As per the notification issued by the GST authorities in October 2020, the HSN codes are now mandatory on all invoices. According to this new regulation, GST authorities mandated the HSN code on all tax invoices from 1st April 2021. The official statement made by the Ministry of Finance clearly states that “With effect from the 1st April 2021, GST taxpayers will have to furnish HSN (Harmonised System of Nomenclature Code), or Service Accounting Code (SAC) in their invoices, as per the revised requirements”.
According to this new mandate, the number of digits in the HSN code has been revised. Now, they shall vary according to the size of the aggregate turnover of the business. Businesses with an aggregate turnover below 5 crore INR in the fiscal year 2020-21 are required to furnish a 4-digit HSN code. Businesses with an aggregate turnover exceeding 5 crore INR in the last financial year are required to furnish a 6-digit HSN code on their GST invoices. Previously, it was 2 and 4-digit codes for businesses with turnover upto 5 crores and over 5 crores, respectively.
Guidelines: Points to Remember
- Businesses with aggregate turnover above 5 crore INR in the last financial year must issue the 6-digit HSN codes on both B2B and B2C invoices.
- Businesses with aggregate turnover up to 5 crore INR must issue the 4-digit HSN code on B2B invoices
- For smaller businesses (with aggregate turnover up to 5 crores), issuing the HSN code on B2C invoices is optional
- Businesses with less than 1.5 crore aggregate turnover need not furnish the HSN code
HSN codes are standard worldwide for the ease of international trade for the systematic organisation and classification of products. Manufacturers and traders have been furnishing the HSN codes on taxable goods and services even before the GST. Importers and exporters have been regularly adding these codes on documents of import-export trade. The traders will refer to the HSN codes provided in the invoices issued by the manufacturer and importer.
Mandating HSN codes on invoices is no new phenomena. However, with the Finance Ministry’s declaration, its use will be a lot more streamlined and uniform. This standardisation of the HSN codes on GST invoices is a welcome move. It will require manufacturers, traders and service providers to provide more specific codes on the invoices issued for the products/ supplies or services.
This, in turn, will help tax accounting officers get deeper data analytics for all traded goods/ services. Also, it will help control the tax evasion practices resulting from false invoices and irregular tax credit claims.