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HSN Code

HSN full form

HSN stands for ‘Harmonized System Nomenclature.’ The nomenclature was developed for the sole purpose of systematising the vision of facilitating the classification of goods and services all around the world. The system nomenclature was developed by WCO (World Customs Organisation) and came into effect in 1988.

How does HSN Code work?

The harmonised commodity description and coding system which generally refers to harmonised systems of nomenclature have about 5,000 commodity groups. All the products are arranged in a legal and logical structure. Each of these 5,000 groups is identified by a six-digit code. To achieve a uniform and well-balanced classification, the HSN code if supported by well-defined rules and regulation. To top it all off, the rules or regulations have attained worldwide acceptance.

HSN code was developed and widely classified for taxation purposes. It helps in the identification of the rate of tax applicable to a specific product in a country that is under review. Apart from that, it can also be used in the calculations involved in claiming benefits.

Anyway, the HSN Code applies to imports and exports. The major use of HSN code in trading practices is to aid in determining the quantity of all the commodities traded through a nation.

Importance of HSN code

In a sentence, the importance of HSN code can be described as a classification of goods from all over the world logically and systematically. It brings in uniformity in the proper distribution and classification of goods and facilitation of international trade.

As mentioned, the primary purpose of the HSN code is the systematic classification of goods. HSN code is also used for gathering data and solving problems. Without HSN code the task of obtaining and determining data would be a difficult task. The HSN code final result would be to make the international trade system more efficient.

HSN code is universal, therefore, it is accepted worldwide. There have been 200+ countries participated through HSN code. The reason behind the impressive adoption rates of HSN codes are majorly its benefits:

  • Collection of international trade statistics
  • Provision of a rational basis for Customs tariffs
  • Uniform classification

In an around 98% of the merchandise in international trade is classified in terms of the HSN.

Since it is widely accepted around the globe, therefore, the HSN code exits for each commodity for its classification and distribution. The numbers remain the same for almost all goods. Although the client may experience a variable in some countries since their HSN code is completely based on the nature of the items classified.

HSN in India: One Example

Since 1971, India has been a member of WCO (World Customs Organisation). Initially, the HSN code used to be six digits to classify merchandise for Customs as well as Central Excise duties. But with time the number of goods increased and longer classification, then the Customs and Central Excise Duties have increased two more digits in HSN code. The addition of two digits in the HSN code was mainly to make the code more precise.

Mostly all the goods in India are classified using the HSN code system. HSN code system would assist in the numbers of calculations for the goods and services tax. Currently, the numbers are majorly used to categorise goods to compute VAT (Value Added Tax).

While preparing tax invoice for GST, the HSN codes shall be accurately mentioned on GST account. Further information would provide an insight into how two digits to eight digits came into India.

The government gives relief to small taxpayers with an annual turnover up to Rs. 1.5 crore in any following financial year. After making the move, there is no requirement for small taxpayers to accumulate HSN codes in their taxable income.

Taxpayers with a turnover between Rs. 1.5 crore up to 5.00 crore has to mention only two digits of their HSN code.

Taxpayers with a turnover that exceeds Rs. 5.00 crore should mention five digits of their HSN code.

Further understanding of HSN code structure:

Any HSN code contains:

  • 21 sections
  • 99 chapters
  • 1244 headings
  • 5224 subheadings

Considering the structure of the HSN code, it has 21 groups and the groups are further classified into 99 different chapters. The 99 classified chapters are divided into 1244 number of headings. Then those 1244 headings are further implemented into 5224 sub-headings. Section and chapters titles describe a broad category of goods, while headings and sub-headings illustrate products in detail.

The HSN code plays out in the following manner:

  • Each Chapter is named as a two-digit HSN number.
  • Each two-digit HSN number is sub-classified into a four-digit HSN code.
  • Later, such four-digit HSN codes are further sub-classified into the six-digit HSN code.

Importance of HSN code under GST

The major role of the HSN code is to systematise and provide global acceptance to GST. With the help of the GST HSN code, the client would not have to upload or provide a full description of the goods as it can be achieved with the help of the HSN code. This way the client may save some time and along with that, it will make it easier to file GST and automate the returns.

For better and further illustration, the client would like to approach a freight forwarder or manage the market place for an effective practice without disruption.