What Is HSN Code

The Ministry of Finance mandates businesses with a turnover exceeding Rs 5 crore to include a six-digit HSN or tariff code on taxable goods and services invoices from April 1. Additionally, businesses with turnovers up to Rs 5 crore in the previous financial year must provide a four-digit HSN code on B2B invoices.

What Is HSN Code?

HSN (Harmonised System of Nomenclature) codes, introduced by the World Customs Organisation (WCO) in 1988, consist of six-digit identification codes used worldwide to categorize goods in international trade. Utilized by over 200 countries, they classify over 98% of globally shipped goods. Mandatory for both B2B and B2C tax invoices, HSN codes streamline goods and services supplies. Adopted by India since 1986 for Customs and Central Excise, HSN codes are integral for Customs and GST, simplifying GST return filings. With specific codes for various commodities, they eliminate the need to detail goods, facilitating efficient trade processes globally.

How Does the HSN Code Work?

The Harmonised System of Nomenclature (HSN) comprises a six-digit code system that categorizes over 5000 products into a structured framework, ensuring consistency and logic. Governed by clear rules, HSN classification enjoys global acceptance, facilitating uniform product categorization.

Primarily utilized for taxation purposes, HSN codes assist in determining applicable tax rates for specific products within a reviewed country. They also support benefit claims by aiding in relevant calculations.

Moreover, HSN codes extend their utility to import and export operations. By employing the HSN code, authorities can accurately quantify all items entering or leaving a nation through trade transactions. This comprehensive classification system plays a crucial role in simplifying international trade procedures and ensuring transparency in tax assessments and trade statistics.
 

The Importance of the HSN Code

Exporters and importers must include the correct HSN code in their legal and commercial documents. HSN codes, consisting of six digits, classify items by category and type, ensuring uniformity in trade. Almost every country requires HSN codes on documents like bills of lading and letters of credit.
Beyond classification, HSN codes aid in data collection and problem-solving, enhancing the efficiency of international trade. Used globally, HSN codes benefit over 200 countries by facilitating:
    

    Collection of trade statistics.
    Establishment of Customs tariffs.
    Uniform classification.

With HSN codes covering nearly 98% of international trade, they're recognized as the standard for global classification. While HSN numbers generally remain constant across countries, slight variations may occur based on item characteristics. Overall, HSN codes streamline trade processes, ensuring clarity and consistency worldwide.
 

HSN Code Structure and Examples

Understanding HSN trading codes might seem complex initially. However, you can simplify it by breaking the six digits into three sets of two-digit combinations.

To start, it's crucial to grasp some WCO terms related to product categorization:

●    Sections: These are product groups listed by the WCO, totaling 21, but they don't form part of the HSN code.
●    Chapters: These are categories of products under sections, numbering 99 in total.
●    Headings: These are sub-categories of products under chapters, with a total of 1,244 headings.
●    Subheadings: These specify the products themselves, amounting to 5,244 subheadings.
Each six-digit HSN code tells the customs authority the chapter, heading, and subheading of any WCO-listed product:
●    The first two digits represent the chapter.
●    The middle two digits represent the heading.
●    The final two digits represent the subheading.

For example, let's consider brown rice:
●    Section II: Vegetable Products
●    Chapter 10: Cereals
●    Heading 06: Rice
●    Subheading 20: Husked (brown) rice
Thus, the HSN code for brown rice is (100620).
 

HSN Code List

The HSN code list is organized into 21 sections, each representing specific product categories based on their technical and industrial characteristics. These sections cover a wide range of products, from live animals to artworks and antique items. Within each section, there are further divisions:
●    Live animals and animal products
●    Vegetable products
●    Animal and vegetable fats, oils, and related products
●    Prepared foodstuffs, beverages, spirits, vinegar, tobacco, and substitutes
●    Mineral products
●    Chemical products and allied industries
●    Plastics and rubber products
●    Raw hides, leather, and related products
●    Wood, cork, straw, and related articles
●    Pulp, paper, and paperboard products
●    Textiles and textile articles
●    Footwear, headgear, and related articles
●    Glass, ceramics, stone, and related products
●    Precious metals, stones, and jewelry
●    Base metals and articles thereof
●    Machinery, electrical equipment, and parts
●    Vehicles, aircraft, and associated equipment
●    Optical, photographic, medical, and precision instruments
●    Arms, ammunition, and related products
●    Miscellaneous articles
●    Artworks, collector pieces, and antiques
When filing GST returns, understanding the HSN code list is essential to assign the correct code to your manufactured product
 

Importance of HSN Under GST

The HSN system doesn't just assist Customs agents – it also significantly impacts GST procedures, ensuring systematic and global acceptance. By utilizing HSN codes, there's no requirement to provide a detailed description for each item under GST, streamlining the process and enabling automation of GST returns, saving both time and money for tax authorities.

Effective from April 1, 2021, declaring HSN codes for GST is mandatory. Here's why the HSN code matters for GST:
● For transactions below ₹5 crores: B2B tax invoices must declare a 4-digit HSN code (mandatory), while B2C tax invoices can optionally declare a 4-digit HSN code.
● For transactions above ₹5 crores: All invoices must declare a 6-digit HSN code (mandatory).
GST taxpayers must include the GST HSN code in every tax invoice. For imports and exports under GST, taxpayers must declare all 8 digits of their HSN code.
Introduction of HSN codes eliminates the need for manual goods detail uploads for each transaction, simplifying GST tax filing and enhancing efficiency. Dealers and service providers falling within specified turnover brackets must provide their HSN sales summary in the GSTR-1 form.
 

Conclusion

Employing the universal HSN Code system and utilizing HSN finders significantly streamlines the process of filing GST returns for taxpayers in India. By accurately assigning HSN codes to their products, businesses can ensure compliance with tax regulations and facilitate smoother transactions. This article serves as a comprehensive guide, offering essential information and practical tips on effectively utilizing the HSN code system. With a better understanding of how to navigate and implement HSN codes, taxpayers can enhance their efficiency in GST reporting and contribute to a more streamlined tax administration process overall.