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The Importance of using HSN Code under GST

The amount of time we spend trying to improve our image in the eyes of outsiders is considerable and may not always be understood by everyone.  The implementation of GST in India is one such measure to boost our image to the eyes of the world, while citizens may not understand or agree with its method of implementation.   India since 1971 has belonged to World Customs Organization (WCO), who came out with the “Harmonized System of Nomenclature” or HSN.  Under GST using HSN will allow every participating country to classify goods in a systematic and logical manner, making international trade smoother.

For most business proprietor’s, depending on your turnover from the previous year, you will need to declare either the two or four HSN digits of your merchandise.

Revenue HSN digits to be declared
Below Rs. 1.5 Crore 0
Rs 1.5 Crore – Rs. 5 Crore 2
Above Rs. 5 Crore 4

Reason For Adoption of HSN in India

By adopting HSN classification, India will rise and gain recognition and acceptance from other global players.  The application of GST rates globally will become systematic, reducing the costs of international trade.  The HSN codes declared on the products will be automatically identified and the appropriate GST rates applied.  Thus, using the correct codes becomes imperative, as it will simplify trade and make this new GST regime globally accepted leading to harmonization in trade

HSN Classification

HSN classification consists of sections, chapters, headings and sub headings.  Each section contains several chapters under which several headings and subheadings are listed depending upon the products and its components.  For example: Umbrellas would have a HSN code of 6601.  The first two digits, 66, represent the chapter under umbrellas and accessories; followed by 01 representing the heading under which umbrellas and sun umbrellas fall into.

The general interpretative rules consist of 6 rules of which the first four are applied in sequence and as they are related. The remaining two can be applied as and when needed.

Rule 1:                                                                                                                               

Classifications can be derived as per headings and sub-headings, since sections and chapters are for reference and legal purposes only.

Rule 2a:

Incomplete products which have the same properties as the finished products are classified the same as the finished product.  For example, a car without seats is still a car.

Rule 2b:

A product’s components which have a mixture of substances shall be classified under a different heading, whereas the mixture can belong to a different HSN.

Rule 3a:

The particular heading of the product shall take precedence over the heading of the product. For example, chocolate falls under a different heading and attracts its own GST rate, whereas choclate milk would fall under the milk beverage classification and not the general milk category which attracts a 0% GST rate.

Rule 3b:

If a product cannot be classified under the set headings, then the characteristics of the product can be used for identifying the HSN.

Rule 3c:

If a product is well suited in two headings, then the heading which is last in numerical order can be selected.

Rule 4:

If a product is not classifiable as per the rules, then it can be labeled as per the product they most likely resemble.

Rule 5:

Products designed as cases for a specific product and for the long term will be classified the same as the product itself.  For example: mobile covers would be classified under mobiles.

Rule 6:

When determining the classification of the products in accordance with the subheading, the comparable sub heading must be of the same level.

Under the GST regime, adopting HSN codes will help business owners file their returns easier, as the system will be automated, thus saving time by not having to give detailed descriptions of each product.  Furthermore, HSN codes will improve global trade practices with systematic GST rates being automatically applied.

Unburden yourself from the tasks of understanding and adopting each rule of the newly implemented system by entrusting the industry experts at H&R Block, who will ensure every I is dotted and T is crossed, so that you do not receive any unexpected surprises due to errors in filing of GST returns.

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Annalakshmi Ekambaram
Annalakshmi Ekambaram
Annalakshmi is a content writer at H&R Block India. She enjoys writing about Income Taxes in a simplified manner so that everybody can easily understand it.

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