HSN Codes in GSTR-1: Are They Mandatory for Grocery Stores?

A common point of confusion for millions of grocery store owners and other small retailers in India is whether they must include the Harmonized System of Nomenclature (HSN) code when filing their GSTR-1 returns. Since these businesses primarily engage in Business-to-Consumer (B2C) sales, selling daily necessities directly to the public, understanding this compliance requirement is crucial.

What is an HSN Code?

The Harmonized System of Nomenclature (HSN) is an internationally accepted method of classifying goods. By assigning a unique code to each commodity, it standardizes product classification, ensuring that goods are taxed at the correct rate under GST.

HSN Code Rules: Turnover and Transaction Type Matter

Under GST law, the requirement to declare an HSN code in GSTR-1 depends on two factors: the business’s annual aggregate turnover and the type of transaction (B2B or B2C).

The rules are as follows:

The Scenario for Most Grocery Stores

The vast majority of local grocery stores fall into a specific category:

• Their sales are almost exclusively B2C.
• Their annual turnover is below ₹5 crore.
• They conduct few or no B2B sales.

Given these conditions, it is not mandatory for such retailers to mention HSN codes for their B2C sales when filing their GSTR-1 returns.

Example: Mr. Kumar runs a grocery store and his turnover for the financial year 2024-25 is ₹3.6 crore. All his sales are made at the retail counter to consumers who do not have a GSTIN. According to the rules, Mr. Kumar can legally file his GSTR-1 return without providing HSN codes for his sales.

Potential Penalties and Common Mistakes

While the rules provide relaxation for smaller B2C businesses, non-compliance in applicable cases can lead to penalties.

• Penalty for Non-compliance: As per Section 125 of the CGST Act, failure to provide a mandatory HSN code or providing incorrect information can attract a penalty of up to ₹25,000.
• Incorrect Classification: If a business with turnover below ₹5 crore makes B2B sales but wrongly classifies them as B2C to avoid reporting the HSN code, the recipient of the goods may face a reversal of their Input Tax Credit (ITC).
• Failure to Update: Businesses must monitor their turnover annually. Failing to start reporting the 6-digit HSN code after crossing the ₹5 crore threshold is a common compliance oversight.

Tax Advisory and Best Practices

1. Assess Your Business: If your grocery store has a turnover below ₹5 crore and only engages in B2C sales, you are not required to provide HSN codes in GSTR-1.
2. Prepare for Growth: Even if it’s not mandatory now, it is a good practice to maintain an internal list of HSN codes for the products you sell. This will make compliance easier if your turnover increases or if you start making B2B sales.
3. Annual Review: Evaluate your sales data and turnover at the end of each financial year to determine if your HSN reporting requirements have changed.

Conclusion

For B2C-centric businesses like grocery stores with an annual turnover of less than ₹5 crore, the GST rules provide a significant simplification by making HSN code reporting optional in GSTR-1. Understanding this provision helps business owners file their returns accurately, reduce compliance stress, and operate with confidence.

Source:

1. Notification No. 78/2020 – Central Tax dated 15th October, 2020

2. Advisory on mandatory mentioning of HSN codes in GSTR-1

3. HSN Codes Reporting in Table 12 & Documents Listing in Table 13 of GSTR-1/1A