The GST roll-out on 1st July 2017 has paved the way for realization of the goal of One Nation – One Tax – One Market. GST is expected to benefit Indian economy overall with most tax compliant businesses getting favourably impacted. It should in time reduce the cost of goods & services, giving a boost to the export of products and services. It would also foster ‘Make in India’ initiative. GST promotes the concept of common market with common tax rates & procedures and removal of economic barriers thus improving ease of doing business.
In this article we would learn as what does HSN Code mean and how much importance it finds in GST law. The word Nomenclature which is suffixed to the term “HSN” has in it itself an hidden meaning to understand the Harmonised System of Nomenclature (HSN) and for what it stands for Harmonized System of Nomenclature (HSN) which was developed by the World Customs Organization (WCO) with the vision of classifying goods all over the World in a systematic manner. Nomenclature here means devising or choosing of names for things. HSN contains of a six digit uniform code that classifies 5,000+ products and which is accepted worldwide.
Chapter III : Levy and Collection of Taxes
- In determining Rate and Value of Tax : Here the GST law says that the tax rate will be the rate as specified in the notification that would be issued in this regard, subject to a maximum of 28%. The rates would be determined based on the recommendation of the Council and the rate of tax so notified will apply on the value of supplies as determined under the Act . And in order to determine such applicable tax, rate determination has to be made in the following manner:
(a) Identify HSN of the product or service and applicable rate of Tax as per rate notification
(b) Once classification is arrived at, look for as to whether such product falls into any specific exemption or not
(c) One also need to look for special transactions like zero rated supplies (exports and Supply to SEZ)
(d) If (b) and (c) are not available, tax at determined rate shall be arrived by multiplying value with such rate.
It is thereby clear that in order to determine the applicable Tax rate for product HSN Code plays an pivotal role as it helps on classifying the products for which tax rate is to be determined. This takes us as how HSN Codes helps in classifying a product :This is also covered in GST Act under the chapter Levy and Collection of Taxes covered by the heading classification of Goods or Services. Let us take a visit of the same.
- Classification of Goods or Services : In this section law speaks that in order to apply a particular rate of tax, a taxable person need to determine the classification of his supply as to whether his supply constitute supply involving supply of goods and or services. Once the same is determined, further classification in terms of HSN in case of goods and SAC in terms of service is to be made by the assessee so as to arrive at the rate of tax at which he is required to pay tax. At the outset, it is important to note that HSN for goods are contained in Chapters from 1 to 98 and HSN for Services are contained in Chapter 99. Since Classification of Goods is older and is based on knowledge gathered from precedents on HSN classification, we shall discuss the steps for classification of goods.
The steps for determination of proper classification is as under:
Step 1 : It is important to note that classification of each product supplied has to made separately if supply of such product is independent. This shall include all by products, scraps etc.
Step 2 : Identify the description and nature of the goods being supplied. One must confirm that the product is also similarly or more specifically covered in the Customs Tariff and HSN 2017. The Section Notes and Chapter Notes to the Schedule to be read.
Step 3 : If there is ambiguity, first reference shall be made to the Rules for interpretation of the Customs Tariff.
- As per the Rules, first step to be applied is to find the trade understanding of the terms used in the Schedule, if the meaning or description of goods is not clear.
- If the trade understanding is not available, the next step is to refer to the technical or scientific meaning of the term. If the tariff headings have technical or scientific meanings, then that has to be ascertained first before the test of Trade understanding.
- If none of the above are available reference may be had to the dictionary meaning or ISI specifications. Evidence may be gathered on end use or predominant use.
Step 4 : In case of the unfinished or incomplete goods, if the unfinished product bears the essential characteristics of the finished product, its classification shall be same as that of finished product.
Step 5 : If the classification is not ascertained as per above point, one has to look for the nature of product which is more specific.
Step 6 : If the classification is still not determinable, one has to look for the ingredient which gives the article its essential characteristics.
Step 7 : If still ambiguity persist, one shall resort to trade understanding of the product and in absence of such trade understanding, we shall refer to the technical or scientific meaning. However if the tariff headings have technical or scientific meanings, then that has to be ascertained first before the test of trade understanding. If none of the above is
available, reference may be made to the dictionary meaning or ISI specifications.
Also in Chapter No. VII of GST Law which speaks about invoicing rules “ Tax Invoice, Credit and Debit Notes” we have some mention of HSN Codes. Let us now read the part related to HSN Code and know how much is HSN Code important when you decide to prepare or make an invoice.
Chapter VII : Tax invoice, Credit and Debit Notes
- In preparation of Tax Invoice : Central Government vide Notification No. 12/2017-Central Tax, Dt. 28-06-2017 has w.e.f 1st July 2017 notified the following number of digits of Harmonized System of Nomenclature (HSN) Codes which are required to be mentioned in a tax invoice issued by a registered person having prescribed annual turnover:
|Turnover in Previous Financial Year||No. of Digits of HSN Code|
|Upto Rs. 1.5 Crores||NIL|
|More than Rs 1.5 Crores but Upto Rs. 5 Crores||2 digits|
|More than Rs. 5 Crores||4 digits|
Similar requirement for mentioning HSN Codes in tax invoice has been prescribed under IGST Act, 2017 vide Notification No. 05/2017-Integrated Tax, Dt. 28-06-2017.
In terms of CGST Rules, 2017, a tax invoice referred to in this section shall be issued by the registered person containing the following:
(g) Harmonised System of Nomenclature code for goods or services;
Explanation : HSN Code definitely has to form part of your invoice as mentioned and evident from the CGST Rules 2017 above and for the applicability of HSN Codes one has to read the notification 12/2017 mentioned in the table above.
- In preparation of Bill of Supply : And also in case of Bill of Supply issued by a composition dealer, the CGST Rules 2017 states that HSN Code must form part of Bill of Supply issued by a Composition Dealer.
- Transportation of goods without issue of invoices – exceptional circumstances : The Rules prescribed lists out certain special circumstances for transportation of goods when tax invoice cannot be issued. In such situations, the Rules also specifies the nature of other documents to be carried along with the goods under transportation. Please note that this list is illustrative and not exhaustive.
|Nature of Supply||Mandatory Documents||Particulars to be mentioned in document|
|(1) Supply of liquid gas where the quantity at the time of removal from the place of business of the supplier is not known
(2) Transportation of goods for job work
(3) Transportation of goods for reasons other than by way
of supply, or
(4) Such other supplies notified by the Board
|1. The consignor to issue a delivery challan
2. Serially numbered Delivery challan to be issued in lieu of invoice at the time of removal of goods for transportation
|(i) Date and number of the delivery
(ii) Name, address and GSTIN of the
consigner, if registered,
(iii) Name, address and GSTIN or UIN of the consignee, if registered,
(iv) HSN code and description of goods,
(v) Quantity (provisional, where the exact quantity being supplied is not known),
(vi) Taxable value,
(vii) Tax rate and tax amount – central tax, State tax, integrated tax, Union territory tax or cess, where the
transportation is for supply to the
(viii) Place of supply, in case of inter-State movement, and
The HSN Codes also do form part of the Returns furnished by you. Let us read this part from Chapter IX related to GST Returns.
Chapter IX : Returns :
Indication of HSN Details in GST Returns : It is proposed that in the return the description of goods and services may not be required to be submitted by the taxpayer as the same will be identified through the submission of HSN code for goods and Accounting Code for services. HSN code as specified in Table 1.0 shall be followed and furnished in gstr 1 form.
The taxpayers who have turnover below the limit of Rs 1.5 Crore will have just to mention the description of goods/service, as the case may be, wherever applicable and will not be required to mention the HSN codes in their invoices.