HSN codes for Goods and Service Tax (GST) in India

Various states in India presently have their own systems for classifying goods for tax rate determination. However, with the coming Goods and Services Tax (GST) regime, there's a desire for more uniform classification - not just on the national level but internationally.  Hence the move to the Harmonised System of Nomenclature (HSN) for goods and the Service Accounting Code (SAC) system for services. In this whitepaper, we'll focus on HSN codes as they relate to GST.

HSN or HS (Harmonised Commodity Description and Coding System) is a multipurpose international product nomenclature developed by the World Customs Organization (WCO).

WCO has 181 members, three-quarters of which are developing countries that are responsible for managing more than 98 percent of world trade. HSN standardizes the classification of merchandise under sections, chapters, headings, and subheadings. This results in a six-digit code for a commodity (two digits each representing the chapter, heading, and subheading).

India, a member of WCO since 1971, has been using HSN codes since 1986 to classify commodities for Customs and Central Excise. Customs and Central Excise added two more digits to make the codes more precise, resulting in an eight-digit classification.

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 year prior.

• Dealers with turnover of less than Rs 1.5 crores will not be required to adopt HSN codes for their commodities.
• Dealers with turnover between Rs 1.5 crores and Rs 5 crores shall be required to use two-digit HSN codes for their commodities.
• Dealers with turnover equal to Rs 5 crores and above shall be required to use four-digit HSN codes for their commodities.
• In the case of imports/exports, HSN codes of eight digits shall be compulsory, as GST has to be compatible with international standards and practices.

HSN has 21 sections, 99 chapter, 1,244 headings, and 5,224 subheadings. Sections and chapters are arranged in order of a product's degree of manufacture or in terms of its technological complexity. Natural products like animals and vegetables appear in the earlier sections; man-made or technologically advanced products like machinery appear later.

Chapters have a similar structure. Take cotton, for example -  Chapter 52. Cotton that has not been carded or combed appears earlier in the chapter; cotton as a woven fabric appears later.

• Each Section is a collection of various chapters. Sections represent a broader class of goods, and chapters represent a particular class of goods. For example, Section XV relates to base metals and articles of base metals, while Section XV, Chapter 72 is for iron and steel specifically.

• Each chapter is further divided into various headings depending upon different types of goods belonging to the same class. For example, Chapter 72, Heading 02 deals with ferro-alloys, and Chapter 72, Heading 29 with wire of other alloys.

• Each heading contains products, which are ultimately assigned an HSN code. Ferro-manganese under ferro-alloys, for example, bears the HSN code 72.02.01 - 01 being the product code under Heading 02 of Chapter 72. The HSN code for other products under ferro-alloys is 72.02.99.

• For better identification of goods, India and a few other countries use eight-digit codes for deeper classification. For example, 72.02.99.11 is the HSN code for ferro-phosphorus under other ferro-alloy products.

• Some HSN codes also use dashes. A single dash (-) at the beginning of a description denotes an article that belongs to a group covered under a heading. A double dash (--) indicates that the article is a sub-classification of the preceding article that has a single dash. Similarly, a triple dash (---) or quadruple dash (----) indicates the article is a sub-classification of the preceding article that has a double dash or triple dash.

In formatting a classification for a particular item, dealers must apply the General Interpretative Rules (GIR) in a sequential manner. Once a classification is complete, there's no need to continue applying the remainder of the rules. Moving on to the next rule is only necessary if a complete classification does not result from applying the previous rule. Classification is final once there is no ambiguity or confusion.

For classification purposes, a word should be construed in its popular sense and not in the strict or technical sense. For example, "Dabur Lal Dant Manjan" is not understood as "ayurvedic medicine" in trade parlance but as "toilet preparation€" and should be classified accordingly.

Rule 1

• Titles of sections, chapters, and sub-chapters are provided for ease of reference only.
• For legal purposes, refer to headings and sub-headings to drive classification.

Rule 2a

• If the goods are incomplete/unfinished and have the characteristics of the finished product, classification is the same as that of the finished product (if the classification is known).
• The heading shall also include removed/unassembled or disassembled parts (i.e., SKD/CKD).

Rule 2b

• Any reference to a material or substance includes a reference to mixtures or combinations of that material or substance with other materials or substances.
• The classification of goods consisting of more than one material or substance shall take place as per Rule 3.

Rule 3a

• Choosing a specific heading is preferred over a general heading.
• For example, 85.10 is the classification for "shavers, hair clippers and hair removing appliances, with self-contained electric motor".€ This is a more specific classification for a handheld electric razor than either:
  • 67: "tools for working in the hand, pneumatic, hydraulic or with self-contained electric or non-electric motor," or
  • 09: "electro-mechanical domestic appliances with self-contained electric motors, other than vacuum cleaners"

Rule 3b

• Mixtures/composite goods should be classified per the material or substance that gives them their essential character.
• For example, a grooming kit consisting of electric hair clippers (85.10), a comb (96.15), and a brush (96.03) inside a leather case (45.02), should be classified under the electric hair clippers heading (85.10).

Rule 3c

• If two headings are equally suited to the item, choose the heading that appears last in numerical order.

Rule 4

• If goods cannot be classified per the above rules, they are to be classified according to the goods to which they are most akin.

Rule 5

• Containers specifically designed for the article and suitable for long-term use will be classified along with that article, if such articles are normally sold along with such cases. For example, a camera case would fall under cameras.

• Packing materials and containers are also to be classified with the related goods except when the packing is for repetitive use.

Along with India's move to GST come moves to an online taxation system and to HSN codes for classifying goods for taxation. It's all designed to bring about more uniform taxation as well as more ease of doing business. HSN codes will now be used in filing returns, on invoices, etc., rather than written descriptions.

It will all require some prep work from professionals and taxpayers, but automated GST compliance solutions are available to help ease the transition.

• Section I (Chapters 1 to 5) covers live animals and animal products
• Section II (Chapters 6 to 14) covers vegetable products
• Section III (Chapter 15) covers animal or vegetable fats and oils
• Section IV (Chapters 16 to 24) covers beverages, spirits, vinegar, and tobacco
• Section V (Chapters 25 to 27) covers mineral products
• Section VI (Chapters 28 to 38) covers chemical and para-chemical products
  Section VII (Chapters 39 to 40) covers plastics and rubber, and articles thereof
• Section VIII (Chapters 41 to 43) covers certain animal hides and skins
• Section IX (Chapters 44 to 46) covers wood, cork, manufactures of straw, and articles thereof
• Section X (Chapters 47 to 49) covers pulp of wood, paper, paperboard, and printed products
• Section XI (Chapters 50 to 63) covers textiles and textile articles
• Section XII (Chapters 64 to 67) covers footwear, headgear, umbrellas, walking sticks, prepared feathers, artificial flowers, and articles of human hair
• Section XIII (Chapters 68 to 70) covers articles made of minerals, stone, plaster, cement, etc., and ceramic and glass products
• Section XIV (Chapter 71) covers precious metals and stones
• Section XV (Chapters 72 to 83) covers base metals and articles thereof (Note: Chapter 77 is reserve for future use)
• Section XVI (Chapters 84 to 85) covers machinery and mechanical appliances, electrical equipment, sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles
• Section XVII (Chapters 86 to 89) covers vehicles, aircraft, vessels, and associated transport equipment
• Section XVIII (Chapters 90 to 92) covers optical, photographic, cinematographic, and musical apparatus and equipment; measuring, medical, surgical, and other instruments; and clocks and watches
• Section XIX (Chapter 93) covers arms and ammunitions
• Section XX (Chapters 94 to 96) covers miscellaneous manufactured articles
• Section XXI (Chapters 97 to 99) covers arts, collector's pieces, and antiques (Note: Chapter 99 is reserved for national use)

This whitepaper is contributed by CA Ami Dhabalia.

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