Essential FAQs for HSN Code Compliance Simplified

The Harmonized System of Nomenclature (HSN) which is introduced under Good and Service Tax (GST) is important to understand the taxation of different goods. This HSN code is generally 8 digits code used for classification of GST, and trade. The proper use of this code ensures that GST is properly filled by correct tax rates, and proper filing of returns and avoids penalty. Therefore it is important to understand the HSN code properly, to avoid such confusions. Let’s explore in this section what are the essential FAQs that should be clear about the HSN code.

What is HSN code?

HSN stands for Harmonized System of Nomenclature. It is an international system used to classify the goods for GST, customs and international trade. It is usually a 4-8 digits code that categorises different types of goods.

Structure of a HSN code

In India, HSN code is 4 digits. In this the first 2 digits indicate the chapter next to heading and the following 2 letters indicate the sub headings that represent commodity. This is further followed by 2 or 4 more letters that are used to detailed classification of further types.

For example, under the GST classification, tar obtained from coal or lignite is broadly classified under HSN Code 2706. Here is the breakdown of HSN code:

Stands for chapter 27 (Mineral fuels, mineral oils, and products of their distillation)

2706

International subheading. Code for classification of Tar distilled from coal, lignite, or peat, and other mineral tars

Is HSN code mandatory for all businesses?

HSN code is essential for all businesses, but the requirement is mandatory for businesses with large turnover, for proper compliance of business.

Turnover 5 crore

HSN code is not mandatory for B2C (business-to-consumer) invoices, but mandatory for B2B (business-to-business) invoices

Above 5 crore

6-digit HSN code is mandatory for all invoices (both B2B and B2C)

The HSN code is necessary for export-import business to avoid any kind of disruption during the movements of goods. The HSN code is 8 digit for import export transactions.

Why is identification of correct HSN code important?

The identification for correct HSN code according to the product is important. It can help you in:

Accurate GST return filing by proper classification of GST rates for products. When products are classified properly, the applicable GST rates are applied correctly, reducing the chances of mismatches between returns.
Proper invoice generation, by ensuring transparency with inclusion of correct tax code. The missing HSN code can lead to invoice failures.
E-way bill compliance, by accurately describing the goods being transported. Correct HSN ensures that the e-way bill matches the invoice and reduces the risk of goods being stopped during transit for verification.
Import and export documentation, as HSN is used internationally. Thus it helps authorities identify the nature of goods, determine applicable duties, and ensure compliance with trade regulations.
Avoiding tax disputes or penalties, by ensuring that one's business stays aligned with GST laws and avoids unnecessary financial and legal risks.

How to find the correct HSN Code for a product?

The HSN code can be found online in GST Portal’s Search Tools. One needs to enter the correct product name and get the correct product code according to your turnover. Here is the procedure to accurately determine the name of your product:

Identify the material, its composition and usage of the product.
Refer to the GST rate schedule where each product has separate chapters that accurately and specifically define its sub classification. Be specific about the product and its requirement to distinguish it from closely related products.
Then refer to the online tools to get the correct HSN code and GST rate of your product. Verify thoroughly this product code according to your needs

Where HSN code needs to be mentioned?

The HSN code needs to be mentioned for proper tax compliance . Here are the few places where HSN code is required:

Tax invoices

The HSN code must be clearly mentioned in GST tax invoices, especially in B2B transactions. It helps in tracking to identify the goods being sold and correct GST rates are applied. Also it helps businesses to claim Input Tax Credit, ITC. Improper mentioning of code results in invoice rejection during audits.

GST Returns

HSN based reporting is required in GST returns like GSTR-1. The business needs to mention the summary of outward supplies based on HSN code and government track tax collection across different products based on these codes. Thus it maintains flow between the invoices and tax collection by the government.

E-Way Bills

Proper HSN usage in e-way bills helps avoid delays, penalties, and any movement disruptions. This is because HSN codes help accurately describe the goods being transported, thus, ensuring alignment between invoice details and e-way bill information. This thus reduces the chances of goods being stopped for verification during transit.

What happens if the HSN code used is wrong?

Correct HSN code is essential for smooth running of business. Incorrect code mentioned can lead to serious business compliance and financial issues. Few scenarios where wrong HSN code leads to problem are:

Wrong GST rates

HSN code is directly linked to GST rates. If one uses the wrong GST rate they end up with less tax or more tax. Underpayment leads to tax liability along with interest and overpayment can affect pricing and competitiveness, and claiming refunds may take time.

Legal issues

The mismatching in invoice data and return filing ends one with legal notice with tax authorities. They ask one for the clearance with supporting documents, such errors can affect the credibility of one's business.

Audit Issues

Wrong HSN code results in monetary penalties from authorities, tax demands, reassessment of past returns, creating audit issues.

Impact on ITC

Wrong HSN codes can create mismatches between buyer and seller records leading to buyers facing difficulty in claiming ITC. It may also affect long-term business relationships by leading to disputes with customers or business partners.