HSN at 6 digits level w.e.f. 01.04.2021 - A question of concern

[Ganeshan Kalyani]

The term ‘HSN’ stands for Harmonised System of Nomenclature. It is a code used universally to classify the goods for taxation at international level. In India, the Customs authority is following HSN based taxation in the name of Customs Tariff to tax the goods imported. The HSN based taxation system was also followed by Central Excise Authority to levy duty on clearance of goods manufactured. 

The VAT – Value Added Tax authority did not followed HSN based taxation method and instead followed scheduled based taxation. Each State had their own VAT Laws and rate wise schedules attached to it. The taxpayer falling under VAT laws used to classify their goods under appropriate rate schedule for paying tax. Thus these taxpayers were not conversant with HSN based taxing system. Even though some class of taxpayers were buying goods from manufacturer and thus should be receiving Excise invoice they never mind it to maintain HSN in their books of accounts as they were required to pay VAT and not excise. Also, there were manufacturers who were engaged in the processing of raw material which did not amount to manufacture of goods and thus was outside the levy of Central Excise. Such taxpayers were also not conversant with HSN.

The Govt. introduced GST – Goods and Services Tax subsuming Central Excise, Service Tax, VAT in the year 2017 and has adopted HSN based taxation system. But since most of the taxpayers as stated above were not conversant with HSN and also did not have the same recorded in their books the Govt. had relaxed the provision of rule 46 of GST Rules with respect to HSN vide notification no. 12/2017-CT dated 28.06.2017. The notification exempted the taxpayer having turnover upto 1.5 crore from mentioning HSN on invoice. And the taxpayers with turnover more than 1.5 crore but upto 5 crores were required to mention 2 digits level HSN code and the taxpayers having turnover more than 5 crores were required to mention 4 digits level of HSN.

Now the aforesaid relaxation of HSN given to taxpayer having turnover upto 1.5 crore has been taken away and the Govt. is now asking every taxpayer to mention HSN on invoice from 01.04.2021. Notification no. 78/2020-CT dated 15.10.2020 gives effect to the same. As per the notification every taxpayer having turnover upto 5 crore must mentioned HSN at 4 digits level and taxpayer having turnover more than 5 crore to mention HSN at 6 digits level.

The taxpayers should refer rate notification no.1 & 2/2017-CTR dated 28.06.2017 as amended from time to time to find out HSN of their goods and start maintaining in their billing system/books. They might already be referring the said notifications to refer tax rate but now emphasis need to be given to HSN. 

The taxpayers having turnover upto 5 crores may refer to the aforesaid rate notifications as it contains 4 digits HSN. But the taxpayers having turnover more than 5 crores will have face challenge themself as the aforesaid rate notificaiton has only 4 digits HSN and the taxpayer need to know 6 digits level HSN. Since the GST rate notification is based on customs tariff the taxpayer can refer Customs Tariff for finding 6 digits HSN. One may also think to maintain HSN at 8 digits level now itself or wait for another notification to come from Govt. in near future asking to maintain 8 digits level HSN. 

The job of finding out HSN itself is not an easy task. The taxpayers has to put a lot of efforts to find out correct HSN. In some case the rule of interpretation need to be applied. 

The GST rate notification though based on the customs tariff is not same as that of customs tariff, in the sense that the list of goods given in customs tariff is not mention  as it is in GST rate notification. As a reason the taxpayers in some cases have to resort to residual entry of GST rate notification at serial no.453 of Sch.III and offer 18% tax. But it is observed that the goods which is not specifically given in GST rate notification is given specifically in customs tariff as taxable at 12% rate. 

As a reason, the dispute arises mainly at the time of import where for payment of import duty one has to refer to customs tariff to pay customs duty and IGST rate notification to pay IGST part in import duty. And as I mentioned in above para that the goods that are mentioned in customs tariff is not given in the same way in GST rate notification. So even if the imported items may fall under particular HSN under customs tariff he has to resort to residual entry no of GST rate notification as the same goods is not specifically mentioned.

One may wonder why IGST rate notification is not in line with customs tariff. Why CGST and SGST rate notification is also not updated in line with customs tariff? If the intention of the Govt. is to build a common national market for the goods then rate of tax applicable on a particular goods should be same under customs tariff and in GST rate notification as well.

Now, if the GST rate notification is not line with customs tariff then one may think why to refer customs tariff to find out 6 digits level HSN so as to comply the requirement of HSN from 01.04.2021. If rate notification is still to remain different from customs tariff then Govt. should increase the HSN from 4 digits level presently given in GST rate notification to 6 digits level and then ask the taxpayer to comply with 6 digits level HSN requirement. This would help the taxpayer to easily refer to the HSN at the same serial number in the notification and copy the additional 2 digits HSN and maintain it in their billing system/books.

Govt. had also issued notification no.90/2020-CT dated 01.12.2020 wherein they have given list of goods with 8 digits HSN and then asked the taxpayers who were into the supply of such goods to mention the same in their invoice. This is correct method as the taxpayer was in a position to simply find HSN from the said notification and maintain it in his billing system/books. Needless to mention the taxpayer should validate HSN in the notification first before considering it.

Similar to the said notification no.90 the Govt. should first increase the 4 digits level HSN in GST rate notification to 6 digits level HSN and then ask the taxpayer to comply for rule 46 of CGST Rules with respect to HSN. As a taxpayer I would like to request the Govt. to relax the compliance requirement of 6 digits level HSN till such time the HSN in GST rate notification is aligned.

Discussions to this article

[niranjan gupta]

You have mentioned that:

"The GST rate notification though based on the customs tariff is not same as that of customs tariff, in the sense that the list of goods given in customs tariff is not mention as it is in GST rate notification. As a reason the taxpayers in some cases have to resort to residual entry of GST rate notification at serial no.453 of Sch.III and offer 18% tax. But it is observed that the goods which is not specifically given in GST rate notification is given specifically in customs tariff as taxable at 12% rate."

Please give one example to this. Thanks

[MANOHARAN ARUMUGAM]

Sir,

I agree with the Author of the Article Mr.Ganeshan Kalyani. In response to your query about Sl.No.453 of Sc.III of Notfn.No.01/2017 IGST (Rate) dt.28.06.2017 which levies IGST @ 18%, I would like to share an example.

Import of finished formulations (medicaments) falls under Tariff Item 3004. An importer imported finished formulations for Research Purpose and accordingly declared the End Use Code as DCH-800 in the Bill of Entry and paid IGST in terms of Sl.No.63 of Schedule II of the IGST Rate Notification No.01/2017. However, the importer received a Notice from DRI seeking clarification as to why IGST should not be levied @ 18% under Sl.No.453 of Schedule III of the said Notification. Here who is correct? Pl. clarify.

Thanks,

[niranjan gupta]

Following is the classification as per Notification Number 1/2017-Central Tax (Rates) dated 28/6/2017 of the product specified by you.

As per schedule II, if the product is classified in 63/3004, the rate of tax is 6%.

Schedule II-6%

63.

3004

Medicaments (excluding goods of heading 30.02, 30.05 or 30.06) consisting of mixed or unmixed products for therapeutic or prophylactic uses, put up in measured doses (including those in the form of transdermal administration systems) or in forms or packings for retail sale, including Ayurvaedic, Unani, homoeopathic siddha or Bio-chemic systems medicaments, put up for retail sale

Schedule III -9%

In case, the goods are not classified in schedule I,II, IV, V or VI, then it falls in 453 otherwise not.

453.

Any Chapter

Goods which are not specified in Schedule I, II, IV, V or VI

I have not come across any issue in this. In case, you may elaborate further, will be helpful

[Ganeshan Kalyani]

Sri Gupta Sir, here is my submission to your query.

HSN 8436 as per Customs Tariff is "OTHER AGRICULTURAL, HORTICULTURAL, FORESTRY, POULTRY-KEEPING OR BEE-KEEPING MACHINERY, INCLUDING GERMINATION PLANT FITTED WITH MECHANICAL OR THERMAL EQUIPMENT; POULTRY INCUBATORS AND BROODERS & PARTS THEREOF"

The word above in italic is mentioned in the same tariff under 8436 91 00 & 8436 99 00 which means same rate of tax applicable to machinery and parts thereof.

But in IGST Notification under serial no. 199 HSN 8436 it is given "Other agricultural, horticultural, forestry, poultry-keeping or beekeeping machinery, including germination plant fitted with mechanical or thermal equipment; poultry incubators and brooders" which attracts 12% tax.

In IGST Notification the word "Parts" thereof is not mentioned, so for "the part " the department asks to refer residual entry no 453 to offer tax @ 18%

[niranjan gupta]

Hi Mr Ganeshan

Thanks for your observation. You have mentioned that in 8436 the words "& Parts Thereof" are there as produced below:

HSN 8436 as per Customs Tariff is "OTHER AGRICULTURAL, HORTICULTURAL, FORESTRY, POULTRY-KEEPING OR BEE-KEEPING MACHINERY, INCLUDING GERMINATION PLANT FITTED WITH MECHANICAL OR THERMAL EQUIPMENT; POULTRY INCUBATORS AND BROODERS & PARTS THEREOF"

I find that 8436 has following headings:

8436

OTHER AGRICULTURAL, HORTICULTURAL, FORESTRY, POULTRY-KEEPING OR BEE-KEEPING MACHINERY , INCLUDING GERMINATION PLANT FITTED WITH MECHANICAL OR THERMAL EQUIPMENT; POULTRY INCUBATORS AND BROODERS

There is no words "& Parts thereof"

In case, this is correct then parts thereof will not be classified in 199 but in s.no 453.

There is another reason to this. Parts of a machine may be fitted in any other machine. For example "Washer". Washer can be used in any machine, hence it is not possible to give specific classification to common parts, hence parts are excluded from specific classification.

This is my view.