HSN–Harmonized System of Nomenclature (HSN) is an internationally accepted method for classifying goods. This system was developed by the World Customs Organization (WCO) and employed by more than 200 countries to facilitate trade and define customs tariffs. In India, the HSN code is an integral part of the categorization of goods under the Goods and Services Tax (GST) system. The HSN code is applied based on the annual turnover of a business with different limits for different turnover brackets. Now, in this blog, let us discuss the significance of HSN codes, their limits under GST, as well as the compliances to be adhered to as businesses.
What is an HSN Code?
HSN Code (Harmonized System of Nomenclature) is an internationally accepted system for classifying goods. It categorizes the type of goods with a line of number digits most of the time, which varies from 2 to 8. The codes create a common categorization of goods around the world that allows them to ease international trade, help businesses comply with customs tariffs, and compile trade statistics. To enhance clarity regarding goods and ensure correct taxation HSN code used in the context of GST.
Significance of HSN Codes
The HSN Codes provide a series of advantages to both businesses and governments.
- Standardisation in Classification: HSN codes help maintain a standard classification of goods all over the world, preventing any confusion in international trade and facilitating smooth transactions.
- WCO Standards and Protocols: Standards and protocols developed by the WCO serve as one of the core functions through harmonization tools that advance international trade.
- Precise Taxation: The HSN code system enables specific taxation by ensuring correct GST rate application, which decreases tax evasion possibilities.
- Ease of customs clearance: Products classified using HSN codes enable easier customs clearance operations through reduced procedural errors and shortened wait times.
- Improved Data Collection:Â Organizations, together with governments, improve their data collection procedures for trade, which enhances both policy evaluation and economic decision-making.
- Enabling Trade: The HSN code helps smoothen the documentation process worldwide by making things easier to comprehend and clarifying product classification, thus making it easier for trade to take place.
- Legal Compliance: By adhering to the correct classification and reporting methods required under the GST, businesses can mitigate the risk of facing legal
- Transparency and Fairness: The uniformity of the HSN code helps promote transparency in tax assessments and customs processes, making it fair in the marketplace.
HSN Code Applicability Based on Type of Business Turnover
Under the GST system, there are different requirements for businesses depending on turnover. These thresholds will decide the extent to which the classification of HSN codes has to be when the businesses report their transaction.
1. Small Businesses: Annual Receipts Up To ₹1.5 Crore
HSN codes are not mandatory for businesses with a turnover of ₹1.5 crore or below. These businesses do not have to mention HSN codes in GST returns or invoices or e-way bills for B2B (business-to-business) transactions. Nevertheless, industries can voluntarily apply HSN codes if they want, mostly to assist in clearly making arrangements for record-keeping.
2. Medium Enterprises: ₹1.5 Crore to ₹5 Crore in Revenue
According to the GST law, businesses engaged in a turnover of ₹1.5 crore to ₹5 crore are mandated to use at least a 2-digit HSN code. This is to classify products in a more granular manner, facilitating appropriate tax assessments. For business-to-business transactions, the HSN code is important as it has to ensure the application of the right tax rate for each product.
3. Large Enterprise: Turnover Over ₹5 Crore
Businesses whose annual turnover is more than ₹5 crore must mention a minimum of a 4-digit HSN code in the GST returns. In some cases where there is a specific type of goods sold by the business as determined by the government, they must provide an 8-digit code for HSN. This granularity allows for more precise classification of products and aids in automating taxation, particularly for businesses with a wider product portfolio.
4. Importers and Exporters need a special HSN Code
For import and export businesses, the 8-digit HSN code is mandatory for GST returns, irrespective of their turnover. That’s because the customs process requires a more precise description so that the right import/export paperwork can be created, which also guarantees exemption from the correct taxes, relevant duties, or refunds.
Advantages of Meeting the HSN Code Restriction
Complying with the HSN code limits under GST offers several advantages. Among the top benefits are:
- Businesses that select appropriate HSN codes will be able to prepare their GST Returns correctly, thus preventing errors that result in penalties.
- Seamless Performance during Audits: Correct application of HSN code facilitates easier representation of tax compliance by businesses during the GST audit process.
- Tax Authority Efficiency: Using Harmonized System codes to classify goods enables tax authorities to easily determine the tax obligations of businesses, ensuring the GST system is operating effectively.
- Avoiding Penalties: Merchants are less likely to incur penalties and face the impact of penalties for non-compliance when HSN code limits are followed. In the process, financial losses are avoided.
How to Use HSN Codes in GST?
- Identify the Product: Know the type and nature of the product you are getting.
- Find out the Correct HSN: You could use an online search to find out the right HSN code, or you could also check the official GST portal.
- GST HSN Search website lets you search for valid HSN codes for different Goods.
- Use the Code: After finding the appropriate HSN code for your products, use it in your invoices and GST returns based on the turnover slab you belong to. Make sure the codes will be used consistently to prevent filing mistakes.
What Happens if HSN Code Rules and Regulations are Not Followed?
Multiple negative effects occur when business operations fail to comply with HSN code regulations.
- The non-compliance of HSN codes with GST laws has the potential to lead to financial penalties and penalties that can injure the business.
- Wrongful HSN code declarations become subject to tax authority inspections, which trigger their review process.
- A business may lose accurate input tax credits when a company misclassifies its operations to claim incorrect input tax.
Conclusion
The HSN code is an integral part of the efficient working of the GST regime and is imperative to ensure correct classification and, subsequently, the taxation of the goods. Tax compliance has penalties for failure to comply with prescribed HSN code limits as per the turnover of the specified business. No matter if a seller is a small business or an enterprise, knowing when to use HSN codes is something businesses involved in domestic and international trade should be aware of. This is precisely why utilizing the appropriate codes not only streamlines tax operations for businesses but also supports and maintains the accuracy and efficacy of the GST system as a whole.
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