HSN Code Mandatory in GST: When and Why

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Published Date:  29-08-2023   Author:   yash-elwadhi
captainbiz hsn code mandatory in gst when and why

Implementation of mandatory mentioning of HSN codes in GSTR-1

In the intricate tapestry of the Goods and Services Tax (GST) framework, HSN codes are essential threads that weave clarity and accuracy into the taxation landscape. While only sometimes mandatory, there are situations where skipping the inclusion of HSN codes simply isn’t an option. Let’s explore these instances to understand why HSN codes are significant in GST compliance.

 1. Crossing Turnover Thresholds

For businesses, surpassing specific turnover thresholds isn’t just a milestone; it’s a signal that the granularity of tax reporting must increase. When your aggregate turnover crosses 5 crore threshold, From 01st November 2022, Phase-2 will be implemented on GST Portal and taxpayers with up to Rs 5 crore turnover would be required to report 6-digit HSN codes in their GSTR-1. (They have to mention a 6-digit HSN Code for the supply of Goods to B2B, B2C and unregistered dealers.) The utilization of HSN codes on invoices becomes a legal mandate. This step ensures transparent tax calculation and reporting, minimizing errors that can arise from vagueness in product identification.

 2. Exporting and Importing Dynamics

 In the realm of Supply of Goods and Services to a Registered Person, precision is paramount. When engaging in export and import activities, HSN codes become indispensable. Accurate codes on shipping documents facilitate seamless communication, classification, and duty calculation for customs authorities. Navigating the complexities of global trade necessitates the adoption of these codes to maintain compliance across borders.

 3. Categorizing Specific Goods

 Specific categories of goods require meticulous classification for effective taxation. Industries like pharmaceuticals, textiles, and chemicals deal with diverse products, each carrying unique implications. Inserting appropriate 8-digit HSN codes ensures that products are placed in their accurate tax brackets, reducing the risk of under- or overpayment and aligning with the principle of equitable taxation.

Crucial Insights: Why HSN Codes Become Compulsory in GST

HSN code adherence isn’t merely a regulatory formality; it embodies GST’s core principle—accurate taxation. By tagging products with specific codes, the system ensures fairness in tax calculation, preventing under- or overpayment. Skipping HSN codes would undermine the foundation of equitable taxation.

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Form GSTR-2, a return for inward supplies, necessitates the inclusion of HSN-wise summaries. This compilation aids in reconciling transactions, detecting discrepancies, and ensuring that your tax credit claims remain accurate and valid. Skipping this vital step might lead to mismatches, delaying refunds or causing unnecessary audits.

Ultimately, the essence of HSN codes lies in their ability to uphold the foundational principle of accurate taxation. By assigning codes to specific goods and services, the GST framework ensures fair tax calculation and equitable distribution of responsibilities among businesses. Skipping the inclusion of HSN codes could jeopardize this balance and undermine the core tenets of GST.

In conclusion, while HSN codes may not be obligatory in all scenarios, the instances where skipping them isn’t an option are pivotal. They safeguard compliance, enable effective global trade, and enhance the precision of taxation. Embracing HSN codes within the GST ecosystem isn’t just a legal requirement; it’s a strategic move that reflects a commitment to transparent, efficient, and responsible business practices.

Also Read: Understanding GSTR-1 IFF: A Comprehensive Guide

Preventing Penalties

Non-compliance with HSN code requirements can result in penalties and legal repercussions. Accurate coding is essential to a business’s commitment to meeting its taxation obligations and avoiding unnecessary financial and reputational risks.

In essence, HSN code compliance isn’t a mere checkbox; it’s a strategic imperative that safeguards your business’s integrity and financial stability. It ensures transparent taxation, facilitates international transactions, and upholds the principles of equitable trade. By adhering to HSN codes in the specified scenarios, you’re not just complying with regulations but building a foundation for success within the GST ecosystem.

As per Section 125, if the taxpayer is not followed the amendments, they are liable to pay PENALTY of Rs.25,000/0 under CGST and Rs.25,000/- under SGST and Rs.50,000/- under IGST for each mistake under CGST Act,2017.

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Government Vigilance 

The essence of GST is accurate, transparent, and equitable taxation. HSN codes epitomize these principles. Each code is a commitment to fair taxation and precise categorization, ensuring that products bear their rightful tax burdens. Straying from this commitment undermines the very essence of GST.

HSN codes are the bridge connecting businesses and government oversight. These codes enable authorities to monitor trade trends, detect irregularities, and ensure compliance. When HSN codes are accurately applied, they foster a symbiotic relationship between businesses and regulatory bodies.

How To Search an Appropriate HSN or SAC Code:

  Step-1. Visit site https://www.gst.gov.in/

  Step-2. Click on the “Services” icon

  Step-3. Further, Click on “ User Services

  Step-4. Select “ search HSN/ Service classification code

Step- 5. Select HSN / Service Classification Code”. Two options, HSN and Service Classification Code, would be displayed. OR  GSTN has provided HSN & SAC Codes in Excel sheet in Common Portal 

Bridging Accuracy and Accountability: The Role of HSN Codes

 1. The Precision Puzzle

At the heart of GST lies the need for precise tax calculation. HSN codes are the missing puzzle pieces that complete the picture of accurate taxation. By classifying goods and services down to the finest detail, these codes eliminate ambiguity and ensure that the correct tax rates are applied. This precision transcends mere formality; it’s the essence of equitable taxation.

2. From Chaos to Clarity:

Imagine a scenario where products lack a standardized language for identification. Chaos would reign in the marketplace and tax administration. HSN codes transform this chaos into clarity. By assigning specific codes to products, a common vocabulary emerges that businesses, regulators, and consumers can understand. This shared understanding forms the bedrock of transparent and accountable transactions.

 HSN codes amplify the concept of compliance from a mere buzzword to a tangible practice. When businesses accurately apply these codes, they align with the regulatory framework, demonstrate transparency, and contribute to the smooth functioning of the tax ecosystem. This adherence is more than just a procedural step—it’s a testament to ethical and accountable business conduct. 

The Bottom Line

Businesses must be aware of the HSN codes applicable to their products, as these codes determine the tax rates and other regulatory requirements associated with them. 

Frequently Asked Questions (FAQs)

  • Is 6 6-digit SAC code mandatory?

5 crore in the previous year will need to furnish all six digits of the SAC code for invoices as well as the filing of GSTR-1. 

  • Can we use 4 4-digit HSN code?

4-digit HSN compulsory from 01.11. 2022 for taxpayers upto Rs. 5 Crore turnover.

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Yash Elwadhi

Yash Elwadhi is a highly skilled and experienced finance content writer with a proven track record of providing insightful and engaging content to a wide range of clients in the financial industry. He has collaborated with prominent financial institutions, fintech companies, and wealth management firms, and is known for his ability to convey complex financial concepts in a clear and engaging manner. Yash is committed to delivering high-quality content that adds value to his clients' target audience and helps them achieve their financial goals.

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