Classification of Goods & Services under HSN – GST Guide

1. Introduction

When it comes to filing GST returns, one small mistake that often causes big confusion is HSN classification. Many businesses still struggle with one simple question — “Which HSN code should I use for my product or service?”

Under the Goods and Services Tax (GST) system, correct classification of goods and services is extremely important.

It decides:

• What GST rate applies,
• Whether an item is exempt or taxable,
• How input tax credit (ITC) is claimed, and
• How returns and invoices should be filed.

If your classification is wrong, you could end up paying the wrong tax rate or even facing notices from the department.

To simplify this, the GST law follows the HSN (Harmonized System of Nomenclature) for goods and SAC (Services Accounting Code) for services.

Let’s break this down step by step — what HSN means, how it works, and why classification matters so much under GST.

2. What is HSN and SAC under GST?

HSN (Harmonized System of Nomenclature)

HSN is an internationally accepted system for classifying goods. It was developed by the World Customs Organization (WCO) and is used by over 200 countries.

India has been using HSN codes for customs and excise since long before GST. Under GST, the same system was continued for consistency.

Each product is given a unique HSN code — usually 6 to 8 digits long — which helps in uniform tax treatment and easy identification.

Example:

• Sugar – HSN Code 1701
• Butter – HSN Code 0405
• Mobile Phones – HSN Code 8517

SAC (Services Accounting Code)

For services, GST uses a similar system called the Services Accounting Code (SAC). Each service type (like transport, consultancy, or education) has a unique SAC number.

Example:

• Legal services – SAC 9982
• Hotel accommodation – SAC 9963
• Transport services – SAC 9965

3. Purpose of Classification under GST

The main purpose of classification is to:

• Identify the correct GST rate applicable to the supply.
• Avoid confusion between similar goods or services.
• Ensure uniformity in taxation across the country.
• Facilitate international trade and customs processes.
• Help in statistical and economic data collection.

Without classification, it would be impossible to standardize taxation on millions of products and services.

4. Structure of HSN Code

An HSN code can be 4, 6, or 8 digits, depending on the level of detail required.

Here’s how it’s structured:

So, HSN 1701.00.00 represents “Cane sugar, in solid form.”

This standardized coding helps both domestic and international traders identify products easily.

5. Structure of SAC Code

The SAC code for services also follows a systematic pattern — generally 6 digits.

So, SAC 998211 would mean “Legal consultancy services provided by advocates.”

6. HSN Code Reporting Requirements under GST

The number of HSN digits that a business must mention on invoices depends on annual turnover.

This rule ensures that small businesses aren’t overburdened with detailed coding while large companies maintain standardization.

Note: For B2C (Business-to-Customer) invoices, HSN/SAC is optional for turnover below ₹5 crore, but mandatory for B2B (Business-to-Business) supplies.

7. How to Find the Correct HSN or SAC Code

Finding the correct code can seem tricky, but it’s actually systematic. You can use:

• The CBIC GST Rate Finder Tool (on gst.gov.in)
• The Customs Tariff Act Schedule I & II
• The WCO official HSN directory

Example: If you manufacture bakery items:

• Go to GST rate finder → enter “bread”.
• It shows: HSN Code 1905, GST rate 5%.

Similarly, for legal or accounting services, enter “legal” or “audit” to find the SAC code and rate.

8. Examples of HSN Codes for Common Goods

9. Examples of SAC Codes for Common Services

10. Importance of Correct Classification

Getting the classification right is not just a formality — it affects your compliance, pricing, and legal safety.

Here’s why it matters:

• GST rate depends on HSN/SAC.
• Wrong classification = wrong tax payment.
• Input Tax Credit (ITC) may get disallowed if HSN is wrong.
• GSTR filings and e-invoices require correct codes.
• During audits, the department often verifies HSN accuracy to detect underpayment of tax.

Example: If a company sells LED lights but wrongly classifies them under “electrical accessories,” it may end up paying 12% instead of 18%, leading to penalties later.

11. Circulars and Notifications on Classification

Here are key legal references governing classification:

These documents form the backbone of how goods and services are classified under GST.

12. What Happens If You Use the Wrong HSN Code

If you use an incorrect HSN or SAC code:

• The invoice may be considered invalid for ITC purposes.
• You may receive a notice under Section 73 or 74 (short payment of tax).
• The wrong GST rate may lead to interest or penalties.
• It can create mismatches in GSTR-1 and GSTR-3B filings.

Hence, always verify codes before finalizing invoices.

13. How CBIC Simplified HSN for Small Businesses

The CBIC made some relaxations to help small businesses:

• Up to ₹5 crore turnover → only 4-digit HSN mandatory.
• B2C suppliers → may omit HSN if turnover under ₹5 crore.
• Auto-suggestions in the GST portal now fetch correct codes while filing returns.

These small tweaks have made compliance simpler for MSMEs and traders.

14. HSN vs. SAC – Quick Comparison

Both systems work hand in hand — one for tangible goods and the other for service-based transactions.

15. Pro Tips for Correct Classification

• Check product composition (not just name) — tax rate depends on material used.
• Use the CBIC GST rate finder for accuracy.
• Don’t guess the HSN — refer to the customs tariff for confirmation.
• For mixed supplies, identify the principal supply to decide classification.
• Keep documentation (invoices, product specs) ready for audit verification.

16. Final Thoughts

The classification of goods and services under HSN and SAC is the backbone of India’s GST system. It may look like a small detail on an invoice, but it determines your tax rate, return accuracy, and compliance score.

Whether you’re a manufacturer, trader, or service provider, make sure you’re using the correct HSN/SAC codes — because one wrong code can mean wrong tax, wrong filings, and even penalties.

As the government continues to automate GST systems and push for e-invoicing, proper classification is more important than ever.

Remember — GST compliance starts with the right HSN.

Also Read: PSF and UDF under GST – Airport Charges Explained