India has been a member of the World Customs Organization since 1971 and has used the 6-digit Harmonized System of Nomenclature codes to classify goods for Customs and Central Exercise. The country added two more digits to its HSN nomenclature to better differentiate goods and services for customs purposes.
The multipurpose products and services nomenclature system is accepted worldwide as it helps in keeping track of:
- What is being traded
- How much is being traded
- Monetary transactions in international trade
- How each transaction should be taxed
By tracking all the goods imported and exported in the country, the HSN system simplifies the taxation process as goods can be identified quickly and the applicable tax rate imposed.
GST Tax Invoice Format
GST Regulations and rules stipulate that all suppliers of goods and services must issue tax invoices when the value of the supply exceeds Rs.200. The tax invoice must contain
- Name, address and GSTIN of the supplier.
- Invoice number not exceeding sixteen characters.
- Date of the tax invoice.
- Name, address and GSTIN of the customer, if available.
- HSN code for goods or SAC code for services.
- Description of goods or services.
- Quantity supplied.
- Total value of supply.
- Taxable value of the supply.
- Rate and amount of GST
- Place of supply
HSN Code Requirements on Invoices
In 2021, the Ministry of Finance mandated the printing of HSN codes on Business 2 Business (B2B) and Business to Consumer (B2C) invoices. Consequently, GST taxpayers are required to furnish an HSN code or Service Accounting Code in their invoices as per the revised requirements.
Following the introduction of the Goods and Services Tax, which is a tax on the sale of goods and services, HSN is now applicable under a three-tiered system.
- Businesses with a turnover of less than Rs. 1.5 crore is exempt from using the HSN code on their invoices.
- Businesses with a turnover of more than Rs. 1.5 crore but less than Rs. 5 Crore must indicate a 2-digit HSN code on their invoices.
- Businesses with a turnover of more than Rs.5 crore must print a 4-digit HSN code in their invoices.
- Businesses engaged in imports and exports trade must use an 8-digit HSN code in their products and detail it in their invoices.
Mandating HSN codes in GST invoices is a welcome move as it helps streamline business practices nationwide. It also makes it easy for customs officials to determine the appropriate tax rate and help tax authorities know if manufacturers, importers and exporters are paying their due share of taxes on goods.
HSN Code in GSTR-1
While it is mandatory to detail the HSN code at 6 and 4 digits on invoices, GST returns must also be reported with the HSN code. Consequently, businesses with an aggregate turnover exceeding 5 crores must upload an HSN summary with a 6-digit HSN code in GSTR-1.
Similarly, businesses with an aggregate turnover of up to 5 crores must upload an HSN summary with a 4-digit HSN code in the GSTR-1 return. Businesses can also choose to mention HSN code with digits. Consequently, businesses that generate up to 5 crores can mention HSN at 6 or 8 digits, and businesses exceeding 5 crores can optionally mention 8 digits of HSN code.
Also Read: HSN Code in GST: Everything You Need to Know
Penalty for Non-Compliance
Businesses that don’t print the correct HSN codes in invoices risk incurring significant penalties as stipulated by the GST. Therefore, taxpayers must report the valid HSN code on tax invoices and GSTR-1.
Failure to provide the correct HSN code allows businesses to incur a penalty of Rs 50,000 (Rs 25000 under CGST and Rs 25000 under SGST). The penalty is applicable for not mentioning the HSN/SAC CODE or wrong mentioning in GST Returns and Tax invoices.