HSN Code
Harmonized System of Nomenclature code used to classify goods for taxation under GST.
HSN (Harmonized System of Nomenclature) Code is an internationally standardized system of numbers used to classify traded products. Developed by the World Customs Organization (WCO), HSN codes are used by over 200 countries to categorize more than 5,000 product groups. In India, HSN codes are mandatory on GST invoices and help determine the GST rate applicable to your product.
Structure of HSN Code
HSN codes are hierarchical, becoming more specific as digits increase:
- First 2 Digits: Chapter (broad product category)
- Next 2 Digits (4-digit): Heading (product group)
- Next 2 Digits (6-digit): Sub-heading (specific product)
- Last 2 Digits (8-digit): Tariff item (used for customs, not mandatory for GST)
Example: HSN Code 8414.51
- 84: Chapter - Nuclear reactors, boilers, machinery
- 8414: Heading - Air pumps, ventilating fans, hoods
- 8414.51: Sub-heading - Table, floor, wall fans with self-contained motor ≤ 125W
HSN Code Requirements Under GST
The number of HSN digits you must mention on invoices depends on your annual turnover:
- Turnover up to ₹5 Crore: 4-digit HSN code mandatory
- Turnover above ₹5 Crore: 6-digit HSN code mandatory
- Exports: 8-digit HSN code recommended (for customs clearance)
Penalty for Wrong HSN Code: While there's no direct penalty for incorrect HSN codes, wrong classification can lead to incorrect GST rates being applied, which can trigger tax notices, interest, and penalties during audits.
Real Factory Examples
Example 1: Steel Furniture Manufacturer
A Delhi-based company makes steel office chairs. They need to identify the correct HSN:
- Product: Steel Office Chair with arms and wheels
- Chapter 94: Furniture, bedding, mattresses
- Heading 9403: Other furniture and parts thereof
- Sub-heading 9403.20: Other metal furniture
- Correct HSN Code: 9403.20
- GST Rate: 18%
If they incorrectly used HSN 9401 (seats), the GST rate might differ, causing compliance issues during reconciliation.
Example 2: Plastic Bottle Manufacturer
- Product: 1-liter plastic water bottles
- Chapter 39: Plastics and articles thereof
- Heading 3923: Articles for the conveyance or packing of goods, of plastics
- Sub-heading 3923.30: Carboys, bottles, flasks, and similar articles
- Correct HSN Code: 3923.30
- GST Rate: 18%
Example 3: Textile Manufacturer (Confusion Case)
A Surat textile mill makes cotton fabric. There are multiple HSN codes depending on processing stage:
- Raw cotton: HSN 5201 (different GST rate)
- Cotton yarn: HSN 5205-5207 (different GST rate)
- Woven cotton fabric (unprocessed): HSN 5208 @ 5% GST
- Woven cotton fabric (processed/dyed): HSN 5208 @ 5% GST (but different sub-classification)
The manufacturer must use the correct sub-heading based on whether fabric is bleached, dyed, or printed. Wrong HSN = wrong GST rate = compliance headache.
Why HSN Code is Important
- Determines GST Rate: Same product can have different GST rates (5%, 12%, 18%, 28%) based on HSN classification
- GST Returns: GSTR-1 and annual returns (GSTR-9) require HSN-wise summary of sales. Incorrect HSN makes reconciliation impossible
- E-Invoicing: E-invoices must have correct HSN codes; mismatches can cause invoice rejection on the IRP portal
- Input Tax Credit (ITC): Auditors verify if ITC is claimed on items eligible for credit by checking HSN codes
- Customs & Exports: HSN codes determine import/export duty rates and documentation requirements
HSN vs. SAC Code
HSN Code: Used for goods (tangible products like steel, plastic bottles, machinery)
SAC (Services Accounting Code): Used for services (intangible offerings like CA services, transportation, job work)
Example: If you manufacture chairs, use HSN 9403. If you provide chair repair services, use SAC 9988 (maintenance and repair services).
Common HSN Code Mistakes
- Using Generic Codes: Some businesses use a single HSN code (like 9999) for all products. This is non-compliant and will be flagged in audits
- Not Updating for New Products: When launching new products, manufacturers forget to find and assign correct HSN codes
- Confusing Similar Products: Example: HSN for "cotton fabric" vs. "cotton fabric with polyester blend" is different
- Ignoring State-wise Variations: While HSN is uniform across India, some states have specific clarifications for certain products
- Not Checking GST Rate Changes: Government periodically changes GST rates for specific HSNs. Businesses fail to update their pricing
How to Find the Correct HSN Code
- Official HSN Directory: Visit GST portal > Search HSN Code section
- Competitor Invoices: Check what HSN codes similar businesses use (if available)
- Consult CA/Tax Expert: For complex products with ambiguous classification
- Customs Database: Check export/import data for similar products
- Product Description Match: Read HSN handbook and match your product description closely with defined categories
Real-world HSN Confusion (Court Cases)
Case 1: Is it a "Machine" or "Machine Part"?
A company making hydraulic cylinders classified them under HSN 8412 (Engines and motors) at 18% GST. Tax department argued it should be HSN 8431 (Parts of machinery) also at 18%. Although GST rate was same, the classification mattered for export incentives.
Case 2: Packaged Food Products
A manufacturer of roasted peanuts classified the product under HSN 2008 (Preserved nuts) at 12% GST. Tax authorities argued it should be HSN 2106 (Food preparations) at 18%. Company had to pay differential GST + interest for 2 years.
Best Practices for HSN Code Management
- Maintain HSN Master List: Create a product master file with each product's HSN code, GST rate, and last updated date
- Quarterly HSN Audit: Review if all products have correct HSN codes, especially when launching new items
- Document Classification Logic: Keep written justification for why a particular HSN was chosen (helps during audits)
- Monitor GST Notifications: Subscribe to GST updates to track rate changes for your HSN codes
- Use ERP HSN Database: Modern ERPs have built-in HSN databases with dropdown selection, reducing manual errors
How ERP Systems Handle HSN Codes
A manufacturing ERP simplifies HSN code management:
- Pre-loaded HSN Database: Thousands of HSN codes with descriptions and current GST rates already in the system
- Product Master Integration: Assign HSN code once during product creation; it auto-populates on all invoices, challans, and reports
- HSN-wise Sales Reports: Auto-generate HSN-wise turnover reports for GSTR-1 and GSTR-9 filing
- Rate Change Alerts: System notifies you when government changes GST rate for your product HSN codes
- E-invoice Validation: ERP validates HSN format before uploading to IRP, preventing rejection errors
- Search & Filter: Quickly find HSN codes by typing product keywords (e.g., type "plastic bottle" → get HSN 3923.30)
See HSN Code in Action
Don't just read about HSN Code. See how Karygar automates this process to reduce manual work and errors on your factory floor.