HSN/SAC Code Requirements in GST in India

1. What are HSN and SAC Codes?

• HSN (Harmonized System of Nomenclature): This is an internationally accepted multi-digit code system developed by the World Customs Organization (WCO). It provides a standardized classification of goods traded globally. India adopted HSN for customs and central excise purposes even before GST and continues to use it for goods under GST. The HSN code helps in identifying the applicable GST rate for a specific product.

• SAC (Services Accounting Code): Similar to HSN for goods, SAC codes are used to classify various services. Developed by the Central Board of Indirect Taxes and Customs (CBIC), SAC codes are based on the United Nations Central Product Classification (UNCPC), with modifications to suit the Indian context. All SAC codes for services start with '99'.

2. Purpose and Benefits of HSN/SAC Codes in GST:

• Uniform Classification: HSN and SAC codes provide a consistent and standardized method for classifying goods and services across India, reducing ambiguity and disputes regarding tax rates.

• Accurate Tax Calculation: Each HSN/SAC code is linked to a specific GST rate. Using these codes ensures that businesses apply the correct tax rate, leading to accurate tax collection and reducing errors.

• Simplified Compliance and Return Filing: By categorizing supplies with HSN/SAC codes, businesses can easily report their transactions in GST returns (especially GSTR-1). This streamlines the filing process and minimizes manual entry.

• Facilitates International Trade: HSN is globally recognized, making it easier for Indian businesses to engage in international trade as their product classification aligns with international standards. This also helps in efficient customs clearance.

• Data Analysis for Policy Making: The government uses the data collected through HSN/SAC codes to analyze trade patterns, GST collections for different sectors, and formulate informed economic policies.

• Prevents Tax Evasion: Standardized classification makes it harder for businesses to misclassify goods or services to evade taxes.

• Transparency: Including HSN/SAC codes on invoices promotes transparency in transactions for both businesses and consumers.

• Input Tax Credit (ITC) Processing: Accurate disclosure of HSN/SAC codes in invoices is crucial for smooth and quick processing of Input Tax Credit claims.

3. Requirements for HSN/SAC Code Reporting in GST:

The requirement for the number of digits in HSN/SAC codes depends primarily on the Aggregate Annual Turnover (AATO) of the taxpayer in the preceding financial year. The AATO is calculated PAN-wise, meaning the combined turnover of all branches/GSTINs under a single PAN is considered, not individual branch turnovers.

Here's a breakdown of the current requirements:

• For Businesses with AATO up to ₹5 Crore (in preceding financial year):

  • B2B Taxable, Exempt, and Nil-rated supplies: Mandatory to report 4-digit HSN/SAC codes.

  • B2C supplies (to unregistered persons): Optional to report 4-digit HSN/SAC codes. However, it's generally recommended for better record-keeping.

• For Businesses with AATO exceeding ₹5 Crore (in preceding financial year):

  • All supplies (B2B, B2C, Taxable, Exempt, Nil-rated): Mandatory to report 6-digit HSN/SAC codes.

• For Export and Import Transactions:

  • 8-digit HSN codes are mandatory for both export and import of goods, aligning with international customs standards.

Key Points on Applicability:

• Effective Date: The mandatory HSN/SAC reporting requirements have been implemented in phases, with significant changes taking effect from April 1, 2021, and further enhancements (like the mandatory drop-down selection and auto-population of descriptions) implemented from January/February 2025.

• Invoice Mentioning: The applicable HSN/SAC code must be mentioned on all tax invoices issued for supplies of goods and services.

• GSTR-1 Reporting: HSN/SAC summary details must be reported in Table 12 of GSTR-1. The GST portal now mandates selection from a predefined drop-down list, disallowing manual entry for businesses above ₹5 crore AATO, and for businesses up to ₹5 crore for B2B supplies. The description based on the selected code will auto-populate.

• E-Invoices and E-Way Bills: For taxpayers mandated to generate e-invoices and e-way bills, the HSN/SAC code must be accurately included as per the turnover thresholds. For businesses with AATO of Rs. 5 crores and above, a minimum 6-digit HSN code is compulsory in e-invoices and e-waybills from December 15, 2023.

4. How to Find and Use HSN/SAC Codes:

• GST Portal: The GST portal provides a facility to search for HSN and SAC codes. Taxpayers can access "HSN/SAC Masters" under "User Services" to add or search for codes.

• CBIC Website: The Central Board of Indirect Taxes and Customs (CBIC) website provides detailed lists of HSN codes for goods and SAC codes for services along with their corresponding GST rates.

• Professional Assistance: For complex classifications or if there's any ambiguity, it is advisable to consult with tax professionals (Chartered Accountants or GST practitioners).

5. Consequences of Non-Compliance:

Failure to comply with the HSN/SAC code requirements in GST can lead to penalties under the GST law. These penalties can include fines for incorrect reporting or non-disclosure of the required codes on invoices and in GST returns.

In conclusion, the requirement of HSN/SAC codes is a cornerstone of the GST framework in India, ensuring a standardized, transparent, and efficient indirect tax system. Businesses must understand and strictly adhere to these requirements based on their aggregate annual turnover to avoid penalties and ensure seamless GST compliance.