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2019

HSN Classification and its Applicability under GST

HSN Classification and its Applicability under GST

What is HSN Code?

  • HSN code stands for “Harmonized System of Nomenclature”. This system has been introduced for the systematic classification of goods all over the world. HSN code is a 6-digit uniform code that classifies 5000+ products and is accepted worldwide. It was developed by the World Customs Organization (WCO) and it came into effect from 1988. It has about 5,000 commodity groups, each identified by a six-digit code, arranged in a legal and logical structure. It is supported by well-defined rules to achieve uniform classification. The main purpose of HSN is to classify goods from all over the World in a systematic and logical manner. This brings in a uniform classification of goods and facilitates international trade. India is a member of World Customs Organization (WCO) since 1971.

The World Customs Organization (WCO):

  • The World Customs Organization (WCO) is an intergovernmental organization headquartered in Brussels, Belgium. The WCO is noted for its work in areas covering the development of international conventions, instruments, and tools on topics such as commodity classification, valuation, rules of origin, collection of customs revenue, supply chain security, international trade facilitation, customs enforcement activities, combating counterfeiting in support of Intellectual Property Rights (IPR), drugs enforcement, illegal weapons trading, integrity promotion, and delivering sustainable capacity building to assist with customs reforms and modernization. The WCO maintains the international Harmonized System (HS) goods nomenclature, and administers the technical aspects of the World Trade Organization (WTO) Agreements on Customs Valuation and Rules of Origin.

Benefits of HSN Classification:

The HSN system is used by more than 200 countries and economies for benefits such as:

  • Uniform classification as Over 98% of the merchandise in international trade is classified in terms of the HSN.
  • Base for their Customs tariffs.
  • Collection of international trade statistics.

HSN in India:

  • Harmonized System of Nomenclature number for each commodity is accepted by most of the countries.
  • The HSN number remains same for almost all goods. However, HSN number used in some of the countries varies little, based on the nature of goods classified.
  • It was originally using 6-digit HSN codes to classify commodities for Customs and Central Excise.
  • Later Customs and Central Excise added two more digits to make the codes more precise, resulting in an 8 digit classification.


Structure of HSN Code:

The HSN structure contains 21 sections, with 99 Chapters, about 1,244 headings, and 5,224 subheadings.
Each Section is divided into Chapters. Each Chapter is divided into Headings. Each Heading is divided into Sub Headings.

Structure of HSN Code

1. Sections:

  • The sections are categorized on a broader perspective.
  • The commodity’s manufacturing and technological complexity define the section or chapter to which it belongs.
  • All natural commodities like vegetables, animal produce, etc. belong to the earlier sections, whereas industrial machinery is seen at the later stages.
  • There are 21 Sections.
  • For e.g. – Processed cotton appears later whereas uncombed, normal cotton appears earlier.

2. Chapter:

  • Chapters, on the other hand, have a much more specific categorization. Like Section 11 covers all kinds of textiles and textile articles, whereas Chapter 62, which falls under Section 11 is expressly for Accessories for Men and Women.
  • There are 99 Chapters divided into 21 sections.

3. Heading:

  • Chapters have been sub-classified into headings. The headings focus on specific types of products under the Chapters.
  • Continuing with the above example, Chapter 62, heading 13 covers all kinds of handkerchiefs, whereas heading 14 covers scarves and shawls of different types.
  • Among 99 chapters there are 1244 headings.

4. Sub-heading:

  • Headings are divided into sub-heading which is another deeper layer of product classification.
  • It includes further classification of products in the heading.
  • There are 5224 sub-headings.

The Indian Sub-classification:

  • For a deeper classification, Indian GST has 2 more digits to these commodities.
  • In the above example, handkerchiefs made of other textile materials are under the heading 13 under Chapter 62.
  • The HSN code for the product is 62.13.90, where 90 is the product code for handkerchiefs made of other textile materials.
  • Where the handkerchiefs are made from a human-made fibre, then the HSN code becomes 62.13.90.10. Similarly, 62.13.90.90 belongs to handkerchiefs made out of silk or waste from silk.

Example:

Let us take HSN Code 72015010 for our reference in order to understand the structure of the HSN Code.

  • The First 2-digits of the HSN code ’72’ refer to the Chapter number under a particular section in the module. Thus, Chapter 72 is covered under Section 15 of the HSN Module titled ‘Base Metals and Articles of Base Metal’.
  • Then, the next two digits combined with the first two digits (that is the First 4 Digits) refer to the Heading under a specific Chapter. Thus, the numbers ‘7201’ refer to the Heading ‘Pig Iron and Spiegeleisen in Pigs, Blocks or Other Primary Forms’ under Chapter 72 of Section 15.
  • The next two digits combined with the first four digits (that is 6 Digits combined) refer to the Sub-Heading. Thus, the numbers ‘720150’ refer to the Sub-Heading ‘Alloy Pig Iron, Spiegeleisen’ under the Heading ‘Pig Iron and Spiegeleisen in Pigs, Blocks or Other Primary Forms’.
  • Lastly, the complete 8 Digits refer to the regional tariff. Thus, the numbers ‘72015010’ refer to the regional tariff referring to the description ‘Classification of Cast Iron’.

Service Accounting Code (SAC):

  • Similar to the International HSN Codes, India has adopted a Service Accounting Code (SAC) for all its services.
  • GST will subsume the service tax, which covers all kinds of services at a national rate of 15%, apart from other rates in some cases.
  • Since GST is a combination of goods and services both, an equable classification for services is also required. SAC will remain the same under the GST regime.

Structure of SAC:

  • SAC code is an all-numeric code and strictly comprises of six digits. Take for example the SAC Code 998431.
  • The First 2 Digits of the SAC Code are by default 99. All services begin with 99 as this is what separates services from goods. 99 is the code that represents the Chapter and it remains constant. Thus, the code ’99’ remains the same for all the services.
  • Next two digits of the SAC Code refer to the Heading under the Chapter that reflects the major nature of the underlying service. Thus, the next two digits ’84’ refer to the Heading ‘Services of public libraries by way of lending of books, publications or any other knowledge-enhancing content or material.’
  • The Last two digits of the SAC Code refer to the sub-heading reflecting the detailed nature of the service in question. Thus, the last two digits ’31’ in the above mentioned code refer to the Sub-Heading ‘On-line text based information such as online books, newspapers, periodicals, directories etc’.

Example:

  • Legal documentation and certification services concerning patents, copyrights and other intellectual property rights—998213.
  • The first two digits are same for all services i.e. 99.
  • The next two digits (82) represent the major nature of service, in this case, legal services.
  • The last two digits (13) represent detailed nature of service, i.e., legal documentation for patents etc.

HSN/SAC Related Rules under GST:

  • The Central Government notified cases where a registered person shall mention the digits of HSN Codes. Therefore, the registered person shall mention. HSN Codes in a tax invoice if he has an annual turnover in the preceding financial year as specified below:

Annual Turnover in preceding Financial Year 

Number of Digit of the HSN Code
Up to Rs. 1.5 Crore NIL
More than Rs. 1.5 Crore but up to Rs. 5 Crore. 2
More than Rs. 5 Crore 4
In case of Import and Export (Irrespective of Turnover) 8

HSN Classification Section List:

Section No. Section Title
1 Live Animals, Animal Products
2 Vegetable Products
3 Animal or Vegetable Fats and Oils and their cleavage products, prepared edible fats, Animal or Vegetable waxes
4 Prepared Foodstuffs, Beverages, Spirits and Vinegar, Tobacco and Manufactured Tobacco Substitutes
5 Mineral Products
6 Product of the chemicals or allied Industries
7 Plastics and articles thereof, Rubber and articles thereof
8 Raw hides and skins, Leather, Furskins and articles thereof, saddlery and harness, travel goods, handbags and similar containers, articles of animal gut ( other than silk-worm gut )
9 Wood and articles of wood, Wood charcoal, Cork and articles of cork, Manufacturers of straw, of Esparto or of other Plaiting Materials, Basketwork and Wickerwork
10 Pulp of wood or of other Fibrous Cellulosic Material, Recovered ( Waste and scrap ) paper or paperboard, paper and paperboard and articles thereof
11 Textile and textile articles
12 Footwear, Headgear, Umbrellas, Sun Umbrellas, Walking-sticks, seat-sticks, whips, riding-crops and parts thereof, Prepared feathers and articles made therewith, Artificial flowers, Articles of human hair
13 Articles of stone, plaster, cement, asbestos, mica, or similar materials, ceramic products, glass and glassware
14 Natural or cultured pearls, Precious or semi-precious stones, precious metals, Metal clad with precious metal, and articles thereof, Imitation Jewellery, Coins
15 Base Metals and articles of Base Metal
16 Machinery and mechanical appliances, electrical equipment, parts thereof, sound recorders and reproducers, television image and souch recorders and reproducers, and Parts and Accessories of such article
17 Vehicles, Aircraft, Vessels and Associated Transport Equipment
18

Optical, Photographic, Cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus, clocks and watches, musical instruments, parts and accessories thereof

19

Arms and ammunition, parts and accessories thereof

20 Miscellaneous Manufactured Articles
21 Works of art, Collectors' Pieces and antiques



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