There are innumerous variety of goods and services. Applying a common rate of tax to all goods and services is not possible. Thus, they are classified into groups and sub-groups and a specific GST rate is applied to a specific sub-group. The most scientific way of classifying goods is on the basis of HSN while classifying services is on the basis of SAC.
HSN means the Harmonized System of Nomenclature code used for classifying goods under GST. This classification is used in Customs, Central Excise and Foreign Trade Policy. The use of HSN codes is to make GST systematic and globally accepted.
However, there is no international classification of services similar to HSN for goods. They are classified on the basis of SAC. SAC means Service Accounting Code used for classifying services under GST.
How many digits of HSN or SAC should I mention in my invoice?
|Annual Turnover in previous financial year||HSN Digits to be shown in Invoice & Return|
|T/O <= 1.5 Cr||NIL|
|1.5 Cr < T/O <= 5 Cr||2|
|T/O > 5 Cr||4|
In the case of Imports/ Exports, HSN codes of 8 digits shall be compulsory since GST needs to be compatible with international standards and practices.
Where should I mention HSN / SAC Code?
HSN for goods and SAC for services should be mentioned by the taxpayer at the following instances:
1. GST Registration
Under GST, every business must declare the type of goods or services they are dealing into. Thus, it is important to mention the correct HSN/SAC Code at the time of enrollment or registration.
2. GST Rate
If the taxpayer is aware of the HSN or SAC code of the good or service, he can determine the applicable GST Rate.
3. GST Invoice
When a seller issues invoice for the goods or services sold, he should mention the HSN or SAC Code in the invoice based on the turnover of his business.
4. GST Returns
When a taxpayer files the GST Return, he must report the HSN Summary. Under the Summary, details of goods or services sold categorised on basis of HSN or SAC are reported.
HSN Code must be used by all dealers except in the following cases:
> Dealers who have an Annual Turnover of less than Rs.1.5 Cr
> Dealers who have registered to pay tax under the composition scheme.
The list of Codes is available on the Ministry’s website which would have a list of goods with the relevant HSN Code and a list of services with a relevant SAC Code.
Taxpayers having turnover exceeds Rs. 1.5 crore but up to 5.00 crore will be required to mention only two digits of HSN code. Taxpayers having turnover exceeds Rs 5.00 crore will be required to mention four digits of HSN code.
From 1st April 2021, Taxpayers with an aggregate Annual Turnover of more than INR 5 Crore during the financial Year 2020-2021 have to mandatorily mention 6 digits of the HSN Code in all tax invoices.
Businesses with a turnover of up to INR 5 crore in the preceding financial year will be required to mandatorily furnish 4 digit HSN code on B2B invoices.
Hope this helps!
Let’s take an example of Cocoa powder to calculate the GST using the HSN code.
Cocoa Powder per Kg = INR1,000.
HSN Code = 18 05 00 00
GST Rate = 18% (For Cocoa powder, not containing added sugar or sweetening matter)
Therefore, GST = INR180
Hope this helps!
What are the consequences of not mentioning or incorrectly mentioning the HSN Code?
It is very crucial to mention the correct HSN/ SAC Code on the tax invoices and Form GSTR-1, barring to do so may attract a penalty of INR 50,000 (INR 25,000 each for CGST and SGST) for non-mentioning or incorrect mention of wrong HSN/ SAC Code under Section 125 of the CGST Act.
Hope this helps!
Hey @Prasana_Srinivasan, this tool can help
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