A cycle is what most of the chains follow. Whether it is the food cycle or a pattern in the business industry. But what most of us do not notice is the factors that affect the cycle.
Focusing on the business cycle, it is started by the producers/manufacturers and is ended by retailers (in some cases even the consumers). Many factors affect the functioning of this cycle. The demand-supply ratio, the costs, the taxation system, etc are some of the most important factors.
A small yet essential factor is HSN which can indirectly affect this cycle. Therefore this article will help you understand everything important about HSN.
In this article, we will cover the basic concept of HSN, how to find HSN for a particular product and what position it has on the GST rate card.
What is HSN?
HSN stands for the Harmonized System of Nomenclature. It is a multipurpose international product nomenclature that was developed by the world customs organization (WCO). This organization consists of 181 members and is divided into 3 quarters. They are responsible for managing more than 98% of world trade.
The merchandise’s classifications are standardized under sections, headings, subheadings, and chapters according to the concept of HSN. This process results in a six-digit code for every product/commodity. Therefore, the resultant code is further divided into three parts, each representing the chapter, subheading, and heading.
India became a member of WCO in 1971. It started using HSN code in 1986. Our country‘s main aim is to classify commodities for Central Excise excise and the consumer. Two more digits are added by India to this six-digit code to make them more precise.
HSN code for GST in India
Pre-GST, various states in India and had its taxation system. They had powerful taxation rights. However, with the introduction of goods and service tax regime, there has been one uniform tax system which is followed by all the states now.
There has been a move to the harmonized system of nomenclature for good and the service accounting code (SAC) system. Indian manufacturers under the system of GST has to follow a three-tier HSN structure.
- Those businesses with a turnover of more than INR 1.5 crores are not required to follow the HSN structure.
- Those with a turnover of more than INR 1.5 crore but less than INR 5 crore are required to use the two-digit HSN code.
- Those with a turnover exceeding INR 5 crore shall use the 4 digit HSN codes.
- Those dealers who engage themselves in imports or exports have to (mandatory) follow the eight-digit HSN code.
The basic classification of HSN
HSN has 21 sections; 99 chapters; 1244 headings and 5224 subheadings. Sections and chapters are sequenced according to the degree of the product of mini facture or its technological complexity.
For example, natural products (animal and vegetables) appear in the first few sections while man-made or technologically advanced products are placed in the latter part.
All of these sections/chapters have a similar structure. For example, in chapter 52, this chapter describes cotton and as the raw material. Cotton as a woven fabric is not a part of this chapter, it appears later. Section 15 relates to base materials and articles made out of them. Chapter 72 comprises of codes iron and steel especially
Each chapter is further divided into sections. This division is based on the different types of goods belonging to the same class. For example, chapter 72 heading 02 deals with fair each chapter are further divided into a heading. This division is based on the different types of goods belonging to the same class. For example, chapter 72 heading 02 deals with ferrous-alloys and while heading 29 of the same chapter deals with wires.
Our country with few other countries has made its code an eight-digit number for better identification of goods. This gives each product a deeper classification. For example, 72.0 2.99 (6 digits) is used to represent ferrous alloys in most countries but in India, the court for the same product is 72.0 2.99.11 (8 digits).
Below mentioned is a list of some of the sections in HSN:
- Section 1: Includes chapters 1 to 5 based on animal and animal products.
- Section 2: Covering vegetables, this section consists of chapters 6 to 14.
- Section 3: This includes chapter 15 which covers animal or vegetable fats and oils.
- Section 4: This section is based on beverages, spirits, tobacco, and vinegar. It includes chapters 16 to 24.
- Section 5: It covers mineral products. It consists of chapters 25 to 27.
There are about 16 more sections with 99 chapters. They consist of different codes based on different products.
How to identify HSN for retail products?
In identifying a particular product, dealers must apply GIR that is the general interpretative rules sequentially. Once the identification is completed there is no need to continue applying the remainder of these rules.
To understand how the classification is completed one must make sure that there is no ambiguity or confusion.
For proper identification of products, it should be called by its popular sense and not by any strict or technical name.
For example “Darbar Manjan” cannot be understood as an ayurvedic medicine instead it needs to be categorized as a toilet preparation for easy understanding and classification.
Let us understand this concept by setting some rules and regulations.
- Title the sections, chapters and subchapters are provided for easy and clear reference. Therefore before identification of a product, one must check the sections and chapters that they are categorized under.
- We have to refer to headings and subheadings to drive classification for legal purposes.
- Even if the products are unfinished or incomplete, we need to be classified under the same category as that of finished goods. (if the classification is known)
- The heading of the unfinished good should include removed or disassembled products, for example, SKD/CKD.
- It is important to note that any reference to a material or substance is a reference to the mixture or combinations that have been used to make the same. In other words, it refers to the other materials that have been used to create the main commodity.
- The classification of goods consisting of more than one material or substance shall take place as per rule three.
- It is more likely to choose a specific heading rather than a general heading. This helps in easy identification of the retail product.
- For example, 85.10 is the classification for shavers, hair clips, and hair-removing appliances, with a self-contained electric motor. There is a more specific classification to the above-mentioned categories.
- It is important to classify the composition of goods according to the material that gives it character. In other words, the classification of the products will depend on the most used material that gives the final product a different character from the others.
- For example, a grooming kit consists of an electric help clip, a cone and a brush inside a leather case. This should be classified under the electric clip headings because that is the most essential part of the entire kit.
- In cases when two headings are equally suited to a particular item, we should choose that heading which appears last in numerical order.
- There are always some exceptions. There are certain goods which cannot be classified according to the above-mentioned rules. Such good then needs to be classified according to the other goods which they are most akin.
- Containers that are specially designed for a particular product should be categorized along with that product. For example, a camera case will be in the same section as the camera itself.
- In cases when the packing is used for repetitive, then the category of the packing material and the product is different.
There many HSN code online tools that help in identifying the HSN for your retail products. Google to find and try them out today!
If you are using any good operational GST accounting software like Easyops, you can manage your HSN codes and GST returns filing by HSN codes with easy.
HSN is required as a part of the new GST rules. To read more about GST click here.
It is your turn now! Tell us how do you identify HSN code for your retail product.
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