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HSN stands for Harmonized System of Nomenclature. This is a Global standard of Nomenclature of trading goods in international trade. It is the codification of all the trading goods into various sections with each chapter containing commodity of similar nature.

Harmonized System of Nomenclature, or HSN, was conceived and developed by the World Customs Organization (WCO) with the vision of classifying goods from all over the World in a systematic and logical manner. It is a six digit uniform code that classifies more than 5,000 products and is accepted worldwide. These set of defined rules is used for taxation purposes in identifying the rate of tax applicable to a product in a country. It is also used to determine the quantum of product exported or imported in and out of a country. It is a crucial feature to analyze the movement of goods across the World. It is a combination of different sections, further drilled down to chapters, which are further classified into headings and sub-headings. The resultant figure is the six-digit code.

The Harmonized System is governed by "The International Convention on the Harmonized Commodity Description and Coding System". The maintenance of the HS is a WCO priority. The HS Committee also prepares amendments updating the HS every 5 - 6 years. The HSN structure contains 21 sections, with 99 Chapters, about 1,244 headings, and 5,224 sub-headings As India is a member of WCO, HS is being used in India for Customs and Central Excise Classifications since 1985. Now HSN Codes are to be used for classification purposes in the GST regime. The HS code consists of Six digits but India has adopted an eight digit code. The width of HSN code is dependent upon various slab of turnover of supplier for the year preceding the current year.

Under GST, the majority of dealers will need to adopt two-, four-, or eight-digit HSN codes for their commodities, depending on their turnover the previous year.

a. Businesses with turnover of less than Rs 1.5 crores will not be required to use HSN codes for their commodities.

b. Businesses with turnover between Rs 1.5 crores and Rs 5 crores shall be required to use two-digit HSN codes for their commodities.

c. Businesses with turnover equal to Rs 5 crores and above shall be required to use four-digit HSN codes for their commodities.

d. Dealers under composition scheme will not be required to mention HSN codes in their invoices. 

Understanding the digit of HSN Code

The HSN structure contains 21 sections, with 99 Chapters, about 1,244 headings, and 5,224 subheadings.

For e.g.  Handkerchiefs made of Textile matters

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. For a deeper classification, Indian GST has 2 more digits to these commodities. 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.

Services Accounting Code (SAC) in GST

In case of services, for each type of service provided is given a unified code for recognition, measurement and taxation. These are known as SAC codes.

Services will be classified as per the Services Accounting Code (SAC). The SAC is strictly numeric and is 6 digits. The first two digits are same for all services i.e. 99, the next two digit represent the major nature of service and the last two digit represent detailed nature of service.

Use of HSN/ SAC

At the time of registration/migration under GST, the applicant will be required to mention Harmonized System of Nomenclature (HSN) code of the goods he deals with & Services Accounting Code (SAC) Code for Service for which he is liable to pay tax.

The author is a Fellow member of ICAI, New Delhi & ICAI, Kolkata and can also be reached at surucan@gmail.com. 

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