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.
HSN code is Harmonized System of Nomenclature for classification of different commodities.
SAC code is Services Accounting Code for classification of different services.
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
|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:
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.