In 2021, the Ministry of Finance in India announced that businesses with a turnover of more than Rs. 5 crore will have to furnish either a six-digit HSN code or the SAC code (as per the case) (Source) on the invoices issued for the supply of taxable services and goods starting from April 1.
While it has made GST taxpayers rush toward getting the required codes, many of them also want to know more about the usage and impact of implementing these codes in relation to their businesses.
In this guide, we will cover HSN and SAC codes in detail.
What is HSN code full form?
HSN stands for Harmonized System of Nomenclature. This system is meant for the systematic classification of goods and was developed by the World Customs Organization (WCO) in 1988. HSN code is considered the global standard to name goods. Being a 6-digit uniform code, HSN code can be used to classify 5000+ products and is globally accepted.
Here are a few more pointers about HSN code that you should know:
- HSN code is in use in more than 200 countries and economies.
- HSN code also helps in the uniform classification of products worldwide while also acting as a base for customs tariffs
- It is a crucial metric related to the collection of global trade statistics
- More than 98% of international trade merchandise is classified in terms of the HSN code (Source – WCO).
Understanding HSN code meaning in India
India has been a member of WCO since 1971 and uses the 6-digit HSN codes for the classification of commodities for Customs and Central Excise since 1986. Unlike other countries that use HSN, the Customs and Central Excise added 2 more digits to the HSN codes later for better differentiation of products.
With the introduction of GST in India, HSN codes are now being used under a three-tiered system. This can be defined as:
- Businesses having a turnover of less than Rs. 1.5 crore do not need to use the HSN system.
- Businesses having a turnover ranging from Rs. 1.5 crore to Rs. 5 crore must use 2-digit HSN codes.
- Businesses with a turnover of more than Rs. 5 crore are entitled to use 4-digit HSN codes.
- The 8-digit HSN code is meant for businesses that deal in the import and export of commodities.
Different sections under the HSN code system
The HSN code structure contains:
- 21 Sections
- 99 Chapters
- 1244 Headings
- 5224 Subheadings
In other words, each section of the HSN code system is divided into Chapters, which are further divided into Headings. Lastly, each Heading is further divided into multiple subheadings. All the information in Sections and Chapters describes the broad categories of goods, while headings and subheadings explain the commodities in detail.
Let’s consider the following example to help you better understand the HSN code structure –
HSN-62.13.90 refers to the handkerchiefs made of textile. Here,
- 62 – the first two digits of the code represent the chapter number that covers articles of apparel and clothing (excluding knitted or crocheted clothing)
- 13 – the next two digits of the HSN code represent the heading number that covers handkerchiefs.
- 90 – the last two digits of the code represent the product code for handkerchiefs made of textile materials.
In India, this HSN code for the same product would include two more digits.
- The HSN code for handkerchiefs made of man-made textiles would be 62.13.90.10.
- On the other hand, if the products are made from silk or silk waste, their code will be 62.13.90.90. Here, the last two digits of the HSN code stand for silk or silk waste.
The following image describes the structure of HSN code in India:
What is SAC code?
Similar to goods, services are also classified for recognition, taxation, and measurement. Here, the Code for Services is known as Services Accounting Code or SAC.
The following example illustrates the nomenclature of services under the SAC code:
The 998213 SAC code full form is defined as follows:
- 99 – the first two digits are the same for all services.
- 82 – the next two digits reflect the major nature of service (legal services in this case).
- 13 – the last two digits represent the detailed nature of services, which is legal documentation for patents, etc. in this case.
As a whole, this 6-digit code represents the SAC code for legal documentation concerning copyrights, patents, and other intellectual properties.
How is HSN related to GST in India?
In relation to GST, the core purpose of HSN code is to make GST globally accepted and systematic. Since the HSN code represents different types of commodities, GST return filing won’t require manual entry of goods-related information.
Keep in mind that you, as a business owner, must provide HSN/SAC-wise details of sales in GSTR-1 if the turnover falls in the slabs mentioned below:
HSN declaration in GST up to Mar 31, 2021
| Turnover | Number of digits of HSN to be declared |
| Up to Rs. 1.5 cr | 0 |
| Ranging from Rs. 1.5 cr to Rs. 5 cr | 2 |
| Above Rs. 5 cr | 4 |
Declaration of HSN code for Goods and Services from Apr 1, 2021
| Turnover | Types of invoice document | Number of HSN code digits to be declared |
| Up to Rs. 5 cr | Mandatory for B2B tax invoices | 4 |
| Mandatory for B2C tax invoices | 4 | |
| Above Rs. 5 cr | Mandatory for all invoices | 6 |
- The HSN codes must be declared in every invoice issued by the taxpayer under the GST regime.
- An 8-digit HSN code is mandatory for exports and imports under GST.
- The above declaration is based on the notification released by the Ministry of Finance.
How to avoid mistakes related to HSN in GST?
One way to avoid HSN code-related mistakes while filing GST is to use smart payment solutions offered by Paytm for Business. Using our products, you can generate GST-compliant invoices automatically for every transaction. These invoices are easy to download and share. Besides this, make sure your business is compliant with various tax regulations.
Recommended Read: Government Mandate About GST Compliant Dynamic QR Codes – How It Affects Your Business
FAQs
What is HSN code meaning?
HSN code refers to the internationally adopted system for commodity description and nomenclature that was developed by WCO in 1988. Under the GST regime in India, goods are classified under HSN while the services have SAC code linked to them.
What is the purpose of HSN code?
The purpose of HSN nomenclature under GST is to make this tax regime globally accepted.
How does HSN code work?
HSN code is used for the systematic classification of 5000+ commodities/goods all over the world. A business owner is liable to declare a certain number of HSN code digits as per the criteria mentioned above.
Why is HSN important?
The importance of HSN nomenclature can be realized from the fact that it is globally accepted and systematic. This further facilitates international trade because of uniform goods classification.
