelihood of errors and facilitating a smoother audit process.
Why Are HSN Codes Mandatory in GSTR-1?
The mandatory inclusion of HSN codes in GSTR-1 serves multiple purposes. It primarily enables the government to gain insights into the composition of goods and services transacted within the economy. This data is crucial for effective policy-making, helping authorities identify sectors that require targeted interventions or adjustments in tax rates. The specificity provided by HSN codes aids in the prevention of tax evasion and ensures fair taxation by allowing for precise categorization of goods and services. Mandating HSN codes also aligns with international trade norms, making the Indian taxation system more compatible with global standards. Ultimately, the inclusion of HSN codes in GSTR-1 enhances transparency, accountability, and the overall efficiency of the tax reporting process.
How to Mention HSN Codes in GSTR-1:
In the GSTR-1 filing process, businesses are required to mention HSN codes for the goods and services they have supplied. The HSN codes can be entered at the invoice level, providing granular details about the products being reported. It is essential for businesses to accurately determine the appropriate HSN code for each item, as this directly impacts the correct calculation of taxes. Many businesses use accounting software that integrates with the GST portal, simplifying the process of HSN code entry. Additionally, the government provides an HSN lookup tool on the GST portal, enabling businesses to search and verify the correct HSN codes for their products. Timely and accurate reporting of HSN codes in GSTR-1 ensures compliance with regulatory requirements and facilitates a smooth flow of information between businesses and tax authorities.
Gstr-1 HSN Code
GST returns must be reported with the HSN code, just as invoices must include the HSN code at 6 and 4 digits. From April 1, 2020, businesses with an aggregated turnover of more than 5 crores in the previous fiscal year must upload an HSN summary with a 6-digit HSN number in GSTR-1.
Similarly, businesses with total revenue of up to 5 crores must include an HSN summary with a four-digit HSN number in their GSTR-1 form. Businesses can, however, optionally include the HSN code at additional digits. Businesses with up to 5 crores can use HSN at 6 or 8 digits, while businesses with more than 5 crores can use HSN at 8 digits.
In the month of May ’21, the effect of HSN summary in GSTR-1 return was made, both in the GST portal and the offline tool. As a result, the new rule will take effect with the May GSTR-1, which is due in June 2021. In the case of quarterly GSTR-1, you must provide details at 4 digits in the April to June’21 GSTR-1, which is due in July,2021.
This modification requires you to record the HSN code of 6/4 digits in the HSN summary, which is table 12 of GSTR-1.. Also, the ‘total amount’ in the HSN summary has been replaced with ‘Rate of Tax,’ which means you must now provide HSN-specific rate details.
Get in touch with Vakilsearch right away to obtain specific information on GST codes and HSN codes.
FAQs
Is HSN mandatory in GSTR-1 below 1.5 crore?
No, HSN codes are not mandatory in GSTR-1 for businesses with a turnover below 1.5 crore.
For whom is the HSN code mandatory?
HSN codes are mandatory for businesses with a turnover exceeding 1.5 crore to classify goods and services accurately for tax reporting.
How much HSN code is mandatory?
The extent of HSN code detail depends on the turnover. Businesses below 1.5 crore can opt for a 2-digit HSN, while those above 1.5 crore must use a 4-digit HSN code.
Is HSN mandatory for small businesses?
HSN codes are not compulsory for small businesses with a turnover below 1.5 crore but can be used voluntarily.
Is HSN compulsory in the invoice?
While not mandatory for all businesses, those with a turnover over 1.5 crore must include HSN codes in their invoices for accurate tax reporting and compliance.
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