How to Determine Which Rate to Apply to a Transaction?

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Published Date:  25-12-2023   Author:   ujjwal-goel
how to determine which rate to apply to a transaction

Approximately 300 million individuals are attempting to initiate around 150 million businesses globally. Given a startup success rate of about one-third, it can be estimated that 50 million new businesses are established each year. This also means there is an ever-growing network of consumers and traders dealing in varied goods and services. 

Without a proper system, the world trade system can easily fall into pieces. Therefore, to smoothen the process, product and service classification codes like HSN and SAC are the most practical approaches. 

However, India has a GST system, so where do these codes fall into play? Read the article below to understand everything about how HSN and SAC codes help in GST rate determination.

What are GST Tax Rates?

GST, or Goods and Services Tax, is a way of taxing goods and services in India. It works by taxing only the added value at each step of the product or service journey. A critical feature of GST is that it eliminates the need for check posts when goods move between states. This helps in making the movement of goods more efficient.

Therefore, GST is a single tax applied from the manufacturing stage to the point where the consumer buys the product or service. It’s meant to ensure that the final consumer pays tax only on the value added by the last seller.

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The GST system has different rates for different types of goods and services. The GST Council decides these rates, and they fall into four categories: 5%, 12%, 18%, and 28%. The rates are adjusted to suit the nature of the products or services.

 How can you Determine Which GST Applies to a Good or a Service?

GST rate determination for a good or service depends on two main factors:

1. Place of Supply

It identifies whether the transaction is considered intrastate or interstate. Intrastate transactions involve the supply of goods or services within the same state, while interstate transactions involve the supply of goods or services between different states.

2. Type of Supply

It determines whether the transaction involves the supply of goods or services. Goods are tangible items, while services are intangible activities.

Based on these two factors, the following GST rates for specific goods and services apply:

Place of Supply Type of Supply GST Rate Determination
Intrastate Goods CGST (5%) + SGST (5%)
Interstate Goods IGST (5%)
Intrastate Services CGST (5%) + SGST (5%)
Interstate Services IGST (5%)


In addition to these standard rates, there are also other
GST rates for specific goods and services, such as nil rates for essential items and exempt rates for certain services.

What is the HSN Code?

The HSN Code, or Harmonised System of Nomenclature Code, is a globally accepted system for systematically classifying goods. It consists of a 6-digit uniform code that categorises more than 5000 products. 

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Thus, the HSN Code serves as a standardised method to classify and identify various goods, facilitating cross-border trade by providing a common language for product categorization. This classification system was developed by the World Customs Organization (WCO) and has been in use worldwide since 1988.

What is the Structure of the HSN Code in India?

The HSN code in India is a multi-tiered classification system used to systematically categorise goods for taxation and trade purposes. The HSN code structure in India consists of several components that provide detailed information about a specific product:

1. Section

The HSN code starts with a section number, which broadly categorises goods into 21 different sections based on their nature or use.

2. Chapter

Each section is further divided into chapters, which help provide a more specific classification of goods. There are 99 chapters in total, allowing for a finer level of categorization.

3. Heading

Chapters are then divided into headings. Headings describe the product in more detail, narrowing down the classification further. There are 1,244 headings in the HSN code.

4. Subheading

Further detailing is provided by subheadings, which offer more specific information about the product. There are 5,224 subheadings in total.

The selection of HSN codes is based on specific criteria, and businesses need to adopt either 2-digit, 4-digit, or 8-digit HSN codes, depending on their turnover and nature of trade:

Type of Business Need of HSN code
Turnover< 1.5 crores Do not need to use HSN codes
1.5 crores < Turnover < 5 crores  Use 2-digit HSN codes
Turnover > 5 crores Use 4-digit HSN codes
Dealing with imports and exports Use 8-digit HSN codes

For Example

HSN code: 42.02.22.20 (Hand bags and shopping bags of cotton)

  • The first two digits (42) show the chapter under HSN codes.

  • The following two digits (02) show the headings under chapters.

  • The next two digits (22) show the sub-headings. 6 digit HSN code is accepted worldwide.

  • The next two digits (20) sub-classify the product tariff heading during export and import of supply.

Why is the HSN Code Important?

The HSN classification system brings several benefits that contribute to the efficiency and uniformity of the global trade system, such as:

1. Facilitating International Trade Statistics

The HSN code serves as a universal language for product classification, enabling the gathering of international trade statistics. With more than 200 countries worldwide adopting the HSN code, it has become a standardised tool for collecting and analyzing data related to global trade activities.

2. Unique Identification for Every Product

Each product is given a unique HSN code, facilitating a precise and standardised identification process. This uniqueness ensures clarity and accuracy in product classification, reducing ambiguity and providing a common ground for international trade partners to understand the nature of goods being traded.

3. Uniform Classification and Global Acceptance

The HSN code promotes a uniform classification system that is accepted globally. With 98% of international merchandise classified using the HSN code, it establishes a standardised approach to categorizing goods. This uniformity is crucial for international harmonization, allowing for smoother cross-border transactions and trade relationships.

4. Automation and Simplification of GST Filing

The implementation of HSN codes in the GST system streamlines the process of filing returns. This not only saves time but also enhances the efficiency of GST returns through automation, making the entire filing process more straightforward for businesses.

How is the HSN Code Declared?

The declaration of HSN codes in tax invoices under GST is mandated by the CGST notification dated 15th October 2020. The declaration requirements vary based on the transaction charges and the type of invoice document. 

Below is a summary of how a GST HSN code is to be declared:

Annual Aggregate Turnover Transaction Charges Type of Invoice Document No. of Digits of HSN to be Declared
Up to 5 Crore Mandatory for B2B Tax Invoices 4
Up to 5 Crore Optional for B2C Tax Invoices 4
More than 5 Crore Mandatory for All Invoices (B2B and B2C) 6

How to Find the HSC Code for a Product?

Finding the appropriate GST HSN code for your product is crucial for GST compliance. Follow these steps to locate the HSN code for your specific product or service:

1. Visit the Official GST Portal

Start by visiting the official GST portal at www.gst.gov.in. On the homepage, go to the ‘Services’ tab and find ‘Search HSN/SAC Code.’

2. Enter Your Product or Service

In the search bar, enter the name of your product or service. Alternatively, you can search using the chapter or section if you already know it.

3. Select the Correct Code

The search results will showcase a list of potential HSN codes related to your search. Carefully review the options and select the code that best describes your product or service. Take note of the associated tax rate.

4. Verify the Code

After selecting a code, double-check it against the description of your product or service. Ensure that it accurately represents the nature of what you are dealing with. If you have any doubts, consider consulting a tax professional for clarification.

5. Use the Code in Your Invoices

Once you have identified the correct HSN code, integrate it into all your invoices and other GST filings. Using the accurate code ensures compliance with GST regulations and helps you avoid potential penalties or fines. 

Regularly updating your records with the correct HSN code contributes to a smooth and lawful business operation within the GST framework.

What is the SAC Code in GST?

The SAC code in GST is a classification system developed by the service tax department in India. It is utilised for categorizing various services for the purpose of taxation, invoicing, and compliance under the GST system. 

The SAC Code consists of a unique six-digit numeric identifier that is crucial for identifying and classifying different services.

What is the SAC Number?

The SAC number consists of six digits, and it follows a structured format to convey specific information about the nature of the service.

Here is a breakdown of the SAC number, using the example SAC code 996311 for room or unit accommodation services provided by Hotels, INN, Guest House, Club, etc:

1. First Two Digits (99)

These digits represent the ‘chapter.’ In the context of the SAC code, chapter 99 is reserved for services. This indicates that the code pertains to services, distinguishing it from goods.

2. Next Two Digits (63)

These digits represent the ‘heading’ of the significant service category. In the example, the heading 63 corresponds to ‘services by way of renting of residential space for use as residence.’

3. Next Two Digits (11)

These digits represent the ‘service code’ of the specific nature of the major service. In the given example, service code 11 refers to room or unit accommodation services provided by Hotels and other such entities. This further specifies the type of renting service within the broader category.

What is the use of the SAC Code in India? 

The SAC code serves multiple purposes to ensure effective tax classification and uniformity across businesses:

1. GST Rate Identification

SAC Codes assist taxpayers in GST rate determination for the services they provide. They are essential for accurately categorizing services under the prescribed GST slabs.

2. Mandatory for Registration

GST taxpayers are required to mention SAC codes during the registration process on the GST portal. This ensures that businesses are appropriately categorised for tax purposes.

3. Inclusion in Invoices

SAC codes must be included in invoices issued by businesses. This practice helps in transparently communicating the type of service provided and aids in accurate taxation.

4. Monitoring and Tracking

SAC codes enable the government to monitor and track the services provided by businesses. This aids in efficient tax collection and enforcement of GST regulations.

Why is the SAC Code Important?

The SAC code holds paramount importance in the Indian tax system, particularly in the context of taxation-related functions for businesses:

1. Precision in Invoicing

The SAC code is crucial for accurate invoicing, ensuring that the appropriate code is assigned to each service. Precise invoicing is essential for accurate tax calculation and compliance with GST requirements.

2. Claiming Input Tax Credit

The SAC Code is instrumental in establishing the eligibility for Input Tax Credits (ITCs) related to services. Accurate classification based on the proper SAC Code is necessary for businesses to claim ITCs, resulting in potential cost savings.

3. Legal Compliance and Troubleshooting

Proper SAC Code classification helps in adhering to legal requirements. Using the correct code ensures that businesses comply with tax regulations, preventing potential legal troubles and facilitating a transparent and lawful operation.

Conclusion

For all businesses, adhering to the regulations of the Indian tax system, especially with regard to the SAC and HSN codes, is immensely necessary. Moreover, you must understand that HSN codes cover both goods and services, while SAC codes specifically pertain to services. Failing to include the correct codes can lead to penalties and legal repercussions. Hence, staying updated with the latest regulations is essential, albeit challenging.

You can use a comprehensive GST tax rate calculator or a billing software like Captain Biz to streamline your invoicing process and ensure compliance. Such an all-in-one solution can significantly facilitate organizing your invoicing efficiently, reducing costs, and contributing to the smooth growth of your business.

FAQs

Q1. What are 4 Types of GST?

The 4 types of GST in Indian tax systems are State Goods and Services Tax (SGST), Central Goods and Services Tax (CGST), Union Territory Goods and Services Tax (UTGST) and Integrated Goods and Services Tax (IGST).

Q2. What are the GST Rates Applicable on Goods and Services?

Goods and services in India are categorised into four distinct tax slabs under the GST system: 5%, 12%, 18%, and 28% GST.

Q3. What is 2-Digit HSN Code?

The 2-digit HSN codes apply to businesses with an annual turnover exceeding INR 1.5 crores but less than INR 5 crores.

Q4. Is the HSN Code Universal?

Yes, the HSN code is accepted worldwide.

Q5. What is the Composition of the HSN Code?

The HSN code is composed of 21 groups, which are further categorised into 99 chapters. These chapters are then subdivided into 1244 headings, and these headings are further detailed into 5224 subheadings.

Q6. What Happens if the HSN Code is Wrong?

If the wrong HSN code is mentioned in GST Returns and tex invoices, a penalty of Rs 50000 ( Rs 25000 under CGST and Rs 25000 under SGST) could be levied.

Q7. Is the SAC Code and HSN Code the Same?

No, the SAC code and HSN code are not the same. HSN codes apply to both goods and services, while SAC codes are exclusively for services.

Q8. Is the SAC code 4-Digit or 6-Digit?

It is a 6-digit number.

Q9. Why do all SAC Codes Start With 99?

As services fall under Chapter 99, all SAC codes initiate with the prefix “99”.

Q10. How do you Find the SAC Code for a Service? 

To find the SAC Code for a service, you can utilise the SAC Code Lookup tool on the official GST portal or refer to the SAC Code list provided by CBIC.

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Ujjwal Goel

Ujjwal Goel is a B2B Technical and Finance Writer. With 5 years of experience, he has established himself as a skilled and knowledgeable blogger and content creator. Hailing from a BBA background, he is passionate about the Technical and Finance field and strives to create engaging, informative, and thought-provoking content for his readers. His writing style is conversational and informative, and he is committed to delivering high-quality work that meets the needs of his clients and readers. When he is not writing, he enjoys binge-watching Netflix or traveling

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