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The Complete Guide to HSN Codes under GST in India

24 July 2024 5 mins read

HSN codes play a pivotal role in shaping the trade and taxation of Indian businesses. Originating from the World Customs Organization (WCO), these codes have been a global standard for classifying goods since 1986. They simplify the complex structure of Goods and Services Tax (GST).

HSN codes are more than just numbers; they are the language through which products communicate their identity. They enable traders, including numerous Flipkart sellers, to navigate the complexities of GST with ease. Understanding these codes is essential for entrepreneurs looking to thrive in the market. Now you might be wondering what HSN means.

Explore this guide to learn about its HSN code’s meaning and significance.

What is the HSN Code?

HSN Codes, or Harmonized System of Nomenclature Codes, are a standardised system of names and numbers to classify traded products. Developed by the World WCO, they are used by more than 200 countries worldwide, making them a global language for trade. Intriguingly, this system categorises over 5,000 commodity groups, each identified by a six-digit code. They are organised in a legal and logical manner, following a set of well-established rules.

How do HSN Codes Work?

Also known as HSN numbers, these codes function as a universal language for products, ensuring a seamless process of classification and taxation. Each code is a unique identifier, meticulously crafted to represent a specific product. It typically consists of six digits, though it can be extended to eight for further specificity.

Businesses use these codes to determine the applicable tax rate for their products. When a business files for input tax credit, the HSN code helps tax authorities easily understand the nature of the goods. This systematic approach not only simplifies tax calculation but also aids in trade.

How Does the HSN Code Work Under GST?

HSN code in GST brings clarity and efficiency to taxing goods, making it easier for businesses and authorities alike. They are a key instrument in gathering data and analysing global trade patterns. Furthermore, they ensure compliance and smooth operation for Indian businesses.

Different Types of HSN Numbers/Codes in India

The HSN code list under GST has a unique categorisation tailored to the country's diverse business landscape. Here is the three-tiered structure followed across all states.

  • 2-digit HSN code:
  • Applicable to businesses with a turnover between ₹1.5 and ₹5 crores, this simplified HSN code system categorises goods, providing a broader view of product classification for easier GST compliance. Specifically designed for medium-sized enterprises in India, it streamlines product categorization and reduces complexities.
  • 4-digit HSN code:
  • Expanding on the 2-digit code, this one offers a more specific classification. It includes the heading number, providing a clearer indication of the product group under a given chapter. This level of detail is generally used by larger businesses in India with turnover exceeding ₹5 crores.
  • 6-digit HSN code:
  • This is for larger businesses with turnover exceeding ₹5 crores in the previous financial year. It is globally standardised, ensuring consistency in the classification of goods for international trade. It is extensively used in India for a detailed and accurate representation of goods in the GST regime.
  • 8-digit HSN code:
  • Aligning with the Indian Tariff Code (ITC), this detailed level is used for the precise identification of goods. This level's crucial role in customs and import-export ensures accurate duty calculations, efficient trade controls, and seamless regulatory compliance.
    Small businesses with an annual turnover of less than ₹1.5 crores are exempt from using HSN codes in India.
The implementation of HSN codes in India offers numerous advantages. Primarily, it brings about a standardised system of classification for goods, which is recognised globally. While learning How to Register for GST, this process of categorising goods makes tax filing and compliance more straightforward for businesses of all sizes.

Moreover, the HSN system enhances the efficiency of the GST regime. It allows for the easy and accurate determination of applicable tax rates on different products. It greatly reduces the possibility of tax evasion and potential errors. This clarity aids in streamlining the taxation process, leading to fewer disputes and a smoother tax administration.

Lastly, the HSN system aids in data analysis and policy-making. The government can efficiently track the movement and taxation of goods, which assists in forming better economic policies and understanding trade patterns.

Conclusion

HSN codes represent a transformative element in India's taxation landscape. They not only streamline the process of taxing goods but also bring a level of clarity and efficiency that benefits businesses and the government alike. By simplifying tax compliance and minimising the scope for errors and evasion, HSN codes play a crucial role in fostering a transparent and efficient market environment.

For Indian businesses, especially those engaging on the Flipkart Seller Hub, understanding and utilising these codes is a step towards seamless integration into the national and global economic framework. As the country continues to grow and integrate into the global economy, the importance of these codes in facilitating trade and taxation cannot be overstated. They are, indeed, a key to unlocking the potential of India's vibrant marketplace.

FAQs on HSN Code:

  • Who is eligible to use HSN codes?
  • Any business that is registered under GST in India is eligible to use HSN codes. The requirement to use them varies based on annual turnover, with different thresholds necessitating different levels.
  • Is it mandatory to use HSN codes?
  • Yes, it is mandatory for businesses registered under GST to use HSN codes. The requirement for the level (2-digit, 4-digit, 6-digit, or 8-digit) depends on the annual turnover of the business.
  • What is the purpose of using HSN codes?
  • HSN codes are used to standardise the classification of goods, simplify tax filing, ensure accurate GST rates are applied, and facilitate international trade. They help in streamlining the taxation process and in policy-making by providing clear data on goods classification.
  • How many digits are there in HSN codes?
  • HSN codes can be 2, 4, 6, or 8 digits long. The number of digits represents the level of specificity and detail in the product classification, with 8-digit codes being the most specific.
  • How to register the HSN code and GST rate?
  • Registering HSN codes and GST rates is part of the GST registration process. Businesses should classify their goods according to the code and apply the corresponding GST rate when filing their tax returns. Also, make sure you have all the right documents required for GST registration.
  • Are HSN codes different for each country?
  • The first 6 digits of HSN codes are standardised globally. However, countries can extend these codes to 8 or 10 digits for more specific classifications, leading to variations in the detailed categorisation of goods.
  • Do B2B and B2C businesses have different HSN codes?
  • B2B and B2C businesses use the same HSN codes for product classification. The difference lies in the level of detail required in invoices, with B2B transactions generally requiring more detailed codes.
  • What happens if the incorrect HSN code is used?
  • Using an incorrect HSN code can lead to wrong GST calculations, resulting in tax discrepancies. It may attract penalties and can complicate compliance and audit processes.
  • What is the importance of HSN codes during GST returns?
  • HSN codes are crucial in GST returns for accurate tax rate application, compliance, and facilitating audits. They ensure the proper categorisation of goods, leading to precise tax calculations and streamlined return filing
  • Is it possible for HSN codes to change over time?
  • Yes, they can change over time. The WCO reviews the HSN system every five years, potentially leading to updates or changes in product classifications and codes.
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