The full form of HSN code as defined under GST is- Harmonized system of nomenclature. HSN code was developed by World customs organization to maintain a uniformity of trading products all across the world. This means that, as now we can see, there is a system of international trade developing in all countries, with an easy to fetch international borders and fast improving system of import and export of goods across the countries in order to establish fruitful relations with other countries .It is important to maintain a point of contact which is understandable by all involved in this chain of trading- from packaging of goods, exporting to other country and receiving by that country. There are lakhs of products which are now traded by different countries; this is beneficial as this develops communication between the other countries. People are able to use world class products, for example something is famous in other country and is made with their best local resources and that good can be used by other people, benefitting both the seller and the customer. This also helps in improving economy of countries as financial resources for countries also increase. Hence, for the products which are traded and exported, the system of HSN codes was developed. With these codes, the codes are written in a uniform language recognized worldwide, and every article/ product is given such code when traded. This has now become an important part in international trading and commerce.
- HSN code under GST is defined for categories of products for more than 5000 products of different categories.
- It is a 6 digit code arranges in legal and logical structure.
- It is also defined by certain rules which are uniform in nature to maintain the uniformity of the code and classification of the products.
- It also defines rules of taxation for the particular country within the code.
- It is also used as a measure to find out the quantity of the product which is being exported or imported in the country.
- This code helps in tracking of your product and its progress around the world.
HSN code’s application worldwide
This uniform coding system is used by more than 200 countries to maintain uniformity in the international export and import of products, to calculate the tariff just by seeing the code and to collect the international trade statistics for the countries. This HSN system is accepted by almost all the countries, and 99% of the products or articles are classified on basis of the HSN codes.
HSN in India
India has developed its own system of HSN codes from 1st July 2017 in lieu of implementation of GST. Before GST, HSN codes were used by central excise and customs department and they have been using it since 20 years now. India is a member of world customs organization since 1971. Customs and central excise department used to use a 6 digit HSN code and now they have added 2 more digits, making it 8 digit codes for more precision.
Functioning of HSN code
HSN structure has 21 sections, 99 chapters, 1244 headings and 5224 sub-headings. Each section is divided into certain chapters and these chapters contain headings and sub- headings within the part of headings. Section and chapter titles describe broad categories of goods and headings and sub-headings describe the product in detail.
Example: Handkerchief- textile matters 62.13.90
- First two digits (62) – it defines the chapter number for articles or products of apparel clothing, not knitted or crocheted.
- Next two digits (13) – this represents the headings where handkerchiefs are defined.
- The last two digits (90) – represents handkerchiefs made of other textile materials.
- You can add two more digits for more precise description- like in case of handkerchiefs made of man-made fibre, the HSN code will be- 220.127.116.11
- In case of handkerchief made from silk or related material the HSN code will be- 18.104.22.168
Implementation of HSN under GST
- There will be no HSN codes for aggregate turnover of supply of goods for less than Rs. 1.5 crores.
- There will be a 2 digit HSN code for supply of goods for aggregate turnover for more than Rs. 1.5 crore but less than 5 crore.
- There will be a 4 digit HSN code for supply of goods with aggregate turnover of more than 15 crores.
- 8 digit HSN code for goods that are imported or exported.
Service accounting code- SAC
Just the same way as goods, services are also classified by SAC codes for purposes of measurement, unification and taxation. The codes for services are called service accounting codes, in short SAC codes. For example-
The SAC code for legal documentation and certification services with regards to patents, copyrights, and other intellectual property rights will be- 998213.
Here to break down the code, the first two digits of the code which are 99 is same for all the service codes. The next two digits, which here in case are- 82 represent, the kind or nature of services- which is legal services, in the present case. The last two digits- 13 represent the detailed nature of services that is the documentation framework in the present scenario.
There is also a provision of unique quantity code, which is used as a unit of measurement like 1 kg of wheat, 1 litre of oil, etc. as per GST rules, any tax invoice or credit/ debit note should have this UQC.
HSN code is a way to bring uniformity is trading of products internationally. It is accepted by almost 200 countries and it has a unique structure with chapters, headings, etc. which give the products unique HSN based on these. In India also there is a system of HSN under GST, a few things do not fall under HSN codes but others do. There are 8 digits HSN code for import and export products given by central customs and excise department in India. Apart from products, the services also have a system of code which is SAC. For further details visit our GST page on our website