Goods traded across the world are known by different names due to language differences. Accordingly, in an IT-enabled multinational trade environment, a unique code is given to each class of tradable commodities based on its nature and usage. The coding system adopted by the GST council in India for the classification of Goods and services traded under the scheme and used for filing of returns is known as the Harmonised System of Nomenclature (HNS). It is an internationally accepted product coding system used for maintaining uniformity in the classification of goods.
As in the GST regime, a majority of dealers will have to adopt Two, Four, or Eight-digit HSN codes for their commodities or goods, depending on the turnover of the previous year:
• Businesses with a turnover of less than or upto Rs 1.5 crores will not be required to use HSN codes for their commodities.
• Businesses with a turnover exceeding Rs 1.5 crores upto 5 Crores shall be required to use two-digit HSN codes for their commodities.
• Businesses with turnover exceeding Rs 5 crores shall be required to use four-digit HSN codes for their commodities.
• In the case of imports/exports, HSN codes of eight digits shall be compulsory, as GST has to be compatible with global standards.
Structure: The Coding process of a commodity is organized logically by economic activity or component material. For example, animals and animal products are found in one section of the HSN, while machinery and mechanical appliances are found in another. The HSN book for referring to an HSN Code for a product is organized into following, by which one can make a quick reference to the HSN Code for product he is searching for.
Structure of HS Code
| Sections and Chapter titles | • Describes the broad categories of goods. • The first two digits of HSN Code refer to the HSN Chapter. • These are arranged in order of a product’s degree of manufacture or in terms of its technological complexity. For Example: within Section X (Pulp of wood or of other fibrous cellulosic material; Recovered (waste and scrap) paper or paperboard; Paper and paperboard and articles thereof), Chapter 47 provides for pulp of wood or of other fibrous cellulosic materials, whereas Chapter 49 covers printed books, newspapers, and other printed matter. • For instance, natural commodities, such as live animals and vegetables are described in the early sections of the HSN, whereas more evolved goods such as machinery and precision instruments are described in later sections. |
| Headings and Subheadings | • These describe the Product in specific or in detail. • The second two digits of HSN Code is attributed to Headings and the third set of two digits is for HSN Sub Headings. • The headings within individual Chapters follow a similar order. For example, the first heading in Chapter 50 (Silk) provides for silk worm cocoons while articles made of silk are covered by the chapter’s later headings |
Let us understand this HSN Structure with an example
Example of the hierarchical structure of the Harmonized System
| HSN Code : 1006.30 (Cereals) | |
| Is a Vegetable/ Agricultural Product falling under | Section II |
| Chapter | • Generally these are the goods which the earth is gifted with –e.g. Minerals, Animals, Plant Water etc. • And besides the first 24 chapter in HS Codes deals with agricultural products (Sec. I- IV) • And Cereals falls under Chapter 10 |
| Heading | General Heading is Rice : xx06 |
| Subheading | • Subheading is : xxxx. 30 • Semi-milled or wholly milled rice (whether or not polished or glazed) |
Six digits Coding System Vs. Eight digits Coding System: In addition to the HSN codes and commodity descriptions, each Section and Chapter of the HSN is prefaced by Legal Notes, which are designed to clarify the proper classification of goods. To ensure harmonization, the contracting parties to the Convention on the Harmonized Commodity Description and Coding System, have agreed to base their national tariff schedules on the HS nomenclature and Legal Notes. Persons using the HSN Codes for classification of products are permitted to subdivide the HS nomenclature beyond 6-digits and add their own Legal Notes according to their own tariff and statistical requirements. Parties often set their customs duties at the 8-digit “tariff code” level. Statistical suffixes are often added to the 8-digit tariff code for a total of 10 digits.
HSN Codes: Notification No 12/2017
| Turnover in Previous Financial Year [A]*** | No. of Digits of HSN Code [B]** |
| 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 |
The notifiication effective 1st of July, 2017 i.e., all invoices from 1st July must be GST Compliant and most have details of HSN Codes in it. And every registered person having annual turnover in the preceding financial year as mentioned in Column [A]*** above shall specify the number of digits of HSN Codes as shown in Column [B] ** above in the tax invoice issued by him under the said prescribed rules.
Do we have any nomenclature to classify services? Services are classified as per the Services Accounting Codes (SAC) adopted by the Central Board of Excise & Customs (CBEC). And this has been carried forward in the GST regime as well.
Conclusion: To sum it up one can say that GST is a new tax regime which draws different tax revenue streams under the erstwhile tax regime into a single reservoir from where it is distributed to meet various public needs, without any hurdles in flow of input tax credit in the distribution channel in which the supplies are made available to the end user. This new regime streamlines the process in various ways, one of which is the introduction of common nomenclature (HSN Codes) on the Tax invoices notified vide Notification No. 12/2017.
It’s an important notification which every business must follow. Failure to follow it, will invite wide ranging penalties. In order to avoid being labelled GST Non-compliant it is best they invest in ERP Systems that is built in accordance with the vision and objectives of the GST system incorporating the provisions for filing GST returns, preparing Tax invoices keeping in mind all the relevant rules related to invoicing for instance HSN Classifications and State Code descriptions. All this is possible with Tally.ERP 9 latest release 6.4, a solution which you can trust for full GST Compliance, error free and complete.
