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Alankar Mishra

September 24, 2024

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Basics of GST

Mentioning of HSN Code Mandatory in GSTR 1

The advent of the Goods and Services Tax (GST) in the Indian context has brought significant changes in the filing of returns and record-keeping by business entities. One essential aspect of GST compliance is the HSN Code, the Harmonized System of Nomenclature. The HSN Code Mandatory in GSTR 1 ensures that businesses properly classify goods and services. This requirement not only facilitates turnover reconciliation across various organizational units but also ensures compliance with tax authorities, especially for businesses meeting certain turnover thresholds during the GSTR-1 filing process.

This blog covers the necessary HSN Code in GSTR-1, its relevance to businesses, and its consequences for industries that don’t comply. We will also make sure that an example is provided regarding the different turnover limits which have to be adhered to as well.

What is the HSN Code?

The HSN Code is explained as a universal method of describing goods developed by the World Customs Organization. It is adopted by several countries to manage and control the classification of commodities within their boundaries for taxation, customs and trade purposes.

In India, the HSN code assists firms in making the appropriate declaration of goods while filing GST returns. The code has 6 to 8 digits:

The first two digits represent the chapter under which the goods fall.

The next two digits represent the heading within that chapter.

The last two or four digits show the categorization of the goods according to their particulars.

In place of the HSN code, there is SAC which is the Service Accounting Code in the case of services.

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Importance of HSN Code in GSTR-1

GSTR-1 is an indirect tax return which contains information on sales made by taxpayers either on a monthly or quarterly basis. There are many reasons why incorporating the appropriate HSN code in GSTR-1 is important: Including Tax HSN:

1. Correct Tax Collection: The HSN relates to a hundred per cent accurate application of goods and services tax. That is why, the HSN needs to be very specific and valid. Goods & Services Tax which is a value-added tax, is charged for each product. A certain range of goods and services offered for sale will attract different dollar tax rates depending on their classification. Misclassification of the goods will result in either tax overpayment or underpayment.

2. Consistency in Classification: The HSN code is a tool that standardizes the way businesses classify their goods and services. This helps come up with a universal system of doing business for all the players that are under the GST.

3. International Adoption: As the HSN code is popular, it transfers the meaning of the products in domestic or international trade making international trade easier.

4. Legal Matters and Verification: The GSTR-1 form must include the HSN code without fail because it is a legal matter too. The regulatory authorities of taxation use the HSN numbers for categorizing goods to execute credible audits and prevent tax evasion or inaccurate accounts reporting.

Related read: Errors & Mistakes during GSTR-1 Filings

HSN Code Requirements Based on Turnover

About GSTR-1, plenty of HSN code documentation is mandatory, but a required number of digits is based on the annual turnover of the business. This has varied with the government, which has set certain slabs to determine how many digits of the HSN code a business will be required to indicate in/disclose.

In relation however to HSN code requirements, here are age and level category details of and requirements of HSN codes based on annual turnover:

‍Turnover up to ₹5 crores: A business whose turnover is above ₹5 crores and less than 5 crores has been required to state 6 codes in GSTR-1 which are 4-digit HSN codes for their B2B transactions only. HSN is not a requirement for B2C transactions.

‍Turnover above ₹5 crore: If the turnover of such businesses exceeds 5 crore the company tax file the return must include in the GSTR-1 for all invoices which are B2B as well as B2C 6 digit HSN code.

‍For Exports: Exporters have to use 8-digit codes, that are related to the products, within their invoices as well as in GSTR-1 returns with a focus on foreign trade.

How to Include HSN Code in GSTR-1?

Now, this is a step-by-step guide on how to fill GSTR-1 with the HSN code in it:

Step 1: Identify the Correct HSN Code

The identification of the proper HSN of a good needs to be done before the filing of GSTR-1 by the businesses. The farmers can also use the HSN code directory provided by the government and the GST portal to locate the proper classification.

Step 2: Type the HSN Code in GSTR-1

When filling out your GSTR-1 return:

Locate the section for recording outward supplies.

Type the HSN code in the appropriate column for every item of a product or service.

Make certain that you put the required number of digits (4, 6 or 8) based on your turnover.

Step 3: Mention Quantity and Value

Along with the HSN code, also give the quantity and the value of every outward supply of these goods on the outward supply form in the respective boxes. This avoids negative documentation of the sales.

Step 4: Submit the Return

After feeding in all the details which are required along with the HSN code available whatsoever, you are supposed to view the return which will then be rendered on the GST portal. Also, make sure all the information is correct to avert misstatements in the course of audits.

Impact of Non-Compliance with HSN Code Requirement

Neglecting to include the correct HSN code in GSTR-1 may have its day for the businesses in many aspects:

‍Penalties for Non-Compliance: Non-completion of the required HSN code formatting shall be punishable as a breach of the GST compliance law. Non-compliance fines might also be taken during the audits or inspections that are geared towards GST.

Difficulty in Claiming Input Tax Credit (ITC): If the HSN code is either absent or not correctly provided, the recipient may not be able to get back the Input Tax Credit (ITC), which he/she might have incurred in the purchase of the goods. This process results in delays in the collection of ITC that would have been used for expenditures.

‍Delays in Processing of Refunds: Businesses with chances of receiving GST refunds can use the wrong HSN code or fail to use one and as a result, their claims will be delayed. This cuts across most export establishments where fast refunds are critical for working capital.

‍Audits and Scrutiny: A vast majority of the persons with incorrect HSN tags may receive GST audit reports. A tendency of Companies that do not conform with the HSN regulations will have a stub probing on them during the examination increasing the likelihood of more expenses on compliance.

Common Challenges in Reporting HSN Codes

Even though filling up the HSN codes in GSTR-1 format is an easy undertaking, businesses however face some challenges.

Wrong Classifications

Goods that are classified under the wrong HSN codes will be taxed at the wrong rates and this leads to tax underpayment or overpayment and this may lead to either penalties or a tax refund.

Ignorance

Most owners of small businesses with few marketable products find it hard to get the rightful HSN code for their products. Such businessmen should at least try to understand the usage of HSN codes for their trade or get help from others.

B2C Transactions Confusion

For businesses with turnover lower than ₹5 crore, there can be some confusion regarding the necessity of mentioning the HSN codes in the B2C transactions. While it is compulsory for B2B transactions, the code isn’t essential for B2C transactions below the prescribed turnover limit.

Export Compliance

In most cases, that is in most cases when the HSN codes are applied to export transactions, it’s usually in the 8-digit format which poses problems to businesses that are usually experts in domestic transactions only. Guaranteeing that the right code is reported is of the utmost responsibility to avoid problems with compliance.

Benefits of Submitting HSN Code in GSTR-1

Even though HSN code inclusion in GSTR-1 is compulsory for some businesses, it has its advantages too:

‍More Ease in Compliance: HSN codes allow for standard coding of goods and guess what? It helps tax men in audits and verifications.

‍Easier Cross Border Trade: The use of HSN code which is an international practice that aids Indian exporters in transacting business outside the Indian territories without many hurdles. There is faster clearance of goods at customs because the right commodity is coded.

‍Business Tax Evasion Decrease: The HSN codes act as an identity of goods which the tax authorities use to trace tax-evasive goods and liabilities enhancing HSNs' usefulness in fighting tax evasion.

‍Simplified ITC Process: If there are inaccuracies with the HSN numbers, recipients of the HSN furnished by the suppliers may be unable to claim Input Tax Credit due to misclassification of goods and services in tax returns.

Conclusion

The mentioning of HSN codes in GSTR-1 is valid as per the amendments made to the GSTR 1 form under the GST regime. It enables efficient and effective categorization of services and goods, offers easy taxation and increases the legitimacy of tax administration. Specialist companies should keep the HSN codes depending on the income they generate within the year to minimize penalties and enable efficient turnover of GST.

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Adhering to HSN code reporting in GSTR-1 helps businesses keep clear records, enhance tax compliance as well and not invite unnecessary audits or penalties. Be it a small business or a large holding, grasping the essence of HSN codes in GST returns is an essential advantage for any tax management process.

FAQs

1. What is the HSN code mandatory limit under GST?

The HSN code mandatory limit varies based on the annual turnover of the business. For businesses with a turnover of up to ₹5 crore, the requirement is to declare a 2-digit HSN code, while businesses with a turnover exceeding ₹5 crore must declare a 4-digit HSN code.

2. Is it mandatory to give an HSN summary in GSTR-1?

Yes, it is mandatory to provide an HSN summary in GSTR-1. Taxpayers are required to report the HSN codes of the goods and services supplied in the GSTR-1 form, based on their turnover and applicable regulations.

3. Is the HSN code mandatory for turnover less than ₹1.5 crore in GSTR-1?

For businesses with a turnover of less than ₹1.5 crore, the HSN code is not mandatory in GSTR-1. However, if the turnover exceeds ₹1.5 crore, the HSN code becomes a mandatory requirement based on the turnover slabs.

4. Is the HSN code mandatory in GSTR-1?

Yes, the HSN code is mandatory in GSTR-1 based on the turnover of the taxpayer. For turnovers between ₹1.5 crore and ₹5 crore, a 2-digit HSN code is required, while businesses with turnover above ₹5 crore need to provide a 4-digit HSN code for all goods and services.

5. What is the purpose of the HSN summary in GSTR-1?

The HSN summary in GSTR-1 helps in the classification of goods and services supplied, ensuring proper compliance with GST regulations. It also helps the authorities verify tax liabilities and input tax credit claims accurately.

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