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Alankar Mishra

April 22, 2025

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Basics of GST

The mandatory mentioning of HSN Codes in GSTR-1

As the compliance structure under the services and goods tax in India grows, it is evident that mentioning HSN codes in GSTR-1 is compulsory for all companies. The government has made it mandatory starting from April 1st, 2021, to report Harmonized System of Nomenclature (HSN) code on tax invoices, as well as in GSTR-1 returns. This is done to ease the process of tax compliance and improve transparency and the tracking of goods and services.

What is an HSN Code?

The Harmonized System of Nomenclature or HSN code is a taxonomic classification system that is accepted globally. The World Customs Organization created it and its use is prevalent all over the world for the systematic classification of items in commerce.

HSN Structure:

1. 2-digit HSN code: Chapter of the goods.

2. 4-digit HSN code: Subheading of the goods.

3. 6-digit HSN code: Specific product category;

4. 8-digit HSN code: Used for deeper classification (India-specific).

Importance of HSN Codes in GST

HSN code brings purpose under the Goods and Services Tax (GST):

1. Standardisation of Goods Classification: This ensures that tax collection and compliance is done uniformly.

2. Global Trade Facilitation: Integrates the Indian system of trade with international systems.

3. Tax Rate Identification: Aids in arriving at the appropriate GST rate which should be charged.

4. Elimination of Misclassification: Lower instances of tax evasion and filing inaccuracies.

Mandatory Requirement of HSN Codes in GSTR-1

According to the shortcomings and the curbs posted by the CBIC Notification No. 78/2020 – Central Tax dated 15th October 2020, it is mandatory for a business to report HSN codes in GSTR-1, and the specifics are relative to the annual revenue generated by the taxpayer exposed.

Revised HSN Code Requirements (Effective April 1, 2021)

Annual Turnover (Previous FY)

HSN Code Requirement

Up to Rs. 5 crore

4-digit HSN Code (for B2B transactions)

Above Rs. 5 crore

6-digit HSN Code (for all transactions)

Exporters & Importers

8-digit HSN Code

Important Notes:

In the records for B2C supplies, businesses with a turnover not exceeding Rs five crores is required to mention HSN codes, but it is not mandatory.

1. Compliance with the 8-digit HSN requirement is mandatory for SEZ Units & Developers.

2. The HSN code provided fills in the tax rate on GSTR-1 automatically.

How to Mention HSN Codes in GSTR-1?

While filing GST returns, businesses should take note of HSN details to be inserted in Table 12 of GSTR-1 as follows:

1. HSN Code

2. Goods and Services Description

3. UQC (Unit Quantity Code)

4. Quantity In Words

5. Taxable Amount

6. GST Rate

7. Tax amount of CGST, SGST, IGST, and Cess

Example of HSN Code Entry in GSTR-1

HSN Code	Description	UQC	Quantity	Taxable Value	GST Rate	IGST/CGST/SGST
8504	Electrical Transformers	NOS	10	Rs. 5,00,000	18%	Rs. 90,000

Penalties for Non-Compliance

Failing to follow HSN code compliance in GSTR-1 can attract penalties as defined under Section 125 of the CGST Act:

1. General Penalty: Up to Rs. 50,000. (Rs. 25,000 under CGST and Rs. 25,000 under SGST).

2. Mismatch Problems: This could result in tax assessments and additional examination by the taxing authorities.

3. ITC Blockage: Due to the wrong classification, the Input Tax Credit (ITC) may be cancelled.

How to Avoid Non-Compliance?

1. Confirm Correct HSN Code Usage: Read the official CBIC publication on HSN codes.

2. Use GST Software for Supplemental Filing: Remove manual calculations to reduce mistakes.

3. Activate Training for Accounting Departments: Inform your finance and accounting staff of any changes in HSN norms.

4. Check Records Periodically: Scan newly added product categories' HSN codes.

Common Mistakes to Avoid

Several businesses commonly make mistakes in GSTR-1, such as:

1. Using Incorrect HSN Codes: Results in further incorrect tax computation and non-compliance issues.

2. Failing to Update HSN in Accounting Software: Does not override the new classification.

3. Omitting HSN from Invoices: Causes discrepancies in GSTR-1 reconciliation.

4. Incorrect HSN GST Combination: This can cause penalties and excessive scrutiny.

Conclusion

To achieve uniformity and transparency under the GST system, it has become compulsory to mention the appropriate HSN code in GSTR-1. As such, businesses need to be aware of the recent changes to stay clear of fines and compliance challenges. Filing of GSTR-1 can be made easier with the correct HSN codes, accurate invoice details, and automated systems.

FAQs

1. Is the HSN Code mandatory for service providers?

Yes, SAC (Services Accounting Code), the service component to HSN, is to be stated in GSTR-1.

2. How can I find the correct HSN code for my product?

For the latest update on HSN codes, kindly check the GST portal or the CBIC site.

3. Can I use a higher-digit HSN than required?

Yes. Businesses can use the 6 and 8-digit HSN codes even when the 4-digit codes are stipulated.

4. What happens if I mistakenly enter the wrong HSN code?

You might be getting a notification from the GST department, which could result in blocking your ITC claims.

5. Are HSN codes required for B2C transactions?

For companies whose turnover is upto Rs 5 crore, including HSN codes for B2C transactions is optional.

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