What is HSN in GST?

The HSN code in GST is a unique code assigned to every product sold in India, deciding how it’s taxed, tracked, and traded for GST purposes. These codes help classify goods and services for taxation purposes, ensuring businesses run smoothly without any regulatory hiccups. This blog explores the importance and structure of HSN codes. Keep reading to know more!

What is HSN Code?

HSN stands for Harmonised System of Nomenclature. It was developed by the World Customs Organisation (WCO) and functions as an internationally accepted system for classifying traded products. The primary purpose of HSN codes is to create uniformity in product classification across different countries, making international trade smoother and more transparent. Think of it as a universal language for identifying goods - whether you’re dealing with raw materials, finished products, or anything in between.

The HSN system was adopted by India in 1986 for customs and foreign trade purposes. However, its significance expanded dramatically with the introduction of GST in 2017, when HSN codes became mandatory for most business transactions. For Indian businesses, these codes serve as the backbone of GST compliance.

Also Read: Impact of GST on Business Loan Interest & Its Processing Fee
 

How Does the HSN Code Work?

HSN codes work on a hierarchical classification system, starting broad and then becoming increasingly specific as you move through the digits. This way, every product or commodity gets assigned a specific code based on its characteristics, composition, and intended use.

For example, all textile products fall under a particular range, but cotton shirts will have a different code from silk scarves. This systematic approach ensures that similar products are grouped together while maintaining distinct identities for taxation purposes.

Although, it must be noted that this classification is not the same globally. The 6-digit HSN code is standardised globally and represents the core product classification. However, some countries add further digits for more detailed classification specific to their national needs.

What is HSN in GST?

In GST, HSN codes serve as the base for determining tax rates and ensuring proper classification of goods and services. When businesses file GST returns or create tax invoices, the codes help

the system automatically identify the applicable tax rate for each item. This reduces errors and ensures consistency across different businesses selling similar products.

The GST system recognises that different businesses can have varying compliance capabilities. Therefore, the requirement for HSN code digits varies based on annual turnover. For example, businesses with higher turnover would need more detailed codes, reflecting their greater involvement in the formal economy.

The current list of HSN codes for GST comprises 98 distinct chapters, further broken down to give each product its own specific code. Note: To know the HSN code for a specific good, you can visit the Goods and Services Tax website, that also has a tutorial on how to find a specific code. Also Read: Everything You Need to Know About GST on Loans

Structure of HSN Code

HSN codes are typically 6 digits; however, in India, we have 8-digit HSN codes. They’re divided into four sections.

• First two digits: This denotes the chapter number, which is the broad category of goods.
• Next two digits (positions 3 and 4): This represents the heading number, which provides more specific classification within the chapter.
• Following two digits (positions 5 and 6): This is the sub-heading, which offers the most detailed classification. This level distinguishes between different types of products within the same heading.
• Last two digits: This indicates the tariff rates of the product or item.

Here’s an example of how the HSN code format works:

• HSN Code 85171200: this is a full 8-digit code for mobile phones.
• 85 - Chapter: Electrical machinery, equipment, and parts
• 8517 - Heading: Communication equipment
• 851712 - Subheading: Telephones for cellular networks or for other wireless networks
• 85171200 - Full 8-digit code: Mobile phones

Importance of HSN in GST

• Tax Rate Determination: Each HSN code corresponds to a specific GST rate. The use of the correct code will ensure that the correct tax is being charged and paid.
• Compliance and Returns Filing: Using accurate HSN codes and documentation for GST return filing ensures compliance with tax laws and avoids receiving a notice from tax authorities or being penalised.
• Input Tax Credit: Classification using proper HSN aids in claiming input tax credit correctly. Wrong classification might translate into a reversal of credits or demands.
• Data Analytics: The government uses data based on HSN for policy-making, industrial analysis, and identifying patterns of tax evasion, making its knowledge and application essential.
• Audit Trail: These HSN codes provide tax authorities with a transparent audit trail for easy tracking of transactions and verification of compliance, ensuring Indian businesses stay above the line.
• International Trade: For businesses involved in import-export, HSN codes ensure smooth customs clearance and proper application of trade policies. Also Read: Online GST Registration and Guidelines

How to Add HSN Code in GST Portal?

Simple steps are to be followed for businesses wanting to add an HSN code in the GST portal:

• Go to the official GST portal (www.gst.gov.in) and log in using your credentials.
• On the dashboard, click on “Services” → “Registration” → "Amendment of Registration Non-core fields".
• Click on the “Goods and Services” tab, and select “Goods”.
• Search the HSN chapter by entering either the HSN code or the name of the item.
• Proceed by clicking “Save and continue.” Keep on clicking “Save” until all particulars have been duly entered.
• Finish the process of verification and submit the amendment by using either your Digital Signature Certificate (DSC) or Electronic Verification Code (EVC).

To Conclude

The HSN system plays a pivotal role in the smooth functioning of GST by offering a structured and standardised way to classify goods. By ensuring proper HSN usage, companies can avoid penalties, facilitate smoother customs processes, and unlock the potential for better data-driven decisions.

Frequently Asked Questions

What if I use the wrong HSN code?

If you use incorrect HSN codes, it can result in wrong tax calculations, notices from tax authorities, and potential penalties. That’s why it’s important to verify classifications before implementation.

How many HSN codes can be added in GST registration?

You can add a maximum of 5 HSN codes onto the GST portal. However, there’s no restriction on the supply of goods and services. You can later mention the relevant HSN codes during GST Return Filing and invoicing.

Can I use the same HSN code for similar products from different manufacturers?

Yes, if products have the same basic characteristics and fall under the same classification, they should use the same HSN code regardless of the manufacturer. HSN classification is based on product attributes, not brand or manufacturer.

What is the difference between 4-digit, 6-digit, and 8-digit HSN codes?

The digit requirement depends on your annual turnover: businesses with turnover of ₹1.5-5 crores use 4-digit codes; those with ₹5+ crores use 6-digit codes. Some specific sectors or high-value goods may require 8-digit codes for detailed classification. Higher digit codes provide more specific product identification for better tax administration.

Do import and export transactions require HSN codes?

Yes, HSN codes are mandatory for all import and export transactions regardless of business turnover. Customs authorities use these codes for duty calculation, trade statistics, and policy implementation