HSN Codes and Success of GST – A Thought

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HSN Codes and Success of GST – A Thought

HSN Codes and Success of GST – A Thought

 
Virtually the whole world trade is centered around the HSN Codes (known as Harmonised Commodity Description and Coding System).  Over 180 countries in the world are Members of World Customs Organization that developed this system.  India has been a member since 1971.  Surprisingly out of 180 countries who are Members, more than 70 percent are developing countries like India.
 
HSN has standardised the classification of thousands type of merchandise under Section; Chapters; Headings and sub-headings.  
The result is a Six Digit Code for a commodity ( two digits each represent the Chapter; heading and sub-heading in the same order).
India has two more digits as we deal in merchandise that many developed or developing countries do not deal.

Customs laws and Central excise laws of India have followed HSN system for the last many decades.  States dealing with VAT; CST and other indirect tax laws have not followed and they had their own Schedules for levying taxes.
 
2.In GST Regime; suddenly States have to follow the HSN and so the trading community who have no clue to HSN Codes and who were never trained as to how to follow this system and reframe their business accounting models.  Not only HSN, but the trade will also have to deal with Service Accounting Codes ( that were being followed in Service Tax Regime – now repealed)
 
3.Under the GST Regime majority of the small traders (annual turnover up to 1.5 crores) are not to deal with HSN codes ( a relief they must relish).  Other have to deal with two or four digits depending upon their turnovers.   However, in the case of imports/exports, HSN codes of eight digits shall be compulsory, as GST has to be compatible with international standards and practices.
 
4.How will the trading community deal with such a vast area?

The Code has 21 Sections; 99 Chapters; 1244 headings and 5224 sub-headings that have been arranged and accepted by the world trade community and are based on the merhandise degree of manufacture or in terms of its technological complexity.  

For example, natural products appear first and man-made or technology based products appear later.  It will be unwise for me to tell you that all products in one category are listed in on Chapter- products overlap and quite a lot.
 
5.For a proper classification of product, many Rules have been designed and accepted internationally for interpretation normally called General Interpretative Rules and even the Supreme Court takes cognizance of the same in their Judgments.  It is a settled law now that these Rules are to be applied in a sequential manner ( in the same order in which they are issued)
 
The settled principle of law is that once we are able to classify the product as per First Rules; there is no need to go to the second Rule. It is also a settled law to interpret these rules ( given below ) that a word used in the HSN should be construed on the basis of common parlance rather than in the strict or technical sense.  

For example, Patanjali Dental Products may not be treated as Ayurvedic Medicines but will be treated as a Toilet Preparations and classified and taxed accordingly.
 
Rules of Interpretation of HSN Codes
 
Rule 1:
Titles of sections, chapters, and sub-chapters are provided for ease of reference only. For legal purposes, refer to headings and sub-headings to drive classification.
 
Rule 2a: 
If the goods are incomplete/unfinished and have the characteristics of the finished product classification is the same as that of the finished product (if the classification is known). The heading shall also include removed/unassembled or disassembled parts (i.e., SKD/CKD).
 
Rule 2b: 
Any reference to a material or substance includes a reference to mixtures or combinations of that material or substance with other materials or substances. The classification of goods consisting of more than one material or substance shall take place as per Rule 3.
 
Rule 3a: 
Choosing a specific heading is preferred over a general heading.
 
Rule 3b: 
Mixtures/composite goods should be classified per the material or substance that gives them their essential character.
 
Rule 3c: 
If two headings are equally suited to the item, choose the heading that appears last in numerical order.
 
Rule 4: 
If goods cannot be classified per the above rules, they are to be classified according to the goods to which they are most akin.
 
Rule 5: 
Containers specifically designed for the article and suitable for long-term use will be classified along with that article, if such articles are normally sold along with such cases. For example, a camera case would fall under cameras. Packing materials and containers are also to be classified with the related goods except when the packing is for repetitive use.
 
 So, Friends, This is a brief summary of HSN codes that the trading community; service providers will now have to deal.  Commit a wrong classification; face the consequences.  The big question is that whether Indian Trade and Service Providers are ready for this kind of legal and technological change brought about suddenly: or we are going to face huge tax litigation in coming years?  Are professionals dealing with VAT or Service Tax or even Tribunals or Courts ready to implement such a complex system easily or we think Government should defer the HSN codes for next one year so that bonafide mistakes are penalised where trade and service providers will suffer.