Trade and commerce between nations have been undertaken as a primary economic practice since centuries. However, it flourished in the age of globalisation, requiring countries to introduce policies for smooth international transactions. Today, thousands of products are exported and imported between nations. A standardised understanding of such products as well their taxation was, thus, essential.
As a result, the World Customs Organisation (WCO) introduced the Harmonised System of Nomenclature or HSN code. More than 200 countries follow this system which applies to nearly 98% of all products traded internationally.
The World Customs Organisation introduced HSN codes to classify different goods. It was done to help different nations understand product quality and standard in uniformity. HSN codes encompass more than 5,000 products, categorising them individually in a logical and systematic manner. HSN codes are 6-digit numbers introduced to confirm international standards.
It’s an essential component that helps identify and analyse trading of different products between nations. HSN codes also signify the volume of goods exported and imported.
India has followed the classification of goods as per the HSN codes system since 1986, under the Central Excise and Customs. In India, HSN codes under GST are of 8-digits, with further detailing of products.
The Harmonised System of Nomenclature is based on a detailed classification of products standing on 21 sections and 99 chapters. These chapters are further divided into around 1,244 headings and 5,224 subheadings. Each subheading indicates a specific product.
In the 6-digit code, the first two digits signify the chapter under which a product is categorised. The following two numbers represent the heading, and the next two are for its subheading.
For instance, 07 is the chapter for edible vegetables. HSN code 03 denotes onions, garlic, shallots, and leeks. Further in the 8-digit HSN coding, 10 represents fresh onion or shallot. In India, another two digits are employed to clarify the product further. If it is fresh onion, then the applicable HSN code is 10.
So, a GST invoice for fresh onions would show 07.03.10.10. Every code has a specific description followed worldwide.
Prior to 2017, i.e. before Goods and Services Tax replaced all indirect taxes, businesses needed HSN codes only for Central Excise and Customs. With the implementation of GST, companies need to mention HSN codes in their tax invoices. Indian manufacturers need to follow a 3-tier structure for this purpose –
Apart from these provisions, businesses engaged in exports and imports need to use the 8-digit HSN codes in their invoices.
The Harmonised System of Nomenclature is significant for the following reasons –
By following a singular code system to identify products across the globe, chances of misinterpretation reduce. HSN is backed by elaborate and categorical product descriptions. Since some products can be exclusive to a nation, these goods are easily identified based on their HSN codes.
One of the many uses of HSN codes is to facilitate taxation of goods. It helps traders understand the rate of tax to be levied on a specific product in the nation in question. With GST in action in India, it becomes easier for manufacturers to file invoices with HSN codes. Businesses can also utilise it to calculate their tax benefits.
HSN codes under GST also represent the volume of goods imported in and exported out of a country. Hence, with these codes, it becomes easier to track import and export statistics.
This code system simplifies international trade and allows concerned institutions to gather data on the movement of goods across borders.
Invoices with HSN codes can also be used by businesses to access credit conveniently via invoice discounting services. With KredX, businesses can utilize their unsettled invoices to avail working capital within 24 – 72 hours*. They can thus meet their emergency financial requirements with ease by availing our invoice discounting services.
Nonetheless, it is essential for businesspersons to understand the nuances of HSN in order to prepare error-free invoices. Such understanding also allows businesses to engage in export and import with more efficiency.