What is HSN code: Harmonized System of Nomenclature

The Harmonized System of Nomenclature (HSN) code is a globally recognized system for classifying goods in international trade. It is used to categorize products based on their characteristics and is essential for customs, taxation, and statistical purposes. In this comprehensive guide, we check what HSN code is, their significance, and how they impact businesses.

What is HSN Code?

HSN codes are alphanumeric codes assigned to goods based on their nature, composition, and intended use. They typically consist of six to eight digits, with each digit providing specific information about the product.

The first two digits represent the chapter, the next two digits denote the heading, and the subsequent digits indicate the subheading and further classification. 

What is the significance of HSN codes?

HSN codes play a crucial role in international trade by facilitating the systematic classification of goods. They provide a standardized framework for identifying and categorizing products, enabling seamless communication between trading partners, customs authorities, and regulatory bodies. HSN codes are used for various purposes, including: 

• Customs clearance:
  • HSN codes help customs authorities accurately assess duties, taxes, and other charges applicable to imported and exported goods. 
• Taxation:
  • HSN codes are used in indirect taxation systems such as Goods and Services Tax (GST) to determine tax rates and eligibility for input tax credit. 
• Statistical analysis:
  • HSN codes are used for compiling trade statistics, conducting market research, and monitoring trends in commodity flows. 

What are the applications of HSN code?

HSN codes are applied to a wide range of products across industries, including: 

• Manufacturing:
  • HSN codes are used to classify raw materials, intermediate products, and finished goods in manufacturing processes. 
• Trading:
  • HSN codes help traders accurately identify and categorize goods for import, export, and domestic trade. 
• Services:
  • While primarily used for goods, HSN codes are also used in some countries to classify services for taxation and regulatory purposes. 

How are HSN codes involved in business compliance?

For businesses involved in import, export, or domestic trade, understanding and correctly applying HSN codes is essential for compliance with customs and tax regulations. Incorrect classification of goods can lead to delays in customs clearance, imposition of penalties, and loss of tax benefits.

• Therefore, businesses must: 
  • Determine the appropriate HSN code for each product based on its characteristics and intended use. 
  • Ensure consistency and accuracy in reporting HSN codes in invoices, shipping documents, and tax returns. 

How does HSN code work?

The HSN code follows a hierarchical structure, with codes arranged in a logical manner based on various criteria such as raw materials, manufacturing processes, and product types. Each product is assigned a unique code, typically consisting of six to eight digits, offering a standardized method for categorizing goods. 

The first two digits of the HSN code represent the chapter, providing a broad classification of goods. As we move further along the code, additional digits offer more detailed classifications, narrowing down to specific product categories. This hierarchical system ensures uniformity and consistency in the classification of goods across industries and countries. 

Why is HSN code important?

• Facilitates International Trade:
  • The HSN code simplifies the process of importing and exporting goods by providing a common language for trade documentation.
  • It enables customs authorities worldwide to classify goods uniformly, reducing the risk of errors and discrepancies in trade transactions. 
• Ensures Compliance:
  • HSN codes are used for determining applicable tariffs, duties, and taxes on imported and exported goods.
  • By accurately classifying products according to their codes, businesses ensure compliance with international trade regulations and avoid penalties for misclassification. 
• Enhances Transparency:
  • The systematic classification of goods through HSN codes promotes transparency and clarity in trade transactions.
  • It enables stakeholders such as customs authorities, businesses, and consumers to easily identify and understand the nature of traded goods. 
• Supports Data Analysis:
  • HSN codes facilitate data collection and analysis, providing valuable insights into trade patterns, trends, and market dynamics. Governments, businesses, and policymakers use HSN coded data to make informed decisions and formulate trade policies. 

HSN System in India

In India, the HSN system is used for classifying goods under the GST regime. It plays a crucial role in determining the applicable GST rates for various goods and services. Businesses registered under GST are required to mention the HSN codes of goods supplied in their invoices, enabling seamless tax administration and compliance. 

HSN Worldwide

The HSN system is adopted by over 200 countries worldwide, facilitating global trade and harmonizing customs procedures. While some countries use the HSN codes directly, others have developed their own classification systems based on the HSN structure, such as the European Union’s Combined Nomenclature (CN) and the United States’ Harmonized Tariff Schedule (HTS). 

What is the structure of HSN code?

The structure of the HSN code follows a hierarchical format, allowing for the systematic classification of goods based on their characteristics and composition. The HSN code consists of a series of digits, with each digit representing a specific level of classification. Here’s how the structure of the HSN code typically unfolds: 

• Chapter:
  • The first two digits in the HSN code denote the chapter. There are 99 chapters in total, covering a broad range of goods and product categories.
  • Chapters provide the highest level of classification and serve as the starting point for categorizing goods. 
• Heading:
  • Following the chapter, the next two digits constitute the heading. Headings further narrow down the classification of goods within a particular chapter.
  • Each chapter contains multiple headings, each representing a distinct group of products sharing common characteristics. 
• Sub heading:
  • Sub headings are represented by the next two digits of the HSN code. They provide more detailed classification within a heading, specifying variations or specific features of the products. 
• Tariff Item:
  • The final two digits of the HSN code, known as tariff items, offer the most granular level of classification.
  • Tariff items provide precise identification of individual products or goods within a sub-heading. 

For example, consider the HSN code 21069010; 

• The first two digits “21” represent the chapter related to “Miscellaneous edible preparations.” 
• The next two digits “06” indicate the heading for “Food preparations not elsewhere specified or included.” 
• The following two digits “90” denote the sub-heading for “Other.” 
• Finally, the last two digits “10” specify the tariff item for a particular type of food preparation.

What is the role of HSN Code in GST?

The HSN plays a crucial role in the Goods and Services Tax regime, primarily in the context of GST invoicing, compliance, and taxation. Here’s an outline of the role of HSN in GST: 

• Uniform Classification:
  • HSN provides a globally accepted system for the classification of goods. In the context of GST, HSN codes ensure uniformity and consistency in the classification of goods across different jurisdictions, thereby facilitating seamless trade and commerce. 
• Rate Determination:
  • HSN codes help in the determination of GST rates applicable to various goods. The GST rates are structured based on the HSN classification, with different rates applied to different categories of goods.
  • HSN codes provide a standardized framework for identifying the applicable GST rate for a particular product. 
• GST Invoicing:
  • Businesses are required to mention the HSN codes of goods in their invoices while supplying taxable goods. For businesses with an annual turnover exceeding a certain threshold, HSN codes are mandatory on invoices.
  • This ensures transparency and clarity in invoicing and helps tax authorities in verification and assessment processes. 
• GST Returns:
  • HSN codes are used in GST returns for reporting outward and inward supplies of goods. Businesses are required to provide HSN wise summary details of their outward supplies in their GST returns.
  • This enables tax authorities to monitor and analyze the distribution of goods across different categories for effective tax administration. 
• Input Tax Credit (ITC):
  • HSN codes are essential for claiming input tax credit under GST. Businesses can claim ITC on the GST paid on purchases of goods used for furtherance of business, subject to compliance with certain conditions.
  • HSN wise details of purchases are required to be furnished while availing input tax credit, ensuring accurate attribution of credits. 
• Compliance and Audit:
  • HSN classification facilitates compliance with GST regulations and simplifies audit processes. Tax authorities can verify the accuracy of GST returns filed by businesses by cross-verifying the HSN wise details provided in the returns with the invoices and other records maintained by taxpayers. 
• International Trade:
  • HSN codes enable harmonization of customs procedures and facilitate international trade. Since HSN is a globally recognized classification system, it ensures consistency in the classification of goods for customs clearance and trade documentation, thereby promoting smoother cross-border transactions. 

Breakdown of goods distribution using HSN codes

The Harmonized System of Nomenclature  code provides a systematic framework for categorizing goods based on their characteristics and composition. It divides goods into various chapters, each representing specific product categories. Let’s explore the distribution of goods across different chapters using HSN codes: 

• Section I: Animals and Animal Products: 
  • Chapter 1: Animals:Covers live animals, including mammals, birds, and reptiles. 
  • Chapter 2: Meat and Edible Offal: Includes fresh, chilled, or frozen meat, as well as processed meat products. 
  • Chapter 3: Fish, Molluscs, Crustaceans, and Other Aquatic Invertebrates: Encompasses fish, shellfish, and other aquatic organisms. 
  • Chapter 4: Dairy Produce, Birds’ Eggs, Honey, and Other Edible Products of Animal Origin: Involves milk, cheese, eggs, honey, and related products. 
  • Chapter 5: Other Products of Animal Origin: Covers animal-based products not specified elsewhere, such as feathers, wool, and hides. 

• Section II: Vegetables and Vegetable Products: 
  • Chapter 6: Live Trees and Plants, Bulbs, Roots, etc., Cut Flowers and Ornamental Foliage: Includes live plants, flowers, and ornamental foliage. 
  • Chapter 7: Edible Vegetables, Certain Roots, and Tubers: Involves fresh or preserved vegetables for human consumption. 
  • Chapter 8: Edible Fruit and Nuts, the Peel of Citrus Fruits or Melons: Encompasses fresh or dried fruits, nuts, and citrus peel. 
  • Chapter 9: Tea, Coffee, Mate, and Spices: Covers tea leaves, coffee beans, spices, and related products. 
  • Chapter 10: Cereals: Includes grains such as wheat, rice, maize, barley, and oats. 
  • Chapter 11: Milling Products, Malt, Wheat Gluten, Starches, and Inulin: Encompasses flour, starch, malt extract, and other milling products. 
  • Chapter 12: Oil Seeds and Oleaginous Fruits, Grains, Straw and Fodder, Seeds and Fruit, and Industrial or Medicinal Plants: Involves seeds, fruits, and plants used for oil extraction or other industrial purposes. 
  • Chapter 13: Lac, Gum, Resin, and Other Saps and Extracts: Covers natural resins, gums, and plant extracts. 
  • Chapter 14: Vegetable Plaiting Materials and Vegetable Products Not Elsewhere Specified: Encompasses materials like bamboo, rattan, and other plant-based products. 

• Section III: Extraction of Animal and Vegetable Oils, Waxes, and Processed Edible Fats: 
  • Chapter 15: Animal or Vegetable Oils, Their Cleavage Products, Waxes, and Prepared Edible Fats: Involves oils, fats, and waxes derived from animals or plants, including edible oils and fats. 

• Section IV: Manufactured Food, Beverages, Alcoholic Spirits, Tobacco, and Alternatives: 
  • Chapter 16: Preparation of Meat, Fish, or Crustaceans, Molluscs, or Any Other Aquatic Invertebrates: Covers processed food products derived from meat, fish, or seafood. 
  • Chapter 17: Sugar and Sugar Confectionery: Involves sugar, molasses, and confectionery products. 
  • Chapter 18x: Cocoa and Cocoa Preparations: Encompasses cocoa beans, cocoa powder, and chocolate products. 
  • Chapter 19: Preparations of Cereals, Starch, Flour, Milk, and Pastry Products: Includes bakery products, pasta, and other cereal-based preparations. 
  • Chapter 20: Preparation of Vegetables, Fruits, Nuts, or Plant Parts: Involves processed vegetable, fruit, or nut products. 
  • Chapter 21: Miscellaneous Edible Preparations: Covers various food preparations not specified elsewhere. 
  • Chapter 22: Beverages, Vinegar, and Spirits: Includes alcoholic and non-alcoholic beverages, vinegar, and distilled spirits. 
  • Chapter 23: Residues and Food Waste, Prepared Animal Fodder: Involves by-products of food processing and prepared animal feed. 
  • Chapter 24: Tobacco and Tobacco Substitutes That Are Manufactured: Encompasses tobacco products, including cigarettes, cigars, and tobacco substitutes. 

• Section V: Minerals: 
  • Chapter 25: Salt, Earths, and Stones, Sulphur, Plastering Material, Lime, and Cement: Covers minerals and mineral-based products. 
  • Chapter 26: Ores, Slag, and Ash: Involves mineral ores, slag, and ash residues. 
  • Chapter 27: Mineral Fuel, Mineral Oils, and Products of Their Distillation, Mineral Waxes, and Bituminous Substances: Encompasses fuels, oils, waxes, and related products derived from minerals. 

• Section VI: Chemical Products or of Allied Industries: 
  • Chapter 28: Inorganic Chemicals, Organic or Inorganic Compounds of Precious Metals, Rare-Earth Metals, Radioactive Elements, or Isotopes: Includes various chemical compounds and elements. 
  • Chapter 29: Organic Chemicals: Involves organic compounds, including hydrocarbons, acids, and alcohols. 
  • Chapter 30: Pharmaceutical Products: Covers medicines, drugs, and pharmaceutical preparations. 
  • Chapter 31: Fertilisers: Encompasses fertilizers and soil nutrients. 
  • Chapter 32: Tanning or Dyeing Extracts, Tannins and Their Derivatives, Dyes, Pigments, and Other Colouring Matter, Varnishes and Paints, Inks, Putty and Other Mastics: Involves chemicals used in dyeing, coloring, and coating processes. 
  • Chapter 33: Essential Oils and Resinoids, Cosmetic or Toilet Preparations, Perfumery: Includes essential oils, perfumes, cosmetics, and toiletry products. 
  • Chapter 34: Soap, Cleansing Agents, Lubricants, Waxes, Polishes, and Dental Preparations: Encompasses a diverse range of hygiene, cleaning, and personal care products. 
  • Chapter 35: Albuminoidal Substances, Glues, Enzymes, and Modified Starches: Involves proteins, glues, enzymes, and starch derivatives. 
  • Chapter 36: Explosives, Pyrotechnic Products, Pyrophoric Alloys, Certain Combustible Preparations, and Matches: Encompasses explosive materials and related products. 
  • Chapter 37: Photographic or Cinematographic Goods: Includes photographic equipment, film, and related accessories. 
  • Chapter 38: Miscellaneous Chemical Products: Covers various chemical products not specified elsewhere. 

• Section VII: Plastics, Rubber, and Articles Thereof: 
  • Chapter 39: Plastics and Plastic Articles: Involves plastic materials, polymers, and plastic products. 
  • Chapter 40: Rubber and Rubber Articles: Encompasses rubber materials, products, and articles made from rubber. 

• Section VIII: Processing of Raw Animal Hides and Skins, Leather Products, and Associated Goods: 
  • Chapter 41: Raw Hides and Skins (Other Than Furskins) and Leather: Covers hides, skins, and leather materials. 
  • Chapter 42: Articles Made of Leather, Travel Goods, Handbags and Similar Containers, Saddlery and Harnesses, Articles Made of Animal Gut (Other Than Silkworm Gut): Involves leather products, bags, saddlery, and harnesses. 
  • Chapter 43: Furskins and Artificial Fur and Articles Thereof: Includes fur products and articles made from artificial fur. 

• Section IX: Wood and Wooden Articles, Wood Charcoal, Cork and Articles of Cork, Basket Ware and Wickerwork, Manufacturers of Straw, Esparto or Other Plaiting Material: 
  • Chapter 44: Wood and Wooden Articles, Wood Charcoal: Encompasses timber, wood products, and charcoal. 
  • Chapter 45: Cork and Articles of Cork: Covers cork materials and products. 
  • Chapter 46: Manufactures of Straw, Esparto or Other Plaiting Materials, Basket Ware and Wickerwork: Includes products made from straw, basketware, and wickerwork. 

• Section X: Production of Wood Pulp, Paper, and Related Articles: 
  • Chapter 47: Pulp of Wood or Other Fibrous Cellulosic Material, Recovered Paper or Paperboard (Waste and Scrap): Involves pulp, recovered paper, and paperboard waste. 
  • Chapter 48: Paper and Paperboard, Articles Made of Paper Pulp, or Articles Made of Paper or Paperboard: Covers various paper and paperboard products. 

• Section XI: Textile and Textile Articles: 
  • Chapter 49: Printed Books, Pictures, Newspapers, and Other Products of the Printing Industry, Typescripts, Manuscripts, and Plans: Involves printed materials and publications. 

• Section XII: Manufacturing of Footwear, Headgear, Umbrellas, Artificial Flowers, and Related Items: 
  • Chapter 50 to 63: Textile and Textile Articles: Encompasses various textile fibers, yarns, fabrics, clothing, and textile articles. 

• Section XIII: Creation of Articles from Stone, Plaster, Cement, Glass, and Ceramic Materials: 
  • Chapter 64 to 97: Miscellaneous Manufactured Articles: Covers a wide range of products, including furniture, toys, games, sports requisites, works of art, collectors’ pieces, and antiques. 

• Section XIV: Trading of Natural and Cultured Gems, Precious Metals, Coins, and Jewelry Replicas: 
  • Chapter 98: Project Imports, Laboratory Chemicals, Personal Imports by Air or Post, Passenger’s Baggage, Ship Stores: Involves miscellaneous imports, including laboratory chemicals, personal imports, and ship stores. 
  • Chapter 99: Services: Covers services provided in various sectors. 

Conclusion

The Harmonized System of Nomenclature or HSN code is a fundamental tool for classifying goods in international trade. By providing a standardized framework for product classification, HSN codes facilitate customs clearance, taxation, and statistical analysis, thereby promoting transparency and efficiency in global commerce. For businesses, understanding and correctly applying HSN codes is essential for compliance with customs and tax regulations, enabling smooth and hassle-free trade transactions. 

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