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written by | July 4, 2022

What Is HSN Code, and Why Is it Important?

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HSN code stands for Harmonised System Nomenclature of six-digit code. It identifies more than 5000 products and helps to arrange them systematically. World's Custom Organization (WCO) issued it in 1988 to classify goods worldwide. Initially, WCO developed the HSN code as a multipurpose international product nomenclature. There will be an HSN number for every product, and by using that number, you can distinguish the product from other products. The world accepts and supports HSN, a standardised system of distinguishing products from each other. Both B2B and B2C must furnish the HSN code.

Did you know? For every product, there will be a unique HSN code.

How Do HSN Numbers Work?

HSN number helps to fulfill the taxation purpose. It helps to distinguish a specific product for identifying a country's tax rate. HSN also helps to claim any benefits. Apart from determining tax rates and benefits, HSN applies to imports and export, along with determining the number of products traded through another country.

Apart from the first six digits, countries have added more digits for further classification. Therefore different countries have different numbers of digits, although the first six digits are the same for all. For example, India follows a 4, 6, and 8-digit HSN code structure.

The code follows a legal and logical structure to classify the products. Well-defined rules are required to achieve uniform classification.

Why Is HSN Code Important?

HSN code means the systematic classification of products which helps collect data and find solutions to some problems. It helps to make the international trade system more efficient. 

More than 200 countries worldwide adopt the HSN code to use it for various purposes. Some of the benefits of HSN are

  • Helps to gather international trade statistics.
  • A unique code for every product.
  • Helps to obtain a uniform classification.

98% of International merchandise is classified in the HSN code, and almost all countries accept this code. Although the HSN number remains the same in most countries, it may sometimes vary due to the variations in the nature of classification amongst the products.

Also Read: Everything You Need to Know About EXIM Bank

HSN Code Meaning in India

India has been a member of the World's Custom Organization (WCO) since 1971. Initially, India applied six-digit codes to classify items for Customs and Central Excise duties. Later it added two more digits to make the classification more accurate, resulting in 8 digit HSN code.

India uses the HSN code almost in all products to calculate Goods and Service Tax (GST). Goods and Services Tax is an indirect tax. GST is applicable to goods and services. The HSN number is also used to classify Value Added Tax (VAT)

HSN Code While Calculating GST 

It is mandatory to mention the HSN number in Tax Invoices for GST. This is because HSN numbers vary for a different classification of turnover of business which has been mentioned below:

  • Those taxpayers whose annual turnover is below ₹ 1.5 crores do not need to furnish an HSN code. The government relieves the small taxpayers by excluding them from the category of filing the HSN code.
  • It is mandatory to mention two-digit HSN codes whose annual turnover is between ₹ 1.5 crore to ₹ 5.0 crore.
  • Taxpayers with more than ₹ 5.0 crore annual turnover mention five digits of the HSN code.

Also Read: What are the Import Duties in India?

What Is HSN Code?

The HSN code includes 21 sections, 99 chapters, 1244 headings, and 5224 subheadings. HSN code is divided into 21 groups, and they are further divided into 99 chapters. Chapters are again divided into 1224 headings, and the headings are again divided into 5224 subheadings. 

Each chapter is called a two-digit HSN code. Each two-digit HSN Number is again divided into a four-digit HSN code. A four-digit number is again subdivided into a six-digit HSN Number. 

Some countries classify HSN codes by adding two additional digits leading to an eight-digit HSN code. To find out the eight-digit HSN code, you have to put them into place to find out the eight-digit code. All eight-digit codes are mandatory for export and import under GST.

The first two digits refer to the chapter number of articles, the next two refer to the product's heading number, and the last two refer to the product's material. In India, two more digits are added, which is used for deeper classification.

Why Is HSN Code Important Under GST?

HSN code helps make the GST system acceptable in the global market and makes it systematic. In addition, this code has important applications in GST as it helps customer agents in a great way. 

When you use the HSN code, you do not require to mention the detailed description of goods that fall under the GST. In addition, it saves time and money for the tax authority by allowing automation in filing GST returns.

Who Needs HSN Code?

Generally, Manufacturers, Importers, and Exporters use the HSN code. Manufacturers used to mention this code even before the GST regime. Importers and exporters furnish these documents in their import and export documents. Traders also use HSN codes. Manufacturers and Importers issue them to the Traders. However, dealers need not use HSN if their annual turnover is below ₹ 1.5 crores

Also Read: Import and Export Procedures & Documentation Followed in India

Where Can You Use the Codes?

HSN codes are used for the products received from animals, minerals, plastic materials, arms, and ammunition. In addition, there is another code called SAC, also known as Services Accounting Code. SAC is used for taxation and recognition of services. These are two separate codes used for products and services separately.

Central Board of Indirect Taxes and Customs (CBIC) issues SAC to classify service taxes under GST. When someone delivers a service, he has to use SAC codes in invoices. With the help of SAC and HSN, goods and services can be classified under GST.

Difference Between SAC and HSN Code

The major difference between HSN and SAC codes is that the HSN code has eight-digit in India. But the SAC code has six-digit.

Another difference is that in the SAC code, all services begin with the number 99. But this is not the case in the HSN code.

Benefits of HSN Code While Using in GST

Some of the benefits of using the HSN code are

  • Offers a uniform system to classify goods.
  • It takes the taxation system to a global level.
  • It helps do the international business effectively.
  • It makes the system of filing returns easy and convenient.

With the registration of GST, some marketplaces give customers discounts and a good amount of money in the final invoices. You can save through claim input tax credit.

The current system of HSN code in GST in India complies with the global standard apart from being uniform across the country. HSN code helps to maintain a flawless system during inter-state trade. Before the introduction of the HSN code, every Indian state had separate codes for purchasing and selling products. It created chaos during the trading among the states.

Also Read: How to Master the Export-Import Business as an Agent/Broker in India?

How Can You Find HSN Codes for a Product

You have to follow certain procedures to find an HSN code for a product

  • To start, you have to select a chapter.
  • Next, you have to select a section.
  • Then you can get the option to filter the subheading.
  • Finally, you will get the product.

ITC-HS Code and HSN Code

The full form of ITC is the Indian Tariff Code. India used the ITC-HS code for import and export operations. ITC HS code has two parts. The first part consists of 8-digit numbers, and the second part consists of a description of goods. The major difference between ITC-HS Code and the HSN code is that 2 ITC added two more digits making the 6-digit HSN code 8 digits. Its purpose was to classify the tariff items. 

Conclusion:

HSN code helps to collect taxes correctly. It is also beneficial for custom agents. Due to the introduction of the HSN code in GST, the tax system is in sync with the global standard. Because of the HSN code, GST has received recognition in the international market. It has helped to make the whole system uniform and systematic. Moreover, using the HSN code saves time as you won't have to mention the detailed description of the products. The application of the HSN code has made the tax procedure automated and easy. 

Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: Is it Mandatory to Use HSN Code?

Ans:

HSN code is mandatory for businesses with an annual turnover exceeding ₹ 1.5 crores. But for businesses with less than ₹ 1.5 crores, the HSN code is not mandatory.

Q: Was it necessary to mention the HSN code before GST

Ans:

Earlier, it was necessary to mention the HSN code Central Excise and Customs. After implementing GST, businesses have to mention their HSN codes in the GST returns.

Q: Is there any different rules for B2B and B2C while using HSN code?

Ans:

It is not compulsory to mention 4 digit HSN code for B2C businesses with a turnover upto 5 crores. But B2B businesses must mention 4 digits code.

Q: Why the HSN code is eight-digit in India?

Ans:

India imposes an additional two-digit in the HSN code to convenience exports and imports under GST. It is used to classify tariff items in India.

Q: What will happen if I use the Wrong HSN code?

Ans:

If you use the wrong HSN number, you will face trouble with the shipment during the customs inspection. It may lead to imposing a penalty or heavy charges on customs duty.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.