HSN Code -  Harmonized System of Nomenclature (HSN)

The Harmonized System of Nomenclature (HSN) code plays a crucial role in global trade, taxation, and customs operations. It's a standardised system used for classifying goods, ensuring that products are identified consistently across borders. This article dives deep into the HSN Code, its structure, importance, and application, particularly under India's Goods and Services Tax (GST) system.

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What is the HSN Code?

HSN code, or “Harmonized System of Nomenclature,” is an internationally standardised system for classifying goods. This 6-digit code categorises over 5,000 products and is recognised globally. Developed by the World Customs Organization (WCO), the HSN system has been in use since 1988 to ensure the systematic classification of goods worldwide.

How Does HSN Code Work?

The HSN code organizes around 5,000 commodity groups, each assigned a unique six-digit code. These codes are arranged in a logical and structured manner, ensuring a standardized classification system. Supported by well-defined rules, the HSN code facilitates uniform and consistent classification of goods across industries and borders.

• The primary purpose of the HSN system is to classify goods systematically and logically on a global scale. 
  
• This uniform classification promotes consistency, simplifies trade procedures, and facilitates smoother international trade by providing a common framework for identifying products across countries.

HSN Worldwide

The HSN system is utilised by over 200 countries and economies for several purposes, including:

• Ensuring uniform classification of goods.
• Serving as the basis for Customs tariffs.
• Enabling the collection of international trade statistics.

More than 98% of merchandise in international trade is classified using the HSN.

The Harmonized System of Nomenclature (HSN) number for each commodity is widely accepted globally and remains consistent for most goods. However, some countries may slightly modify the HSN numbers to reflect the specific nature of goods classified.

HSN in India

India has been a member of the World Customs Organization (WCO) since 1971 and adopted the HSN system to classify goods. Initially, India used the standard 6-digit HSN codes for Customs and Central Excise purposes. To achieve greater precision and address specific requirements, two additional digits were later added, resulting in an 8-digit classification system tailored to the country’s needs.

Understanding the HSN Code

The HSN code structure is organised systematically into:

• 21 Sections
• 99 Chapters
• 1,244 Headings
• 5,224 Subheadings

The structure follows a hierarchical format:

• Sections are the broadest categories, grouping related types of goods.
• Chapters within each section further narrow the classification into specific product categories.
• Headings within chapters define narrower groups of products.
• Subheadings provide detailed descriptions of individual products.

Example:

• Handkerchiefs made of Textile Materials: HSN Code 62.13.90
• The first two digits (62) indicate the chapter number, which pertains to Articles of Apparel and Clothing Accessories, Not Knitted or Crocheted.
• The next two digits (13) specify the heading number for Handkerchiefs.
• The final two digits (90) identify the product code for Handkerchiefs made of Other Textile Materials.

In India, an additional two digits provide more specific classification. For example, if the handkerchiefs are made of man-made fiber, the complete HSN code would be 62.13.90.10.  

Structure of the HSN Code in India

In India, the HSN code system is an 8-digit classification designed to meet specific trade and taxation requirements. Here's how it is structured:

First Two Digits:

• Represent the Chapter under which the product falls.
• Example: "07" refers to Vegetables.

Next Two Digits:

• Indicate the Heading, which further narrows down the product category.
• Example: "0702" refers to Tomatoes.

Next Two Digits:

• Denote the Subheading, which provides a more specific classification.
• Example: "070200" refers to Fresh or Chilled Tomatoes.

Last Two Digits (Indian Specific):

• Added for greater precision in classification, customised for Indian trade and taxation purposes.
• Example: "07020001" might refer to a specific type of organic fresh tomatoes (hypothetical example).

Determining HSN Code Descriptions

The HSN Code description is determined by factors like weight, type, source, production method, and packaging. It is constructed to reach the required level of specificity for precise classification.

For instance, the HSN code for sarees varies based on the materials used. The chapter in the HS code and the values at the tariff item level differ for each type of material.

Silk sarees are categorised under Chapter 50, while cotton sarees fall under Chapter 52.

The Difference Between Silk and Cotton HSN Code

Here's another example. Although terylene sarees and polyester sarees share the same 6-digit HSN Code, their tariff item value is different:

• Terylene sarees: HSN Code 54075230.
• Polyester sarees: HSN Code 54075240.

Hence, it is crucial to be familiar with your product, identify the right HSN code, and double-check its accuracy for precise document submission.

Find HSN of Your Product!

Misclassifying a product can result in customs delays, denial of export privileges, incorrect customs duty charges, or, in more severe cases, fines or confiscation of goods.

ITC-HS Codes and Their Division

The ITC-HS (Indian Trade Clarification based on Harmonized System) codes are a critical tool in India’s trade policy framework. These codes are divided into two schedules that guide import and export policies:

Schedule I: Import Policies

Purpose: Contains rules and guidelines related to the import of goods into India.

Example:

•  HS Code: 96132000
• Item Description: Pocket lighters, gas-fueled, refillable
• Import Policy: Prohibited
• Policy Condition: Import is "Free" if the CIF (Cost, Insurance, and Freight) value is ₹20 or above per lighter.

Schedule II: Export Policies

Purpose: Outlines the guidelines for the export of goods from India.

Example:

• HS Code: 01022120 (and related codes)
• Item Description: Live pure-bred breeding cows and other cattle/buffaloes
•  Export Policy: Restricted
•  Policy Condition: Exports permitted only under a license.

Key Features of ITC-HS Schedules

• Policy Conditions: Both schedules define the conditions under which goods can be imported or exported, such as restrictions, licenses, or exemptions.
• Customs Duty Rates: They are crucial for determining applicable customs duty rates.
• Regulating Authority: These schedules are maintained and enforced by the Directorate General of Foreign Trade (DGFT), ensuring adherence to India's trade policies.

Why is HSN Important Under GST?

The Harmonized System of Nomenclature (HSN) is crucial in the Goods and Services Tax (GST) system for several reasons. It facilitates the systematic classification of goods, ensures accurate taxation, and promotes transparency in business transactions.

• Uniform Classification of Goods: HSN codes ensure a standardized method to classify goods across businesses and industries. This uniformity minimizes disputes and ensures consistency in tax application.
• Accurate Taxation: By categorizing goods precisely, HSN codes help determine the correct GST rates applicable to different products. this reduces the chances of misclassification and incorrect tax levies.
• Ease of Compliance: Taxpayers can use pre-defined HSN codes and benefit from auto-populated descriptions, simplifying the invoicing process. The standardized system makes GST return filing more straightforward.
• Facilitates Global Trade: HSN codes align with international standards set by the World Customs Organization (WCO). This simplifies export and import processes and ensures consistency in global trade.
• Efficient Tax Administration: By enabling precise categorisation, HSN codes assist tax authorities in tracking goods, detecting tax evasion, and ensuring compliance. It simplifies audits and reduces administrative burdens.
• Supports Data Analytics: The detailed classification allows governments to analyse trade data effectively, identify trends, and frame better policies.

Practical Applications in GST

• B2B Transactions: HSN codes are mandatory on tax invoices, ensuring clarity in inter-business dealings.
• B2C Transactions: Optional or mandatory, based on turnover, to facilitate compliance for high-value transactions.
• International Trade: HSN’s 8-digit codes are indispensable for exports and imports, ensuring alignment with global trade practices.

How is the HSN Code Used in India?

In India, the HSN (Harmonized System of Nomenclature) code is a critical classification tool for businesses to ensure accurate Goods and Services Tax (GST) compliance. Its usage extends across several key areas:

GST Registration and Compliance:

• Businesses must use HSN codes during GST registration and while filing GST returns.
• The HSN code is required for generating invoices and preparing HSN summaries for tax reporting.

Import and Export:

For international trade, businesses must use the ITC-HS code, an 8-digit version of the HSN code specific to India, to classify goods for Customs and taxation.

Determining GST Rates:

HSN codes help businesses identify applicable GST rates for goods, reducing errors and ensuring correct tax application.

Statistical and Administrative Use:

HSN codes simplify tax administration and facilitate trade data collection for statistical analysis.

Compliance Benefits:

Using HSN codes reduces the risk of errors in tax filings, ensures compliance with GST regulations, and aids in determining accurate compliance costs.

 Declaration of HSN codes

 The declaration of HSN codes is mandatory on tax invoices, with the number of digits varying based on the turnover and type of transaction.

HSN Code Declaration Rules (Up to 31st March 2021)

HSN Code Declaration Rules (From 1st April 2021)

As per CGST Notification No. 78/2020, dated 15th October 2020, the updated rules are:

Annual Aggregate Turnover Reference:

• The turnover of the previous financial year is used for determining the HSN code declaration requirement.
•  Example: For invoices issued in FY 2021-22, the turnover of FY 2020-21 is considered.

Exports and Imports:

For international trade, declaring all 8 digits of HSN code is mandatory, ensuring compliance with global trade standards.

HSN Code Reporting in GSTR-1

Reporting of HSN codes in GSTR-1 is mandatory under GST to ensure accurate classification of goods and services for taxation. Businesses with a turnover up to ₹5 crore must report 4-digit HSN codes for B2B invoices (optional for B2C), while those with turnover above ₹5 crore must report 6-digit HSN codes for all invoices. For exports and imports, 8-digit HSN codes are mandatory. This ensures compliance, transparency, and accuracy in GST filings.

Click here to learn more about  Mandatory HSN Code Reporting in GSTR-1/1A from Jan 2025

How to Add HSN Code in the GST Portal?

To add an HSN code to the GST portal, follow these steps:

• Login to the GST Portal: Visit the GST portal and log in using your username and password. Navigate to the Registration Amendment Section
• On the dashboard, go to: Services > Registration > Amendment of Registration Non-core Fields.
• Access the Goods and Services Tab: Click on the Goods and Services tab from the available options.
• Select the Goods Tab: Under the Goods tab, you can manage the HSN codes for the goods or services you supply.
• Search for the Relevant HSN Code: Use the search bar to find the relevant HSN chapter, either by entering the HSN code directly or by typing the name of the item. Select the appropriate HSN code from the dropdown menu.
• Save and Continue: Click on Save and Continue to confirm the selected HSN code. Repeat the process for any additional goods or services you need to add.
• Complete Verification and Submit: Once all changes are made, complete the verification process by choosing either:
  • Digital Signature Certificate (DSC), or
  • Electronic Verification Code (EVC).
  • Submit the amendment request.

Key Points to Remember

• Amendments to HSN codes are considered a non-core field, so approval from GST authorities is not required.
• Ensure the correct HSN codes are selected to avoid any compliance issues.
• Changes will reflect in the GST portal after successful submission and processing. 

Services Accounting Code (SAC) in GST

In the GST framework, services are classified systematically using Services Accounting Codes (SAC), similar to the classification of goods using HSN codes. This uniform system facilitates recognition, measurement, and taxation of services.

Structure of SAC Code

• First Two Digits (99): These are common to all services and indicate that the code pertains to services.
• Next Two Digits: Represent the major category or nature of the service. Example: "82" indicates legal services.
• Last Two Digits: Specify the detailed nature of the service. Example: "13" refers to legal documentation and certification services concerning patents, copyrights, and other intellectual property rights.

Example of SAC Code

998213: Legal documentation and certification services concerning patents, copyrights, and intellectual property rights.

Difference Between HSN Code and HS Code

HSN (Harmonized System of Nomenclature) and HS Code (Harmonized System Code) are essentially the same in customs and shipping. Both refer to the international product nomenclature introduced by the World Customs Organization (WCO) in 1988 for the systematic classification of goods. However, there are subtle differences based on regional usage:

• Global Usage (HS Code): The 6-digit codes are widely referred to as HS Codes worldwide and are used for classifying goods in international trade.
• India-Specific Usage (HSN Code): In India, the 6-digit HS Codes are referred to as HSN Codes. India, a WCO member since 1971, initially adopted the 6-digit HSN system for Customs and Central Excise purposes.

To enhance precision, India later extended the classification by adding two additional digits, creating an 8-digit code known as the ITC-HS Code (Indian Trade Clarification based on Harmonized System of Coding).

• ITC-HS Code vs. HS Code: The ITC-HS Code includes the same 6-digit base as the HS Code, with two additional digits added for finer classification of goods in Indian trade and taxation.

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RENU SURESH Expert

Updated on: January 22nd, 2025