Goods And Services Tax has been announced recently in India and the focus of this change is to meet the international standards. To meet international standards, it must need to comply with the HSN regime. Harmonized System of Nomenclature or often referred as HSN is an international standard system of tariff for names and numbers to classify traded products. This system is effective from 1988 and maintained by the World Customs Organization, which is a intergovernmental organization with 200+ member countries. HSN entertains various commodity groups of nearly 5000 numbers which are identified by different numbers. These numbers are six-digit codes are arranged by legal and logical structures which are made to classify each of the 5000 commodities individually. The reason Goods And Services Tax has been focused on this system because 98% of the international trade is classified under this HSN umbrella which indirectly reduces international trade costs.
So, according to Indian rules, any business exceeding the annual turnover limit of Rs 5 crore required to follow this international coding rule. This will auto populate the tax rate in return form according to the HSN code used in their invoicing system. Completing one year under this GST umbrella will make the previous year’s turnover a baseline for 4 digits HSN codes which ultimately help Goods And Services Tax accepted globally. The businesses with annual turnover window of 1.5Cr-5Cr will be specified with 2 digits HSN code. From the second year of GST, the businesses under this window will have to mention this code while filing income tax on a mandatory basis. This will make the GST system more compatible for international commodity recognition. Also, using HSN code will be mandatory for importing and exporting any listed commodities under Goods And Services Tax rules. This 2 digit code will be further categorized into 6 digit code which finally end up in 8 digit unique code.
Simplifying this concept, it can be said that HSN will be used to make Goods And Services Tax more compatible with international standards.