As more countries began trading across borders, a need arose to monitor and standardise the products being transacted. Hence, in 1988, the World Customs Organisation (WCO) developed the HSN Code to fulfill that need.
HSN is an abbreviation for Harmonized “System of Nomenclature”. HSN Code is a six-digit code that labels and classifies more than 5,000 products. This code is backed by a set of well-defined rules and is accepted internationally.
HSN code is used widely for taxation purposes and is applicable in 200 countries. The widely accepted standard helps logically and uniformly classify the commodities.
HSN Code In India
India has been a member of the World Customs Organisation since 1971 and utilised the HSN Codes for the classification of commodities for customs and excise purposes. Recently, India has been utilising the HSN Code in GST (Goods and Services Tax).
These codes help streamline the tax calculation process, thereby ensuring consistency and accuracy in tax assessment. GST and HSN Code together, help in determining the applicable tax rates, tariffs, and regulations governing the import and export of goods.
To add to the precision of the codes, The Customs and Central Excise authorities added two more digits to the HSN Code, resulting in an eight-digit classification number. Correct application is essential for businesses engaged in international trade as well as those subject to GST regulations.
GST and HSN Code are currently being used under a 3-tier structure in India:
- Businesses with a turnover of less than ₹1.5 crore do not need to use the HSN Code
- Businesses with turnover of more than ₹1.5 crore but less than ₹5 crore must use 2-digit HSN Codes
- Businesses with a turnover of more than ₹5 crore must use 4-digit HSN Codes.
- Businesses that deal with imports and exports must use an 8-digit HSN Code.
Structure of the HSN Code
HSN Codes constitute 21 Sections, under which there are 99 chapters accompanied by 1,244 headings and 5,244 subheadings. Each section number is divided into chapters, which are then divided into headings and further subheadings.
The sections and chapters are used to describe the product, while the headings and subheadings give the details of the product itself.
For example, let’s take a look at HSN Code – 07.03.10.10
In this case,
- the first two digits (07) are used to describe edible vegetables.
- The next two digits (03) refer to onions, shallots, garlic, and leeks.
- The last pair of two digits (10.10) are both subheadings, representing chilled onions or shallots.
Under this code, 98% of products traded worldwide are categorised. By understanding this, we can know how the implementation of HSN Code in GST can help make GST globally acceptable.
Importance of HSN Code
The application of the HSN Code provides an infrastructure for a logical and systematic classification of products. Since this classification is based on their characteristics such as material, origin, utility, etc., it helps facilitate the implementation of various tax regimes seamlessly. The uniform classification globally helps in seamless trading and reduces the possibility of disputes and errors in trade transactions between different countries.
Moreover, the code is made to be six-digit so that it can adapt to various countries worldwide. The countries can add more digits to further add subcategories in product classification. For example, India modified the code by adding the subcategories to make it an eight-digit classification code. The motive was to add precision and align the code with the GST regime.
By using these codes, the traders do not need to provide a detailed description of their products. Instead, by only mentioning the HSN codes, GST tax can be easily calculated. This may help in making the taxation process easier and more automated.
Overview of the HSN Code Sections
Let’s look at the breakdown of various sections and the products included in them:
| Section No. | Commodities included |
| I | Animals and Animal Products |
| II | Vegetables and Vegetable Products |
| III | Animal or Vegetable Oils, Their Cleavage Products, Waxes, and Prepared Edible Fats |
| IV | Prepared Food, Beverages, Spirits, Tobacco and Tobacco Substitutes |
| V | Minerals |
| VI | Chemical Products or of Allied Industries |
| VII | Plastics, Rubber, and Articles Thereof |
| VIII | Raw Hides and Skins, Furskins and Articles Thereof, Leather, and Related Goods |
| IX | Wood and Wooden Articles, Wood Charcoal, Cork and Articles of Cork, Basket Ware and Wickerwork, Manufacturers of Straw, Esparto or Other Plaiting Material |
| X | Pulp of Wood or Other Fibrous Cellulosic Material, Recovered Paper or Paperboard (Waste and Scrap), Paper and Paperboard and Articles Thereof |
| XI | Textile and Textile Articles |
| XII | Footwear, Headgear, Umbrellas, Walking Sticks and Seat Sticks, Whips, Riding Crops and Parts Thereof, Artificial Flowers, Articles of Human Hair, Prepared Feathers and Articles Made Thereof |
| XIII | Articles Made of Stone, Plaster, Asbestos, Cement, Mica, or Other Similar Materials, Glass and Glassware, Ceramic Products |
| XIV | Natural or Cultured Pearls, Precious Metals Clad With Precious Metal and Articles Thereof, Precious or Semi-Precious Stones, Coins, Imitation Jewellery |
| XV | Base Metal and Articles Made of Base Metal |
| XVI | Machinery and Mechanical Appliances, Electrical Equipment and Parts Thereof, Sound Reproducers and Recorders, Television Image and Sound Reproducers and Recorders, and Parts and Accessories of Such Articles |
| XVII | Vehicles, Aircraft, Vessels, and Associated Transport Equipment |
| XVIII | Optical, Photographic, Cinematographic, Checking, Measuring, Precision, Medical or Surgical Instruments and Apparatus, Musical Instruments, Clocks and Watches, Parts and Accessories Thereof |
| XIX | Arms and Ammunition, Parts and Accessories Thereof |
| XX | Miscellaneous Manufactured Articles |
| XXI | Works of Art, Collectors’ Pieces and Antiques |
Concluding
The worldwide application of the HSN Code has made the process of international trade seamless. Moreover, it has facilitated making taxation more automated across various countries, including India (HSN Code in GST).
The systematic framework provided by the HSN Code system ensures consistency, accuracy, and ease of tax assessment. This structure has been accepted by over 200 countries now and it continues to assist the global economy. Furthermore, if you are looking to venture into financial markets, opening a Demat account with Angel One can make your process smoother. Get started on your investing journey now!
Disclaimer: This article has been written for educational purposes only. The securities quoted are only examples and not recommendations
FAQs
What is HSN Code?
HSN is an abbreviation for Harmonized “System of Nomenclature”. HSN Code is a six-digit code that labels and classifies more than 5,000 products. This code is accepted globally.
What are HSN Codes used for?
HSN Codes are used to classify various types of products into different sections, chapters, headings, and subheadings.
Who is eligible for the HSN Codes in GST?
A taxpayer with a turnover of ₹1.5 crore or above in the previous financial year must mention the HSN Code on their invoices and GSTR-1 returns.
Is filing of HSN Code mandatory in GST returns?
Yes, it is mandatory for businesses depending on the turnover:
- Businesses with a turnover of less than ₹1.5 crore do not need to use the HSN Code
- Businesses with turnover of more than ₹1.5 crore but less than ₹5 crore must use 2-digit HSN Codes
- Businesses with a turnover of more than ₹5 crore must use 4-digit HSN Codes.
- Businesses that deal with imports and exports must use an 8-digit HSN Code.
Where should the HSN Codes be mentioned?
The HSN Codes are required to be mentioned in invoices/bills of supply/GSTR-1 returns.
