The Ministry of Finance has declared that, as of April 1, companies having annual revenue of Rs 5 crore and above must include a six-digit HSN or tariff code on all invoices they issue for the provision of taxable goods and services. On B2B invoicing, those with a turnover of up to Rs 5 crore in the previous fiscal year would also need to provide a four-digit HSN number.
This post will give you an overview of what is HSN code and how it works. So, keep reading till the end.
What Do You Mean by HSN Code?
HSN code full form is “Harmonized System of Nomenclature,” which is a globally adopted system designed for the structured categorisation of goods. It comprises a uniform 6-digit code that facilitates classifying over 5,000 products and is recognised worldwide. The HSN code was established by the World Customs Organization (WCO) and has operated since 1988.
How Does the HSN Code Work?
Globally, HSN is extensively utilised for tax purposes. Finding the tax rate in any nation for a certain product is helpful. Businesses can also compute their tax benefits with an HSN code.
An HSN code is widely accepted and aids in figuring out how much merchandise is imported and exported from any given nation. Over 5,000 commodity groups utilise the HSN code, which is unique to each group and consists of six digits. The following justifies the usage of the HSN code system in more than 200 nations, including India:
- Classifying the products uniformly
- Calculating custom tariffs
- Collecting the international trade’s latest statistics
Approximately 98% of goods traded internationally are categorised with an HSN code, according to the WCO. Well-defined guidelines for the consistent classification of goods support the HSN code.
Since 1971, India has been a member of the WCO. The HSN code was used to categorise goods for customs and central excise purposes before introducing the GST. India’s excise agency created an 8-digit HSN number by adding two digits to a beginning code of six.
Importance of HSN Code
Introduced in 1988, the HSN code is a global coding system used for the uniform classification of goods worldwide. This system employs a 6-digit code that has been instrumental in categorising more than 5,000 products. The primary aim of the HSN code is to ensure a systematic and coherent classification of manufactured goods on a global scale.
The systematic classification of goods plays a vital role in facilitating international trade, and currently, over 190 countries utilise this code. As an international standard, the initial six digits of the HSN code remain consistent across all countries. Each country then appends additional digits to create its HSN code for more detailed classification. For instance, India employs 4, 6, and 8-digit classifications, while the United States utilises a 10-digit HSN code.
The HSN code is applicable to every commodity in World Customs Organization (WCO) member nations and remains uniform for all goods across countries. However, the specific HSN numbers may vary in some countries depending on the nature of the classified goods.
HSN Code While Calculating GST
For GST purposes, tax invoices must include the HSN number. This is due to the fact that HSN numbers change for various business turnover classifications, as listed below:
- Taxpayers are exempt from providing an HSN code if their yearly revenue is less than Rs 1.5 crore. The government relieves Small taxpayers by not included them in the group of taxpayers who file the HSN code.
- Two-digit HSN codes with a yearly revenue of Rs 1.5 crore and Rs 5.0 crore must be included.
- Taxpayers whose yearly revenue exceeds Rs 5.0 crore provide the five-digit HSN number.
Who Needs an HSN Code?
Manufacturers, importers, and exporters often use the HSN code. Manufacturers would refer to this code even before the GST system was implemented. Importers and exporters provide these documents in their import and export documentation. Traders often use HSN codes. They are sent to traders by manufacturers and importers. Dealers do not have to utilise HSN if their yearly revenue is less than Rs 1.5 crore.
Where Can You Use the Codes?
HSN codes are applied to categorise products originating from sources such as animals, minerals, and plastic materials, as well as items like arms and ammunition. In addition to HSN codes, there is another coding system known as SAC, or Services Accounting Code, which serves the purpose of taxation and the classification of services. These two distinct codes are used to separate products and services.
The Central Board of Indirect Taxes and Customs (CBIC) is responsible for issuing SAC codes, which are employed to classify service taxes under the Goods and Services Tax (GST) regime. SAC codes must be included in the invoices when a service is provided. Combining SAC and HSN codes enables the classification of goods and services under the GST framework.
HSN Code List for Outward Supplies
The HSN code list is given below:
| Sections | HSN code list |
| Section 1 | Live animals, animal products |
| Section 2 | Vegetable Products |
| Section 3 | Animal or Vegetable fats and Oils and their cleavage products; Animal or Vegetable waxes; prepared edible fats |
| Section 4 | Prepared Foodstuffs, Spirit, Vinegar, Beverages, Tobacco and Manufactured Tobacco Substitutes |
| Section 5 | Mineral Products |
| Section 6 | Product of the chemicals or allied Industries |
| Section 7 | Rubber and articles thereof, Plastics and articles thereof |
| Section 8 | Raw hides and skins, Furskins and articles thereof, Leather, saddlery and harness, handbags and similar containers, travel goods, articles of animal gut ( other than silkworm gut ) |
| Section 9 | Wood and articles of wood, Cork and articles of cork, Wood charcoal, Manufacturers of straw, Basketwork and Wickerwork, of Esparto or of other Plaiting Materials |
| Section 10 | Pulp of wood or of other Fibrous Cellulosic Material, paper and paperboard and articles thereof, Recovered (Waste and scrap) paper or paperboard |
| Section 11 | Textile and textile articles |
| Section 12 | Footwear, Umbrellas, Headgear, Sun Umbrellas, seat sticks, Walking-sticks, whips, riding-crops and parts thereof, Prepared feathers and articles made therewith, Articles of human hair, Artificial flowers |
| Section 13 | Articles of stone, ceramic products, cement, plaster, asbestos, mica, or similar materials, glass and glassware |
| Section 14 | Natural or cultured pearls, precious metals, Precious or semi-precious stones, Metal clad with precious metal, and articles thereof, Coins, Imitation Jewellery |
| Section 15 | Base Metals and articles of Base Metal |
| Section 16 | Machinery and mechanical appliances, parts thereof, sound recorders and reproducers, television image and sound recorders and reproducers, electrical equipment, and Parts and Accessories of such article |
| Section 17 | Aircraft, Vehicles, Vessels and Associated Transport Equipment |
| Section 18 | Optical, Cinematographic, Photographic, measuring, precision, checking, medical or surgical instruments and apparatus, musical instruments, clocks and watches, parts, and accessories thereof |
| Section 19 | parts and accessories, arms and ammunition, thereof |
| Section 20 | Miscellaneous Manufactured Articles |
| Section 21 | Collectors’ Pieces, Works of art, and antiques |
HSN Code Structure and Examples
Comprehending HSN trading codes might initially appear intricate, but you can simplify it by breaking down the six digits into three sets of two-digit combinations. To facilitate this, it’s essential to grasp certain terms defined by the World Customs Organization (WCO) regarding how goods are categorised:
- Sections: These represent product groups, and the WCO enumerates 21 of these on its website. It’s important to note that the Section itself is not part of the HSN code.
- Chapters: These are product categories situated within the Sections, totaling 99 in all.
- Headings: These are subcategories of products falling under Chapters, with a total of 1,244 headings.
- Subheadings: These directly refer to the specific products themselves, and the WCO lists 5,244 of these.
Each six-digit HSN code combination informs customs authorities about the chapter, heading, and subheading of any product listed by the WCO:
- The first two digits signify the chapter.
- The middle two digits indicate the heading.
- The final two digits designate the subheading.
For instance, let’s consider the HS code for brown rice:
- Section II: Vegetable Products
- Code: XXXXXX
- Chapter 10: Cereals
- Code: 10XXXX
- Heading 06: Rice
- Code: 1006XX
- Sub-heading 20: Husked (brown) rice
- Code: 100620
Consequently, the HSN code for brown rice would be (100620).
Conclusion
The HSN code serves the dual purpose of facilitating accurate tax collection and benefiting customs agents. With the integration of the HSN code into the Goods and Services Tax (GST) system, the taxation structure aligns with global standards. As a result of the HSN code, GST has garnered recognition internationally, contributing to a more consistent and methodical system. Furthermore, using the HSN code meaning streamlines the process, eliminating the need for lengthy product descriptions and effectively automates and simplifies the tax procedure.
FAQs
Q1. What is HSN Code?
HSN or Harmonized System Nomenclature Code is a 6-digit code that classifies goods and services under GST. It uses an internationally standardized system of names and numbers to classify traded products.
Q2. Why do we need HSN Code?
HSN code is required to determine the tax rate applicable to a product or service. It helps in classifying goods and services systematically for taxation purposes.
Q3. Who needs to provide HSN Code?
All registered businesses with an annual turnover of over Rs. 1.5 crores are required to mention HSN codes on their tax invoices. Those with turnover below Rs. 1.5 crores have the option to provide HSN code.
Q4. How many digits are there in HSN Code?
HSN code is a 6-digit uniform code. It consists of a 4-digit HS code + 2-digit Indian customs sub-classification code.
Q5. Where do I find the HSN Code for my product?
You can find the relevant HSN code for your product in the GST Rate Finder on the GST Portal. There is search functionality to find HSN code by product name or description.
Q6. Is HSN Code same for all products?
No, HSN code is unique for every product and service. Products that are alike may have the same HSN code, but no two different products can have the exact same HSN code.
Q7. Can I have one HSN Code for all my products?
No, every distinct product or service must have its own applicable HSN code mentioned on the invoice. You cannot use one code for multiple items.
Q8. Is HSN Code mandatory in a tax invoice?
Yes, providing HSN code is mandatory if your annual turnover exceeds Rs.1.5 crores. It is optional only for businesses with turnover below Rs. 1.5 crores.