HSN Code

The HSN Code, short for Harmonised System of Nomenclature Code, is an internationally standardised system of names and numbers used to classify traded products. It serves as a universal language for goods classification, ensuring consistency in taxation, customs duties, and trade statistics across countries. In India and many other nations, the HSN system forms the foundation of indirect taxation, particularly under the Goods and Services Tax (GST) regime, simplifying compliance and promoting uniformity in international trade practices.

Background

The Harmonised System (HS) was developed and maintained by the World Customs Organization (WCO), an intergovernmental body headquartered in Brussels. It came into effect in 1988, replacing earlier fragmented classification systems used by different countries. The purpose was to create a globally accepted framework that could be adopted for customs tariffs, trade policies, and statistical data collection.
The HSN is based on the International Convention on the Harmonised Commodity Description and Coding System, signed by over 200 countries. India adopted this system in 1986 for customs classification and later integrated it into the GST framework in 2017 to maintain alignment between domestic and international trade classification.

Structure of the HSN Code

The HSN Code follows a hierarchical six-digit structure developed by the WCO. However, countries may add additional digits for national purposes to create greater specificity. The basic international structure is as follows:

• First Two Digits: Chapter number (broad category of goods)
• Next Two Digits: Heading (sub-category within the chapter)
• Next Two Digits: Sub-heading (specific product description)

For example:HSN Code 6403.59

• 64 – Footwear
• 03 – Leather footwear
• 59 – Other leather footwear not covering the ankle

Countries can extend this six-digit format to eight digits or more for domestic tariff and statistical purposes. In India, the Customs Tariff Act, 1975 expanded the HSN to eight digits, with the first six aligning with the global system and the last two representing further national subdivisions.

Example of HSN Code Structure

To understand its detailed classification, consider the example of Milk and Cream, Concentrated or Containing Added Sugar:

• Chapter: 04 – Dairy produce; birds’ eggs; natural honey
• Heading: 04.02 – Milk and cream, concentrated or containing added sugar or other sweetening matter
• Subheading: 04.02.10 – In powder, granules, or other solid forms, of a fat content exceeding 1.5% by weightThus, the complete HSN Code: 0402.10

This systematic structure enables uniform interpretation of product categories across countries, facilitating both trade and taxation.

Objectives of the HSN Code

The adoption of the HSN Code serves several key objectives:

• Standardisation: Establishes a consistent and universally accepted classification of goods.
• Trade Facilitation: Simplifies international trade documentation and customs clearance processes.
• Tax Uniformity: Ensures consistent application of tax rates and exemptions under indirect tax laws.
• Statistical Analysis: Enables accurate compilation of international trade data and economic analysis.
• Reduction of Disputes: Minimises ambiguity in classification, thus reducing litigation and compliance disputes.

The HSN system ensures that all goods are classified in a logical, hierarchical manner, promoting transparency and efficiency.

HSN Code in India under GST

Under India’s Goods and Services Tax (GST) regime, the HSN Code plays a vital role in determining the applicable tax rate on goods. GST relies on the same HSN-based classification as customs tariffs, ensuring consistency between imports, exports, and domestic transactions.
Key features of HSN usage under GST include:

• Linkage to GST Rate: Each HSN code corresponds to a particular GST rate, as listed in GST rate schedules.
• Mandatory Reporting: Businesses are required to mention HSN codes on tax invoices and in GST returns, depending on their annual turnover.
• Data Harmonisation: The use of standardised codes helps the government in data analytics, compliance monitoring, and trade tracking.

Turnover-Based HSN Code Requirements in India

The requirement to quote HSN codes on invoices and GST returns depends on the taxpayer’s annual turnover. The current structure is as follows:

The move toward detailed HSN reporting ensures greater precision in classification and helps in aligning India’s trade data with international standards.

Example of HSN Code Application in GST

• HSN Code 1006 – Rice
  • GST Rate: 0% for non-branded rice, 5% for branded or packaged rice.
• HSN Code 2106 – Food preparations not elsewhere specified (includes health supplements, protein powders, etc.)
  • GST Rate: 18%

Correct classification ensures appropriate tax rates and avoids penalties due to misreporting.

HSN vs. SAC (Services Accounting Code)

While HSN applies to goods, the Services Accounting Code (SAC) is used for services under GST. Both are structured and maintained by the WCO and domestic authorities respectively, following similar principles of classification.

Together, HSN and SAC provide a unified framework for classifying all taxable supplies under GST.

Advantages of HSN Code System

• Uniformity in Classification: Ensures consistency across different countries and tax systems.
• Ease of Trade: Simplifies customs procedures, reducing clearance time and administrative burden.
• Transparency: Enhances taxpayer clarity regarding applicable tax rates.
• Reduced Misinterpretation: Prevents ambiguity and disputes in tax assessment and compliance.
• Improved Data Collection: Facilitates reliable trade and tax statistics for policy-making.

The HSN Code thus contributes to both domestic tax efficiency and international trade harmony.

Challenges and Limitations

Despite its advantages, the HSN system faces certain challenges in practical implementation:

• Complexity: Some goods fall under multiple headings, creating confusion in classification.
• Frequent Updates: Regular changes by the WCO and domestic authorities require continuous monitoring.
• Compliance Burden: Small businesses may find it difficult to identify the correct code due to limited awareness.
• Penalties for Misclassification: Incorrect reporting can lead to tax mismatches, penalties, and audit complications.

Addressing these issues requires awareness campaigns, digital classification tools, and simplified guidance for small enterprises.

International Relevance

The HSN system is globally recognised and serves as the foundation for tariff schedules in over 200 countries. Approximately 98% of global merchandise trade is classified under the HSN. Regular updates by the WCO ensure that emerging products—such as electronic goods, renewable energy devices, and biotechnology items—are included in the nomenclature.
Countries often modify the six-digit base code by adding more digits to suit domestic requirements. For example:

• United States: Uses a 10-digit code (Harmonised Tariff Schedule of the United States – HTSUS).
• European Union: Uses an 8-digit Combined Nomenclature (CN).
• India: Uses an 8-digit Customs Tariff based on HSN.

This global adaptability makes the system both flexible and universally relevant.

Significance in Modern Trade and Taxation

The HSN Code is indispensable in the era of globalisation, where trade integration demands a standard classification of goods. Its role extends beyond taxation to include customs valuation, logistics, supply chain management, and international compliance.
In India, accurate HSN usage has streamlined GST operations, reduced classification disputes, and aligned domestic taxation with international trade practices. Globally, it continues to underpin customs automation, digital trade systems, and trade negotiations.