What Is HSN Code?

The HSN code in full form is the Harmonised System of Nomenclature code. It plays a crucial role in international trade and taxation. Developed by the World Customs Organisation (WCO), this standardised system is used to classify goods and streamline trade practices globally. In India, HSN codes are integral to the Goods and Services Tax (GST) system, ensuring that products are uniformly categorised. 

This blog post will delve further into the explanation of the HSN code, its significance in the Indian business landscape, and how it relates to taxation, particularly GST. 

What Is the HSN Code?

HSN code is a standardised numerical method used to classify traded products. It is an internationally accepted system of product classification developed by the World Customs Organisation (WCO). This system is used by more than 200 countries worldwide for customs and taxation purposes.

The HSN code consists of 6 digits, with some countries adding additional digits for further classification. Each digit in the code represents a specific category or subcategory of products. The first 2 digits denote the chapter, the next 2 digits represent the heading, and the last 2 digits indicate the subheading. This hierarchical structure allows for a precise and uniform classification of goods across different countries, facilitating international trade and ensuring consistency in taxation.

In India, the HSN code is widely used under the GST regime, ensuring that goods are categorised uniformly across the nation, thereby reducing ambiguities and errors in tax calculation.

How Does the HSN Code Work? Explained with Example

To understand how the HSN code works, let's delve into an example that shows the practical application of this system. Imagine you're exporting a cotton t-shirt. The HSN code for this product would be 610910. Here's how this code breaks down:

• Chapter 61: Articles of apparel and clothing accessories, knitted or crocheted
• Heading 09: T-shirts, singlets, and other vests
• Subheading 10: Of cotton

This detailed classification demonstrates the hierarchical nature of the HSN code, showcasing how each digit contributes to a more specific product description. The HSN code meaning becomes clear when we see how it precisely identifies the nature of the product. This level of detail is crucial for various stakeholders in international trade.

For customs officials and tax authorities, the HSN code allows for quick identification of the product's nature, enabling them to apply appropriate duties or taxes efficiently. Businesses benefit from this system as well, as it assists them in determining correct tax rates and navigating export-import regulations for their products. 

Understanding the HSN code and its practical application is essential for businesses engaged in international commerce, as it streamlines processes and reduces potential misunderstandings in trade transactions.

The Benefits of the HSN Code

The implementation of the HSN code system offers numerous benefits for businesses and governments:

• Uniformity in Classification: HSN promotes standardised product classification across countries. This uniformity reduces confusion and disputes in international trade, as the HSN code remains consistent globally.
• Streamlined Customs Procedures: The HSN code allows for smoother customs processes and faster clearance of goods. Customs officials can quickly understand the nature of products using HSN code.
• Tax Compliance: Understanding and correctly using HSN codes ensures compliance with tax regulations, particularly in the context of GST in India. 
• Accurate Tax Rate Determination: The HSN code details help in determining appropriate tax rates for products, avoiding errors in calculations and potential penalties.
• Global Product Tracking: The HSN code system enables businesses to easily identify and track their products in global trade databases. This feature of the HSN code provides valuable insights for market research and expansion strategies.
• Simplified Trade Documentation: Using standardised HSN codes simplifies trade documentation, reducing paperwork and potential errors in international transactions.
• Data Analysis: Governments can use HSN code data for economic analysis, policy-making, and monitoring trade patterns.

Understanding How the HSN Code Is Used in India

The Indian government has adopted the HSN code structure to classify goods under GST, aligning the country's tax system with international standards. This adoption has significantly simplified the process of classifying goods for taxation purposes, making it easier for businesses to understand what is HSN code and how it applies to their operations.

Under the Indian GST regime, the use of HSN codes is mandatory for businesses with an annual turnover exceeding a certain threshold. The number of digits required in the HSN code varies based on the business's turnover:

• For businesses with an annual turnover of up to INR 5 crores: 4-digit HSN code
• For businesses with an annual turnover exceeding INR 5 crores: 6-digit HSN code

This tiered system ensures that smaller businesses aren't overburdened with complex classifications while larger enterprises provide more detailed information.

The HSN code must be mentioned on tax invoices, allowing for easy identification of goods and applicable tax rates. This requirement has brought about greater transparency in transactions and reduced the chances of misclassification or tax evasion. By including the HSN code in invoices, businesses communicate the nature of their products to both customers and tax authorities.

Moreover, the use of HSN codes in India has streamlined the process of filing GST returns. The codes help in automatically populating the correct tax rates in GST returns, minimising errors and saving time for businesses. This automation is particularly beneficial for companies dealing with a wide range of products, as it eliminates the need for manual tax rate assignment for each item.

The implementation of the HSN code system has also facilitated better data analysis for tax authorities. By using standardised codes, authorities can more easily identify trends, detect anomalies, and make informed policy decisions. This data-driven approach enables the government to refine tax policies and address potential areas of concern in the tax system.

Conclusion

HSN code system plays a vital role in international trade and tax compliance, providing a standardised method for classifying goods globally. By correctly applying HSN codes, businesses can simplify tax calculations, improve efficiency, and enhance their overall financial management. 

To further enhance your business’s financial efficiency and optimise day-to-day operations, consider SMFG India Credit’s tailored business loan solutions. We offer unsecured business loan solutions up to INR 75 lakhs* at minimal and competitive interest rates. Apply now or contact us for more information.