How Do HSN Codes Work?

Introduction

The Harmonized System of Nomenclature (HSN) designations serve as a standardized product classification system essential to international trade. The World Customs Organization (WCO) created and maintained HSN codes with alphanumeric identities linked to various commodities, enabling a smooth international exchange of traded goods. These identifiers, which usually consist of six digits, facilitate effective communication between commercial partners, improve transparency, and expedite customs operations.

HSN codes are a crucial part of the tariff and customs environment since they help with precise classification, guaranteeing that every product is recognized consistently throughout borders. Businesses involved in international trade must have a basic understanding of HSN codes since they affect regulatory compliance, customs duties, and cross-border operations’ effectiveness.

What is an HSN Code?

HSN code is the short form of the Harmonized System of Nomenclature. It is a system which is applied all across the world for systematic classification of goods. It is a six-digit uniform code for over 5000 products, accepted globally. It has been in effect since 1988 when WCO, or the World Customs Organization, first introduced it.

What is the Importance of HSN Code?

India and other countries globally have been using HSN Codes for an extended period. However, after implementing GST in India, HSN and globally recognized import and export codes have also been embraced. Besides the systematic classification of goods, the HSN code’s most essential purpose is to simplify the customs process and minimize cost.

Moreover, these HSN codes also assist the taxpayers in knowing and understanding the GST rates associated with a particular commodity. Hence, the government has made writing the HSN codes in the GSTR forms mandatory.

HSN Code Current Requirements

Effective the 1st of April 2021, the CBIC has changed how the HSN codes will be reported in the GSTR forms. The table below will help you understand the requirements:

Explanation of HSN Codes – Understanding its Structure

To understand how HSN code works, it is necessary to know its structure. Let’s look at it below:

• There are a total of 21 sections overall in HSN codes.
• These 21 sections are further divided into 99 chapters. These chapters are specific to a category of product.
• All these 99 chapters are later classified as headings, sub-headings and tariff items.
• If the HSN code is for eight digits – the first two digits will be the chapter, 4th digit will be the heading, the sixth digit will be the subheading, and 8th digit will be the tariff items.

Example of HSN Code

Here is an example of a vegetable identified and classified as per HSN codes:

In the above example, the first two numbers or digits- 07 describe vegetables (chapter). The following two (03) digits describe which vegetable (heading). The following two (10) are the sub-headings referring to the various options within the main heading. Finally, the last (10) refers to the tariff items, which are fresh or chilled onions.

HSN Codes and Product Identification

Let’s look at the different HSN Codes associated with the various products for your reference and understanding. These are listed under various chapters, along with their product classification, which will be helpful in the GST filing.

Bottom Line

In summary, the smooth operation of customs and international commerce operations depends on the functionality of HSN codes. HSN codes facilitate unambiguous communication about the type of commodities being exchanged by offering a defined, hierarchical classification system. These standards’ methodical approach streamlines the customs process, improves openness, and guarantees uniformity in calculating taxes and charges.

Companies that do business internationally need to understand the importance of HSN codes since proper categorization helps with regulatory compliance and speeds up cross-border transactions. As a developing system, HSN codes are still essential for enabling practical and transparent international trade and encouraging a uniform method of classifying commodities in the world market.

Also Read:

Reporting HSN Codes In GSTR – 9: Procedure Requirements And Penalties

New GST Rates 2023 – List Of Latest Goods And Service Tax Rates Slabs

GST Rates And SAC Code On Construction Services

FAQs

• Is there any rule regarding the HSN code?

All taxpayers with a turnover of INR 5 crores must write 4-digit HSN codes in the GSTR forms.

• What will happen if someone enters an incorrect HSN code?

Every taxpayer must record the correct HSN code on their tax Invoices and GSTR-1. It is essential to mention the HSN correctly in GST returns and tax invoices to avoid a penalty of Rs 50000 (Rs 25000 under CGST and Rs 25000 under SGST).

• What does the eight-digit HSN code mean?

An HSN code’s chapter is determined by its first two digits, headings at the four-, subheadings at the six-, and tariff items at the eight-digit positions.

• How are the different products classified as per HSN codes?

Every chapter has an HSN number that is two digits long. Every two-digit HSN number is subclassified to produce a four-digit HSN code. These four-digit HSN codes are subsequently further subdivided into six-digit HSN codes.

• Who needs to use HSN codes?

Every taxpayer with an annual turnover of over five crores must use HSN codes in their GST returns.

• Are there any HSN codes that are GST-free?

Yes, many HSN codes are free under GST.

• Can there be two products with the same HSN code?

Indeed, it is feasible for two objects to share the same codes under the HSN code system.

• Is it a mandate for taxpayers to mention the HSN code in their GST invoice?

All taxpayers with B2B invoices of more than Rs. 5 crores must mention the HSN code in their GST invoice.

• Is the ITN and HSN code the same?

ITN, or the Indian trade classification or Indian tariff code, are the last two digits of the 6-digit HSN code.

• Who assigns the HSN code?

The World Customs Organization (WCO) updates and manages the HSN every five years.

Shradha Kabr Content Management Specialist

Shradha Kabra is an experienced finance writer based in India with 15 years of experience simplifying complex financial topics for readers. Her articles on taxation, Indian stock markets, and other national finance issues are well-researched and presented in an easy-to-understand style. Shradha holds a Double Master's degree and aims to make financial literacy accessible to all through her writing.

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