Journey of HSN – From Optional to Compulsion

Introduction of HSN – Harmonized System Nomenclature

HSN is a six-digit code that classifies more than 5000 products, arranged in a legal and logical structure. The WCO (World Customs Organization) developed it as a multipurpose international product nomenclature that first came into effect in 1988 with the vision of facilitating the classification of goods all over the World in a systematic manner. In India, in order to make the codes more precise, the Customs and Central Excise authorities went on to add two more digits. This resulted in an eight-digit HSN classification.

GST – Applicability of HSN on introduction of GST

Initially when GST was introduced on 01.07.2017, it was made optional to mention on the tax invoice for the different categories of dealer.

For turnover below Rs. 1.50 Crore it is not mandatory, for turnover between Rs. 1.5 Cr to 5 Cr, only 2 digits of HSN code is mandatory and for the turnover above 5 Cr 4 digits HSN code is mandatory, as per Rule 46 of CGST Act.

Further, as per rule 59 of CGST rules, it is mandatory to show the HSN wise summary as per above categories in GSTR – 1.

 Thus, for small taxpayers and composition tax payers it is not mandatory.

HSN – Annual Return

The government vide various notifications for simplification of filing the annual return, made the HSN wise summary of inward and outward supply optional for both FY 2017-18 and FY 2018-19

Recent Amendments Related To HSN

Now, the government on 15^th October 2020, released numbers of notifications for amending various provisions of GST Act.

As per Notification No. 78 & 79, now every dealer has to mention the HSN code on the tax invoice issued by them. For the turnover below 5 Cr, 4 digits of HSN code is mandatory and for turnover above 5 Cr, 6 digits of HSN is compulsory.

Further, the amendment has also made in Rule 59 of CGST Rules, where it will be mandatory to fill the HSN wise summary in GSTR -1

These amendments are applicable from 01.04.2021.

Thus, now irrespective of the turnover, each and every dealer whether small or large, they have to compulsorily mention the HSN code on the tax invoice issued by them, and give the HSN wise summary in GSTR – 1.

Impact of the above Amendments

We all can understand the purpose of making these amendments, that is to harmonize the trading activities product base. But if we look closely, the small tax payers will also suffer.

If we look closely even the composition tax payers and the dealer issuing the bill of supply, i.e. dealing in tax free goods, will have to provide the HSN code as per Rule 49 of CGST Rules.

If we look for the penal provisions for not mentioning the HSN on Tax invoice as per the rules, there are no specific penalty clause, however it will be covered under the general penalty clause of CGST Act.

As the GST has just turned 3 years, it is expected to first settle the law clearly by giving some relief to the small dealers.

Now, making HSN mandatory will increase the burden on the small tax payers unnecessarily, specially on the composition dealers and dealers trading in the Tax free items.