HSN Code: Meaning, Features And How They Benefit You

Introduction

HSN codes play a crucial role in classifying goods under the Goods and Services Tax (GST) regime in India. These codes act as a universal language for categorising products, enabling clear communication between businesses and customs authorities worldwide. 

In this guide, we will decode the meaning of HSN codes, explore their features and benefits within the GST framework and how to get business loans.

What Is HSN Code?

The term “HSN” stands for Harmonised System of Nomenclature. It is a systematic way to classify goods. Developed by the World Customs Organisation (WCO), it is a 6-digit uniform code used by over 200 countries globally. The purpose of the HSN code list is to provide a systematic way to classify goods for taxation purposes.

Features And Benefits Of HSN Codes

HSN codes offer several unique features that make them a powerful tool for international trade and domestic tax systems like GST:

1. Standardised and universal: Every country adhering to the HSN code list system uses the same codes for specific products, ensuring clear communication between businesses and customs authorities worldwide. This minimises confusion, reduces the risk of disputes or errors in trade transactions and facilitates international trade.
2. Streamlined trade statistics and policies: HSN codes make collecting and analysing trade data convenient and fast. Governments can track import and export trends, formulate effective trade policies, and create a conducive environment for business growth.
3. Benefits for businesses of all sizes: Understanding HSN codes empowers businesses to accurately classify their products. This classification helps determine the correct GST rate and ensures smooth interactions with customs authorities. Whether you run a small-scale business or a large enterprise, using the HSN code list can simplify your tax compliance process.
4. Tailored for GST in India: The HSN code system initially consisted of 6 digits in India. However, it was expanded to 8 digits to align with the GST framework. The use of HSN codes is mandatory for taxpayer invoices and returns. This system recognises the needs of small businesses by allowing them to use 2-digit HSN codes for turnover up to Rs 1.5 crore and 4-digit codes for turnover exceeding Rs 5 crore.
5. Flexibility for domestic use: While the core structure of the HSN code list is standard globally, countries have the flexibility to incorporate additional digits specific to their domestic tax systems. In India, businesses with a turnover of Rs 1.5 crore to Rs 5 crore use 2-digit HSN codes, and those with a turnover above Rs 5 crore use 4-digit codes in invoices and returns.

How Do HSN Codes Work?

HSN codes follow a hierarchical structure that offers enhanced levels of detail with each additional digit. The basic structure includes:

• The first two digits represent broad categories of goods.
• The next two digits define the category.
• Optional subsequent digits provide even more specific product identification.

As the number of digits increases, the HSN code identifies a more specific product, determining the appropriate tax rate under GST for accurate trade statistics.

How To Do HSN Code Search?

HSN code search is done on the Central Board of Indirect Taxes and Customs (CBIC) - GST portal. Here is how you can do HSN code search:

• On the GST portal, find the section for "Services".
• Then click on "User Services."
• Under this section, you should find an option labelled "Search HSN/SAC Code." Click on it.

You can search for an HSN number or code by entering either a keyword related to the goods you are interested in or directly inputting an HSN code if you already know it.

If you're unsure of the exact keyword or code, you can browse through categories provided on the portal to locate the specific goods.

Conclusion

HSN codes provide a standardised and efficient way to classify goods, ensuring smooth international trade procedures, facilitating accurate tax collection, and generating valuable data for trade analysis.

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FAQs

Q1. Do small businesses need to mention HSN codes in their invoices and returns?>

A: Yes, small businesses are required to mention their respective HSN codes in their invoices and returns if their turnover exceeds Rs 1.5 crore. For turnovers between Rs 1.5 crore and Rs 5 crore, a minimum of 2-digit HSN code is required, while turnovers above Rs 5 crore need at least 4-digit HSN codes.

Q2. What happens if I use the wrong HSN number or code in my GST filings?

A: Using the wrong HSN code can lead to penalties and additional tax demands from the authorities.

Q3. How often are HSN codes revised or updated?

A: The government revises and updates HSN codes periodically. To stay informed about any changes, follow official notifications from the Central Board of Indirect Taxes and Customs (CBIC) or consult with a tax professional.

Q4. Is SAC HSN and HSN code the same?

A: No. HSN codes apply to tangible goods, categorising them for tax purposes, while SAC codes categorise services provided by businesses under the GST regime.