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Published on:

July 10, 2024

Viraaj Vashishth

Difference between HSN and SAC Codes in GST

The effective implementation of Goods and service tax is highly dependent on HSN code and SAC code which help in classification of wide range of goods and services. It is important for businesses to identify the disparity between HSN codes and SAC codes as it affects compliance as well as accurate tax filing. Stick to this article to know about the difference between HSN and SAC Code.

Understanding HSN Codes in GST

HSN or Harmonized System of Nomenclature is a standardized system consisting of names and numbers used for classifying traded products. WCO, meaning World Customs Organization, created this system to ease trade among different countries by changing how statistics on trade are compiled. On other hand, since they have been widely declared all over the world including more than 200 countries like India, these codes are useful for distinguishing products consistently.

1. HSN Codes Structure

HSN codes are divided into 8 digits in terms of structure. The first two digits stand for chapter, the next two stand for heading, the following two represent sub-heading and the last two specify the product.

For example, in the HSN code 10061000 “10” refers to cereals (chapter), “06” refers to rice (heading), “10” further categorizes it (sub-heading) and “00” specifies its type as a product.

2. How HSN Codes Are Applied In Goods Classification

Goods are systematically classified using HSN codes. For instance, common products like rice, wheat and machinery have their own specific HSN codes. Proper classification is essential because it determines which GST rate is applicable. Wrong classification may attract penalties and compliance issues.

3. Indian GST System's HSN Codes

Businesses in India must adhere to HSN codes according to their turnover under the GST regime. Businesses whose annual turnover does not exceed INR 1.5 crore do not require HSN codes at all. Thus those having a turnover between INR 1.5 crore and INR 5 crore should use a 2-digit HSN code whilst those with more than INR 5 crore turnover need either a 4-digit or an eight digit HSN code for international trade.

Goods vs Service

Understanding SAC Codes in GST

SAC or Services Accounting Code is a system that was developed to define services under GST. To ensure uniformity and standardization in the classification of services for taxation purposes, a Service Accounting Code (SAC) has been introduced. Its structured as follows:

1. Structure of SAC Codes

The structure of SAC codes is arranged in a 6-digit format while HSN codes deal with goods; SAC codes deal with services only. The first two figures within a full code name gives information about the nature of service being offered while other four digits provide further specifications so as to simplify differentiation amongst various service providers.

Examples include:- “construction services of highways, streets, roads, railways, and airfield runways” are covered under SAC code 995412.

2. Application of SAC Codes in Services Classification

Consultancy, transport, Legal, Financial services are some of the many forms of service industry that apply SAC-Codes for classifying their services correctly as per this framework for levying taxes on them. Misplacement during ITR or GSTR forms filing could result in inaccurate gst returns being filled hence there should be penalties if not careful enough when going through such procedures like taxation process or else it would mean that your company has not been audited by the revenue authorities. To ensure consistent service classification and simplification of the returns submission process, SAC codes are used.

Major Difference Between HSN and SAC Code

1. Nature of Goods vs. Services

The significant difference between HSN and SAC codes is the way they are used: for goods, HSN codes while for services, SAC codes. This differentiation is important for businesses that operate in both goods and service industries to ensure compliance with GST.

2. Code Structure and Length

HSN code is typically an 8 digit long number, whereas SAC code contains only 6 digits. The difference in structure and length indicates the classification of goods or services under the GST regime.

3. Application and Usage

Manufacturers, traders as well as importers use HSN codes to classify their products while service providers use SAC codes to identify their services. For instance, a firm that manufactures electronic products will utilize HSN codes whereas software consulting companies would make do with using SAC codes.

4. Impact on GST Compliance

Correctly employing either an HSN or an SAC code helps promote accurate filing of GST returns; misclassification may result in wrong GST returns hence penalties and non-compliance issues can occur too. Thus, it is essential for businesses to understand differences between HSN and SAC codes within the context of their firms’ operations in order to meet their obligations under GST law..

Aspect	HSN Code	SAC Code
Full Form	Harmonized System of Nomenclature	Services Accounting Code
Purpose	Classification of goods	Classification of services
Structure	8 digits (Chapter, Heading, Sub-heading, Item)	6 digits (Service Category, Sub-category)
Used By	Manufacturers, traders, importers	Service providers
Example	10061000 (Rice)	995412 (Construction services)
GST Rate Determination	Determines GST rate for goods	Determines GST rate for services
Compliance Requirement	Mandatory based on turnover	Mandatory for all service providers
Global Usage	Used internationally	Primarily used within India
Implementation in India	Mandatory based on turnover thresholds	Mandatory for all services
Common Mistakes	Incorrect classification, not updating codes	Incorrect classification, not updating codes
Turnover Thresholds	A. Up to INR 1.5 crore: None; B. INR 1.5 to 5 crore: 2 digits; C. Above INR 5 crore: 4 or 8 digits	Not applicable

Practical Implications for Businesses

1. Compliance Requirements

To determine their products and services, businesses must identify and apply the right HSN and SAC codes. They can use various resources and tools such as the official GST portal and tax consultants to find out the correct codes.

2. Common Mistakes and How to Avoid Them

Errors like wrong codes or failure to update them after regulation changes are common among others. Tax professionals should be consulted by business to prevent these mistakes by regularly re-evaluating their classifications.

3. Case Studies

For instance, companies that use the accurate HSN code when dealing with textiles will be charged the correct GST rate which ultimately lowers tax obligations hence no penalties. Real-life cases on businesses that have made proper use of HSN and SAC codes demonstrate how important it is to precisely classify goods.

Conclusion

Every business must understand HSN vs SAC Codes for compliance with GST regulations in India. Goods are classified using HSN Codes while services are given a classification under SAC Codes. Both systems constitute an integral part of the GST administration system enabling better accuracy in allocating commodities as well as services under it.

Ensuring the compliance requires businesses to be aware of the latest changes in HSN and SAC codes. Proper classification can simplify GST filing, avoid penalties, and facilitate smooth business operations. Resources are available to help businesses correctly categorize their goods and services for GST accurately, while professional advice should also be sought. Taxes are efficiently managed only if companies comply with HSN and SAC codes.

FAQs

1. What is HSN in GST?

HSN simply means Harmonized System of Nomenclature, which is applied during categorization of Goods under GST to maintain consistency in their identification methodically.

2. What is SAC in GST?

SAC refers to Services Accounting Code used to classify services according to uniformity of service taxation under the GST regime.

3. What is the difference between HSN and SAC code?

HSN codes deal with classification of goods only while SAC codes are responsible for classification of services under GST.

4. What is HSN and SAC code full form?

HSN is an acronym that stands for Harmonized System of Nomenclature while SAC refers to Services Accounting Code.

5. Why are HSN codes important in GST?

The importance behind having HSN Codes lies on standardized good classifications which lead to right rates of taxes for accurate compliance with such tax resulting code requirements as well as Goods

6. Why are SAC codes significant under GST?

The importance of SAC codes lies in the fact that they standardize services classification so that it will carry correct GST rates and remain compliant.

7. How is HSN Code structured?

An 8 digit format characterizes HSN codes; the first two digits stand for chapter, next two stand for heading, next two stand for subheading while the last two give specifics of the product.

8. How is a SAC code structured?

A 6 digit structure characterizes SAC codes; this means that the initial two figures represent service category whereas the subsequent four stands for further classification.