What is HSN code, and how is it used under GST?

HSN Code (Harmonized System of Nomenclature) is an internationally standardized system of names and numbers used to classify traded products. It is used for the identification of goods and services under the Goods and Services Tax (GST) system in India, and it helps in the systematic categorization of goods for the purpose of taxation.

What is HSN Code?

HSN Code is a 6-digit code that helps in identifying and classifying goods in a structured and uniform manner across countries. The system is designed to facilitate international trade by ensuring that the same product is classified similarly across the world.
HSN Code is structured as:
- First 2 digits: Represent the chapter or the broad category of the product (e.g., 01 for live animals).
- Next 2 digits: Represent the heading, which narrows down the category (e.g., 0101 for horses).
- Last 2 digits: Represent the sub-heading, which further categorizes the goods (e.g., 010121 for purebred horses).

Under GST, HSN codes are used to identify products for the proper application of GST rates, and also for customs duties and international trade classification.

HSN Code under GST in India

GST Registration: Businesses with a turnover exceeding Rs. 5 crores are required to mention the HSN Code for the goods supplied in their GST returns. For businesses with a turnover of less than Rs. 5 crores, the HSN Code is optional but still can be used for clarity.
Classification of Goods and Tax Rates: HSN Codes are used to determine the applicable GST rates on goods, as every good or service has a pre-defined GST rate depending on its classification under the HSN.
GST Returns: Businesses need to mention HSN Codes when filing GST returns. The code ensures that the goods are correctly categorized, and the right amount of GST is levied.

Use of HSN Code under GST in India

GST Rate Determination: The GST rate on goods depends on their classification under specific HSN codes. For example:
- HSN Code 0101: Live horses, asses, mules, and hinnies (these would fall under a specific GST rate for livestock).
- HSN Code 0301: Fish (fresh, chilled, or frozen) may have a different GST rate compared to HSN Code 0303 for fish products (canned fish).
Clear and Transparent Taxation: The use of HSN codes helps in reducing ambiguity, ensuring that goods are classified uniformly, and tax rates are applied correctly.
Customs Clearance: HSN Codes are used for customs procedures, ensuring consistency in the categorization of imported goods.

HSN Code and GST Slabs

The GST slabs for goods are as follows:

0%: Exempted goods (e.g., unprocessed food items).
5%: Low-taxed items (e.g., packaged food, pharmaceuticals).
12% and 18%: Standard tax rates for goods like processed foods, electronics, etc.
28%: Luxury and sin goods (e.g., high-end vehicles, tobacco).

For example, the HSN Code 8703 corresponds to motor cars (vehicles for transporting people), which falls under the 28% GST slab.

Provisions and Acts in the Indian Constitution Related to HSN Code

While the Indian Constitution does not specifically address HSN Codes, the use and application of HSN codes are governed by the Goods and Services Tax (GST) laws which are based on constitutional provisions. The relevant constitutional provisions and laws include:

101st Constitutional Amendment Act (2016):
- This amendment allowed for the implementation of GST in India and laid down the foundation for the creation of a single tax system across the country.
- Article 246A grants both the Central Government and State Governments the authority to levy GST, making it possible for GST rates, including those based on HSN codes, to be determined by both entities.
GST Act (2017):
- The Central Goods and Services Tax Act (CGST) and the State Goods and Services Tax Act (SGST) lay the legal framework for the HSN Code classification system in GST.
- Under Section 25(6), businesses with a turnover of over Rs. 5 crores are required to mention HSN codes in GST returns.
- Section 164 gives the GST Council the authority to determine the classification of goods and services under specific codes, including HSN codes.
GST Council:
- The GST Council is responsible for recommending changes in tax rates, and also helps in the implementation of HSN codes in the context of GST. It specifies the required HSN Code level for businesses based on turnover (e.g., businesses with turnover under Rs. 5 crores need not specify the HSN Code).
Customs Act (1962):
- While not directly part of the GST law, the Customs Act works in conjunction with GST to regulate the import and export of goods. Customs uses the HSN system to classify goods for the purpose of customs duties, and these codes also assist in determining GST liability when goods cross borders.

Landmark Cases Involving HSN Codes under GST

Several cases have clarified the interpretation and application of HSN codes under GST. Some of the key landmark cases are:

M/s. Bajaj Auto Ltd. v. Union of India (2018):
- In this case, the issue arose regarding the classification of motor vehicles under the HSN system and the applicable GST rates. The court clarified that motor vehicles, depending on their specifications (e.g., passenger cars, two-wheelers), would fall under different HSN codes, with corresponding GST rates.
M/s. Andaman Traders v. Union of India (2019):
- This case involved the issue of classification of goods for GST purposes. The petitioner challenged the applicability of HSN codes under GST and sought clarification regarding the correct classification of certain goods. The Court upheld that the HSN classification system is consistent with international norms and should be followed to determine the tax rates for various products.
In Re: Classification of Services (2020):
- This case addressed the issue of classification of services and whether certain services should be taxed under specific HSN or SAC codes. The court ruled that services should be classified under the Services Accounting Code (SAC), and not under the HSN system, which is strictly for goods. However, both systems work in tandem to ensure clarity and proper taxation.
M/s. Coca-Cola India Pvt. Ltd. v. Union of India (2019):
- This case dealt with the GST on beverages like soft drinks and whether certain beverages could be classified under the correct HSN codes. The ruling confirmed that soft drinks, based on their ingredients and classification, should fall under HSN codes for beverages and attract a higher GST rate of 28%.

Conclusion

The HSN Code is an essential tool under the GST regime for classifying goods and determining the correct GST rates. It ensures transparency, consistency, and efficient tax collection. The use of HSN codes under GST is governed by provisions of the Indian Constitution (primarily the 101st Amendment Act), the GST Act (2017), and the GST Council guidelines. Landmark cases have clarified the interpretation and application of HSN codes, helping businesses comply with tax regulations effectively.

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