The Harmonized System of Nomenclature (HSN) code is a globally recognized system of classifying goods, primarily for the purpose of taxation. Introduce by the World Customs Organization (WCO) in 1988, the HSN system is use by over 200 countries, including India, to classify goods in a standardize manner. Under the Goods and Services Tax (GST) regime in India, HSN codes help determine the correct tax rate applicable to various products.

However, a common question that arises among businesses and tax practitioners is whether one HSN code can have multiple GST rates. The answer is yes, and this article will explain the reasons behind this and how it works.

Understanding HSN Codes and GST Rates

Each HSN code under the GST regime is an 8-digit code that identifies a specific product. The first two digits represent the chapter, the next two digits represent the heading, the subsequent two digits represent the subheading,

and the last two digits further classify the product. This classification allows for precise identification of products, which helps in applying the appropriate GST rates.

Under GST, there are five primary tax slabs: 0%, 5%, 12%, 18%, and 28%. These rates are determine by the GST Council base on the nature of the product—whether it’s an essential commodity or a luxury good, for instance.

Why Can One HSN Code Have Multiple GST Rates?

There are several reasons why a single HSN code can be subject to different GST rates. Below are the key factors that explain this phenomenon:

Variety in Product Types within an HSN Code: Some HSN codes cover a broad category of products, and these products can range from basic to luxury items. For example, under the HSN code 8703 (which refers to motor cars and other motor vehicles), vehicles can be both small hatchbacks and luxury cars. A basic small car may attract a GST rate of 18%,

while a luxury SUV may be taxed at 28%. Even though they share the same HSN code, their GST rates differ due to the type and value of the product.

Classification Based on Use or Purpose: Certain goods, though classified under the same HSN code, are used for different purposes, which can result in varied tax rates. For example, medicinal products under the same HSN code may attract a lower GST rate (5%) for life-saving drugs but a higher rate (12% or 18%) for over-the-counter medications. This differentiation is done to provide essential goods at a lower tax burden while ensuring standard goods are taxed appropriately.

Exemptions and Special Cases: Some items may be exempt from GST entirely or taxed at a concessional rate under certain conditions. Agricultural equipment, for instance, may fall under a general HSN code but could be exempt from GST or taxed at a reduced rate if used by farmers. In contrast, if the same equipment is sold for industrial purposes,

it could attract a higher rate.

Goods Differentiated by Value: For certain goods, the value or price of the product determines the applicable GST rate. An example of this is gold jewelry versus imitation jewelry. Both may be classified under the same HSN code,

but gold jewelry, being a high-value item, attracts a different rate (usually 3%) compared to imitation jewelry, which may fall under the 18% tax bracket.

Government Notifications: The government periodically issues notifications clarifying or amending GST rates for specific goods within an HSN code. These notifications often lead to differential rates for products that fall under the same HSN category but are intended for different uses or segments of consumers. For instance during a particular fiscal period, the government may reduce the GST rate on a particular type of fertilizer or industrial product.

While keeping the rate unchanged for others in the same category.

Examples of HSN Codes with Multiple GST Rates

Here are a few examples of how the same HSN code can have multiple GST rates:

• HSN 2202 (Water, including mineral waters and aerated waters):

  • Pack drinking water attracts 18% GST.
  • Water with add sugar or other sweeteners (like soft drinks) attracts 28% GST along with a compensation cess.

• HSN 3401 (Soap and other cleaning products):

  • Hand soaps may attract 18% GST, while other personal hygiene products within the same HSN code could attract a different rate base on their composition or usage.

• HSN 8703 (Motor cars and vehicles):

  • Small cars with engine capacity up to 1200cc attract 18% GST.
  • Larger, luxury cars attract 28% GST plus additional cess.

Implications for Businesses

For businesses, the existence of multiple GST rates under the same HSN code necessitates a thorough understanding of product classification. Mistakes in applying the correct GST rate can lead to compliance issues, penalties, and even the risk of overcharging or undercharging customers.

To avoid such problems, businesses should:

Consult Updated GST Rate Schedules: GST rates are subject to periodic revisions by the GST Council. Staying update with the latest notifications ensures the correct rate is apply to products.

Seek Expert Advice: For complex or ambiguous products, consulting a tax expert or GST consultant can help in correctly interpreting the applicable rates under the correct HSN code.

Maintain Proper Documentation: In case of audits or scrutiny by tax authorities.

Having proper documentation and justification for the rate applied can safeguard businesses from disputes.

Conclusion

While the HSN code system is design to simplify the classification of goods.

It is not always straightforward when it comes to GST rates. A single HSN code can indeed have multiple GST rates based on factors like the type of product.

Its intend use, and government notifications. Businesses must exercise diligence in ensuring the correct GST rate is apply to avoid compliance issues and ensure smooth operations under the GST framework.