Reporting HSN Codes on GSTR-1: Requirements and Penalties

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Published Date:  04-12-2023   Updated on:  15-02-2424    Author:   swati-goyal
captainbiz reporting hsn codes on gstr requirements and penalties

The Harmonized System of Nomenclature (HSN) has simplified the process of classifying goods and services for taxation purposes. In India, the uniform code helps organize over 5,000 products arranged in a legal and logical structure. Therefore, HSN codes in GSTR-1 have become a common phenomenon. 

The classification adheres to specific rules that help ensure uniform classification for customs purposes. In return, the system helps improve the overall efficiency of the Goods and Services Tax system, allowing the government to carry out a better analysis of the tax base and avert the risk of tax evasion. 

While the HSN system was originally a 6-digit code system, India added two more digits to make the code more precise. Consequently, the HSN structure in India consists of 21 sections, 99 chapters, about 1,244 headings, and 5,244 subheadings. In this case, each section is further divided into chapters, which are further divided into headings and subheadings. 

In any HSN code, the first two digits always identify the section to which the code or service belongs, while the next two digits define the chapter, the next two the headings, and finally the subheadings.

Implementation of HSN Codes in GSTR-I 

As per Notification No. 78/2020, Central Tax, dated October 15, 2020, all registered taxpayers are required by law to mention HSN codes in their tax returns. GSTR-I is the monthly or quarterly return that individuals and businesses must file. 

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The GSTR-I report contains the details of all the outward supplies a business makes, including sales and exports. Since April 2021, it has been mandatory for businesses to mention the HSN codes for goods and use SAC codes for services in the GSTR-I fillings. In this case, businesses must adhere to a specific number of HSN codes depending on their turnover. 

Reporting Correct HSN Code on GSTR-I

 It is the responsibility of taxpayers under GST to ensure they mention the correct HSN code for goods and services supplied in their GSTR-I return. It’s the only way one can avoid penalties or interest for non-compliance. In addition, the use of the correct HSN codes ensures appropriate tax charges on the goods supplied or received. 

Transaction Value No. of digits of HSN to be declared
Annual turnover up to 1.5 crore 0
Annual turnover of between 1.5 crore and 5 crore 2
Annual turnover  of more than 5 crore 4

While filling out GSTR-1, taxpayers must ensure that the returns specify the income details for clarity and calculate the amount of tax required to be paid. In this case, a business will need GST-compliant invoices for sales and purchases.

Benefits of Correct HSN Codes in GSTR: 1

One of the key benefits of using the correct HSN code in the GSTR-1 return is ensuring compliance. In this case, the business complies with GST regulations efficiently and accurately, ensuring the correct tax rate is applied to each product or service. Ultimately, the business ends up paying the right amount of tax to the government. 

The use of the correct HSN code ensures clarity and transparency in the classification of goods and services. Ultimately, it helps reduce disputes and controversies about tax rates and classifications. Accurate tax filings also reduce the risk of penalties and fines for non-compliance. 

Most importantly, correct HSN codes in the GSTR-1 return allow businesses to claim input tax credit more accurately. The result is a reduction in the tax liability of businesses, which helps reduce the overall cost of doing business. 

Finally, correct HSN codes in GSTR-1 help the government monitor the supply of goods and services more efficiently. In the end, the government can watch the supply of goods across the supply chain, therefore ensuring the correct amount of tax is being paid at each stage.

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Also Read: What Are the Benefits of Using HSN Codes?

Requirements for Reporting HSN Codes on GSTR-1

 It’s mandatory to detail the correct HSN code in GSTR 1. Some of the requirements to keep in mind while reporting HSN codes in GSTR-1 are: 

Requirement 1: HSN for Goods

 For goods, the requirements for filling out the GSTR-I include the following: 

  • Declaring zero digits of the HSN code if the business has a turnover of up to Rs. 1.5 crore
  • Declaring 2 HSN codes if the business has a turnover of between Rs. 1.5 crores and Rs. 5 crores Declaring 4 HSN codes if a business has a turnover of more than 5 crores 
  • Declaring an 8-digit HSN code for businesses engaged in imports and exports trade

Also Read: How do I determine the correct HSN code for a good?

Requirement 2: HSN Code for Services 

When dealing with the provision of services, GST taxpayers are required to use the Service Accounting Code instead of the HSN code. The SAC codes are used to classify and measure the applicability of GST to various services.

In most cases, the code has 6 digits, with the first digit always 99, detailing the chapter under which it falls. The following two detail the primary service, while the last two detail the information regarding the subservice. 

Also Read: How do I determine the correct HSN code for a service?

Requirement 3: Time limit for mentioning HSN codes

 The HSN and SAC codes for goods and services must be mentioned in GSTR 1 every month. The deadline for making the filing is the 11th of every month for taxpayers with a turnover of up to Rs. 1.5 crore and the 12th for taxpayers with an annual turnover of more than Rs. 1.5 crore.

 Requirement 4: Penalties for Non Compliance 

Businesses that fail to mention the HSN codes in GSTR 1 face the risk of incurring significant penalties.

Penalties for Failing to Report HSN codes correctly on GSTR-1 

A penalty will have to be paid if a GST taxpayer fails to report HSN codes correctly on GSTR-1 or uses an incorrect code for tax evasion purposes. Consequently, if a taxpayer fails to mention the correct HSN code on their GSTR-1 return, they are liable to a penalty of Rs. 50 per day. The penalty includes Rs. 20 per day for taxpayers with an annual turnover of up to Rs. 1.5 crore.

 Rs. 50 per day may be levied for each day the taxpayer delays submitting the correct HSN code on GSTR-1 returns to a maximum of Rs. 5,000. 

Frequently Asked Questions 

  • What is an HSN code?

 A HSN code is a 6-digit code that classifies goods based on their nature, type, and characteristics. The code is globally recognized, thereby ensuring swift international trade. In India, it is an 8-digit code used for customs purposes. 

  • What is the latest HSN code requirement? 

Effective October 2023, all GST taxpayers with an aggregate turnover of Rs. 5 crores or more are required to use a 6-digit HSN code in their e-invoices and e-way bills. Taxpayers with an aggregate annual turnover of less than Rs. 5 crore must use at least a 4-digit HSN code. On the other hand, an 8-digit HSN code is only applicable for the import and export of goods.

  •  Is it a must to report HSN Codes in GSTR-1? 

Yes, by law, GST taxpayers must detail accurate HSN codes for all goods supplied and received on their monthly and quarterly GSTR-1 returns. The HSN code ensures compliance and makes it easy for GST to determine the right amount of tax to be paid. The HSN code also said it enables input tax credit, therefore reducing the tax liability of businesses. 

  • What is GSTR-1? 

GSTR-1 is a mandatory monthly or quarterly return that the business registered under GST in India file. The report details all the goods the business supplies, including sales and exports. It contains an HSN code for describing goods or a SAC code detailing the services rendered. 

  • Who should file GSTR-1? 

Every registered person is required to file GSTR-1 returns, regardless of whether there were any transactions during the period or not. In the case of nil returns, there is a facility to ensure compliance through an SMS. The only people exempt from GSTR-1 returns include input service distributors, composition dealers, nonresident taxable persons, and taxpayers liable to collect TCS or deduct TDS. 

  • In what case is a business not required to mention the HSN code in GSTR-1? 

Not all businesses are required to include HSN codes while filling out the GSTR-1 return. The requirement only applies to businesses with a turnover of more than Rs. 1.5 crore. Consequently, businesses with an annual turnover of less than Rs. 1.5 crore are exempt from mentioning HSN for goods supplied in GSTR-1. 

  • Are there consequences for not mentioning the HSN code in GSTR-1? 

Yes. Businesses that fail to detail the correct HSN code for goods supplied risk incurring penalties. A penalty of Rs. 50 per day applies for each day of a delay to a maximum of Rs. 5,000. 

  • What is the benefit of mentioning the correct HSN code? 

The use of the correct HSN code for goods and services supplied ensures an accurate description of the supplies, which helps the tax agency charge the correct tax bill. The code also allows the agency to detect tax evasion and reduces the compliance burden for taxpayers.

Bottom Line 

Reporting the correct HSN codes in GSTR-1 filling is a must for compliance purposes and to avoid unnecessary penalties. The codes are designed to ensure greater clarity and transparency in the GST regime while also simplifying the compliance process for businesses. The HSN codes also help in supporting input tax credit claims and improving the accuracy of tax filings. Only businesses with an annual turnover of less than Rs. 1.5 crore are exempt from detailing HSN codes in GSTR-1 returns.

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Swati Goyal
Swati Goyal is an experienced financial reporter, who writes on the Australian share market (ASX), as well as global equity movements and trends more broadly. She also covers commodities, currencies, bonds, and the private market space. As a business writer and financial analyst, Swati has also published on FX Empire, TipRanks, Inquisitr, and many more. Swati holds a Bachelor of Commerce. She previously worked as a research analyst and trader at Angel Broking and led an accounts team at Cox & Kings.

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