December 15, 2023 6-Digit HSN Code Update: Key Insights for Taxpayers

Recent changes in the technological regimes and the dynamics of legislation to enhance compliance, accountability, and effectiveness have redefined the face of Indian tax structure. Starting from December 15, 2023, e-invoices require the entry of a 6-digit HSN code into the e-invoice. This article focuses on this obligation, its impact on organizations, and India’s GST adjustments.

Knowing HSN codes

HSN codes are used across the globe in an effort to bring about some form of classification of products and services. With the main aim of promoting global trade and harmonizing the classification of commodities, the WCO established the HSN system. HSN codes have become a vital component of the GST regime in India since its implementation in the year 2017 to determine the description of the actual supply of goods and services.

Earliest GST involved 2 digit 4 digit or 8 digit HSN numbers depending on the turnover of the taxpayer and nature of goods. The new rule for the six-digit HSN code enhances the categorization density and reliability according to the international standards.

Need for the mandate

Multiple considerations prompted the 6-digit HSN code mandate:

1. Increasing compliance and accuracy

To avoid categorization mistakes, the government will enact a proposed 6-digit HSN number. Such information reduces misclassification that could result in evasion or disputes and enhances tax assessment.

2. Aiding data analytics

A higher HSN code system enhances data taking and analysis due to better categorization. For the government, this data is necessary to follow the commerce, steal the money, and make special measures. This information might be very helpful for businesses to make strategic decisions on their future movements and to analyze the market situation.

3. Enhancing international trade compliance

International traders’ commerce should adhere to global standards. It makes export and import documents and rules of global trade easier by matching with international HSN which has a 6-digit HSN number.

4. Streamlining GST

GST return filing, refund claims, and audits are made easy through the following HSN code system. It simplifies the GST environment while at the same time aiding both the taxpayer and the tax authorities.

Challenges in implementation

The 6-digit HSN code rule has apparent advantages, but implementing it is difficult for companies, especially SMEs. But a reliable tally institute in Ahmedabad can help you know these challenges.

1. Accounting system update

Businesses must adapt their accounting and invoicing systems to include 6-digit HSN numbers. This involves software updates and maybe personnel training to guarantee correct and efficient usage of the new system.

2. More compliance work

For firms with different product lines, providing the right 6-digit HSN number to each product may be difficult and time-consuming. This makes compliance harder for SMEs with minimal resources.

3. Transitional concerns

The switch to the new system may cause confusion and problems. Businesses must be careful during the early period to prevent misclassifications and comply with the new regulation.

4. Supplier/customer coordination

Businesses must cooperate with suppliers and consumers to utilize the relevant HSN codes across the supply chain. Discrepancies might affect GST filings and audits.

Business preparation

Businesses should take certain precautions to ease the 6-digit HSN code required transition:

1. Thoroughly reviewing

It is beneficial for companies to determine which products and services belong to a specific 6-digit HSN code to align their products and services accordingly. Specialist knowledge, for example the state of knowledge of taxes, or specialized programs, may be required to achieve the necessary level of accuracy.

2. System and process updates

New HSN codes require new accounting and issuing bills systems. It could create additional steps that cause businesses to invest in new software or enhance their current processes.

3. Employee training

Those involved in accounting, invoicing, and GST compliance should train those who will deal with the new standards. This includes understanding how new systems and tools can be used and the requirements for proper HSN coding.

4. Communicating with stakeholders

It is also helpful to make sure that all suppliers, customers, and other stakeholders understand the new HSN codes that affect them. This avoids having two different versions in play and the smooth flow of supply chain transitions.

5. Seeking professional help

Corporations may turn to tax specialists and advisors for help in deciphering the new requirement. These experts will assist with categorization, ensure compliance, and recommend system changes that will make the transition seamless.

Border GST ecosystem implications

The 6-digit HSN code regulation is part of GST’s digitalization and transparency push. This mandate and other actions improve GST efficiency and effectiveness.

1. Electronic invoicing

Commercial invoicing is done through e-invoicing, implemented in phases since October 2020 and which optimizes and standardizes this paperwork. E-invoices based on 6-digit HSN numbers are accurate and therefore less prone to mistakes and fraudulent activities.

2. GSTN infrastructure

GSTN is a registration, return submitting, and compliance network for millions of taxpayers. Specific HSN codes are helpful in increasing the quality of data available in GSTN and therefore better analysis leading to better formulation of policies.

3. Live data sharing

Higher-level HSN codes in business environments enhance real-time business-tax authority data exchange. This enhances the GST transparency since the various transactions can be easily traced and can be verified easily.

4. Policy Making and implementation

Six-digit HSN codes may affect policymaking due to the comprehensive data that they provide. The Government can develop more targeted and effective policies because of improved trends recognition, compliance assurance, as well as the targeted resolution of sector-specific issues.

Global view 

Use of a 6-digit HSN code system has been adopted in India in compliance with international standards and global trade practices. For better commercial and administrative use, many countries use accurate HSN codes in the context of compliance and data analysis.

1. Global trade facilitation

Businesses trading internationally may ease bureaucracy and assurance using a uniform HSN code. It avoids erroneous categorisation and guarantees that commodities are not governed differently in different regions.

2. Global standards

To be in compliance with the international trading laws, India has adopted the six digit HSN code system, thus enhancing the legitimacy of its trade partners. Depending on the situation, greater encouraged investor confidence may flow in more FDI.

3. Learning from global practices

Other nations that have implemented proper HSN code systems can teach India about the complete procedure. The practices in these nations may be adopted in India to facilitate a proper and successful implementation of the mandate.

Assistance from the government

Businesses may struggle to switch to the 6-digit HSN code system, but the government has provided guidance and tools.

1. Awareness campaigns

One of the awareness efforts that the government has made to ensure that firms understand this new requirement include: These programs help firms to educate and implement new laws by using webinars, seminars, and other instructional tools.

2. Advice and clarification

The government has provided clear guidance on identifying products and services under the 6-digit HSN code system. Consulting services help centers, and frequently asked questions provide organizations with ways to find and implement the correct codes.

3. Technical help

The government collaborates with software companies and industries to support companies experiencing technological difficulties. This involves updating the accounting systems, sensitizing the society and putting in place the new requirement change management programme effectively.

4. Monitoring compliance

The government has also improved compliance monitoring to guarantee new mandate compliance. To discover and fix non-compliance, audits, data analytics, and targeted inspections are used.

Conclusion

From December 15, 2023, e-invoices must include a 6-digit HSN number, which would improve India’s GST system. The change is difficult, especially for SMEs, but the long-term accuracy, compliance, and international alignment advantages are significant. 

Businesses may ease the transition to the new requirement by updating systems, training people, and coordinating with stakeholders. This move is part of India’s digitalization and transparency push, demonstrating the government’s commitment to a strong and effective GST ecosystem.