HSN is a short form for Harmonized System of Nomenclature introduced by the world customs organization in 1988 to identify and classify goods for levying custom duty. HSN avoids goods being classified differently in different custom zones of the various ports, thus bringing certainty to the taxation part of the business transaction.
HSN was widely used under the excise system and the same was adopted by the GST council for classifying goods under GST. Word wide goods are classified into 6 digit HSN code, first, two representing chapter head and the rest four are sub-Heading representing exact code for the goods, In India CBIC has extra two digits to item code to make it six digits for the subheading, Thus India has 08 digit HSN code to identify and levy taxes on goods.
Indian tax authorities classify goods in eight-digit HSN code, First two represent Chapter heading, next six are for exact code for goods, for example, Drugs and Medicines attached to the list -1 of Schedule IV of CGST act attract 5% whereas same goods in API form are classified under chapter 29 and taxed at 18% such variation exists across schedules notified under the act. It’s important for the taxpayer to correctly classify their goods to avoid under-collection of tax on sales.
CBIC has published a classification of services on its website cbic.gov.in, according to the list SAC code contains a total of six digits, first 4 digits identified as Heading and the last two digits are used to exactly classify the service, it’s important to determine which of these services are used or intended to be used in the course or furtherance of business and map accordingly.
Section 16 of the CGST act provides eligibility to take an input tax credit on supply received by the business, one such important criterion is goods or services should be used or intended to be used in the course or furtherance of business, it’s important for business owners to map entire business process to HSN/SAC code to gain following benefits
1. Claim correct ITC on eligible goods or services
2. Avoid claiming credit on in-eligible goods or services
3. Avoid claiming a refund on capital goods, which later attract penalty and interest
4. Automate the entire process to minimize clerical errors
Modern-day ERP systems and accounting software can handle mapping of HSN/SAC code to business process, even small customization is also worth it, Businesses can derive long term value from this activity and reduce tax litigation that could make life difficult for everyone.