Under GST law, one of the most important elements is the classification of goods/services for the purpose of determination of rate of tax to be levied on them. The rate of tax to be charged on a particular product depends on the HSN/SAC codes specified under the GST law. Also, for the availability of exemptions, we need to classify the goods/services properly and accurately.

What is HSN/SAC code?

HSN code is Harmonized System of Nomenclature for classification of different commodities.

SAC code is Services Accounting Code for classification of different services.

What are the effects of wrong classification of goods/services ,i.e., use of a wrong HSN or SAC Code?

Wrong classification leads to wrong valuation which further leads to wrong payment of taxes. Here are a few cases with their significant effects:

GST charged at higher rate Loss of orders Loss of credibility with customers Extra cost of re-establishing business with the new/old customers Unavoidable loss on account of discounts given to customers
GST charged at lesser rate Loss of non-recovery of tax from customers Interest cost and penalty paid under the Act
Wrong exemption claimed Loss of non-availment of Input tax credit Interest cost and penalty paid along with output tax liability
Goods/services classified under Reverse Charge Mechanism where they are not supposed to be so classified OR Vice-versa Non-payment of tax OR Unnecessary payment of tax
Non-payment of Compensation Cess on specified goods/services Penal proceedings over and above interest cost
Wrong classification of export/import Denial of benefits under Foreign Trade policy

  • Duty drawback
  • Incentives
ANY OTHER CASES of wrong classification of Goods/services Calculation of incorrect tax liability Incorrect claim of Input tax Credit or No claim Interest cost and penalty Extra cost of dispute resolution at adjudication, appeal, court

Some of the factors that may lead to wrong classification of Goods/Services are as follows:

  1. Lack of knowledge of the goods specifications and services.
  1. Demand-Supply competition in the market.
  1. Non-availability of Input tax credit.
  1. Avoidance of disputes with customers.
  1. Avoidance of complexities in classification.
  1. Minor differences in description of goods under one HSN code and the other.

To sum up, it’s important to avoid mistakes during classification of goods and/or services, as this may lead to disputes with the customers as well as demands from the revenue department.

It’s better to refer to the notifications prescribed from time to time specifying the rates applicable on various products and the Advance Rulings passed in some cases to classify them accordingly, following the rules of interpretation.

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Qualification: CA in Practice
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Location: Gurugram, Haryana, IN
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CA in Practice ..Partner at S.Saraf & Associates .. Also a blogger : https://indiantaxhub.blogspot.com View Full Profile

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  1. Arulsamy says:

    I have invoiced with wrong HSN code. Rate of GST is charged @18% and OK . Now the customer withheld the payment due to wrong HSN in invoice. How could I resolve the issue since GSTR already filed. I understand not possible to rectify the HSN once filed. Please clarify to collect the payment. Has the customer the right to hold the payment on error in HSN.

    1. RISHABH MISHRA says:

      As GST Rate is same of Both Wrong HSN code filed in GSTR-1 & of the one actual HSN Code. So there will be no issue. You can ask customer to show sufficient cause with relevant law & rules to hold the payment. Otherwise he is surely liable to pay you the full amount.

  2. R C Verma says:

    Being retired from the Central Excise Department,Revenue officers decides classification in favour of revenue i.e. at higher rates. The same is done by the AAR.
    R C Verma, Advocate

  3. Ramesh says:

    Being retired from the Central Excise Department,Revenue officers decides classification in favour of revenue i.e. at higher rates. The same is done by the AAR.
    R C Verma, Advocate

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October 2021