HSN - Harmonized System of Nomenclature : GST

[Ganeshan Kalyani]

Full form: The full form of HSN is Harmonized System of Nomenclature. It is also called as Harmonized Commodity Description and Coding System. HSN is an international standardized system of names and numbers to classify traded goods. It has been developed and maintained by the World Customs Organization (WCO).

Use of HSN: HSN is used by various authorities such as Customs, statistical agencies, and other government regulatory bodies, to monitor and control the import and export of commodities. Most of the companies use HSN to calculate the total landed cost of imported products and parts, and to identify selling and sourcing opportunities abroad.

Contains: HSN is organized into 21 sections, which are divided into 99 chapters. The chapters are further divided into various headings and subheadings. Section and chapter titles describes broad categories of goods, while headings and sub-headings describe products in more detail. Each Section and Chapter is prefaced by Legal Notes, which are given to clarify the proper classification of goods.

Classification: A product can be classified in HSN by using the General Rules for the Interpretation of the Harmonized System (GRI). HSN codes are determined based on various factors like product's composition, its form and its function. It is a challenge to classify a product under a correct HSN. One has to know the composition, form and use of the product to classify it under a correct HSN. If one fails to classify the product under correct HSN and happens to pay less tax then he may have to pay the differential tax that may be pointed out by the Customs authority.

Tax component: Under erstwhile tax regime the import duty structure consisted of basic customs duty, countervailing duty, special additional duty, surcharge etc. The countervailing duty was equivalent to Central Excise duty and special additional duty was equivalent to Value Added Tax. Now, after the introduction of Goods and Service Tax the countervailing duty, special additional duty got subsumed in IGST - Integrated Goods and Service Tax. And now in GST the import duty consists of customs duty, IGST and Social Welfare Surcharge.

Universal: HSN is used by 180 countries to determine the tax rate of a product.

Challenges in classification: Under Central Excise regime there was Central Excise Tariff which provided the duty rate product wise. The Tariff carried a list of goods along with their applicable excise duty. The list of goods enumerated under a particular HSN in Central Excise tariff was more or less same that of the list of goods enumerated under Customs tariff. As a result the rate on say, main machinery and its parts were carrying same rate of duty. But in GST since the IGST rate is defined via notification, and customs duty is based on customs tariff the rate of customs duty of main machinery and its part may be same but the IGST rate on main machinery may be different from the rate applicable on their parts. Thus the parts attract higher rate even though the machinery falls under lower rate.

Self assessment: The responsibility is on the importer to correctly classify the product imported by him under correct HSN and pay the applicable import duty. The customs allows the goods to be cleared based on self assessed tax payment by the importer. However, later on the Department of Revenue Intelligence does the assessment of the import consignment based on Bill of Entry and re-classify it and if found short payment by the importer then it informs the importer to pay tax that was short paid.