Classification of Goods and Services

It may be tempting to classify the goods or the service in a heading having lower rate of tax.
But, determine the classification firs without getting influenced by the rate of tax.
Usually, the notifications prescribing rate of Tax describe the goods or the service and also
specify the HSN or SAC. The rate of tax therefore depends upon classification as well as
description of the goods. Both are important and both must be taken into account while
applying the notifications

HSN Code: The HSN Code is to be determined as per the  Classification of goods
Customs Tariff1. HSN is an acronym for Harmonised means determination of
System of Nomenclature. The World Customs its HSN Code;
Organisation has developed this system. It is also called
‘Harmonised Commodity Description and Coding  Classification of services
System’ or simply HS. The system is used by more than means determination of
200 countries. Over 98% of the goods in international its Service Accounting
trade are classified in terms of this Harmonised System2. Code (SAC).
Purpose of the coding system is to enlist, arrange and
classify various products. This helps in monitoring & regulating trade, getting statistical
data, formulating policies, price monitoring, quota control, economic research and analysis
etc.

The HS Code provides classification only up to six digits. Various countries have made
further sub-classifications. The following classification codes in India are based on the HS
Code:

 C. Excise Tariff – Eight Digit Level

 Customs Tariff – Eight Digit Level

 Import Trade Control (Harmonised System) – Ten Digit Level

Determining right HSN Code is a specialised function. One needs an in-depth knowledge of
the coding system as well as detailed information about the nature of the product in
question, its material constituents, use, the chemical characteristics, ISI specifications, etc.
etc. The classification depends upon multiple factors.

It is important to determine the right classification because the rate of tax depends upon it.
We are required to determine the code by referring to the first schedule of the Customs
Tariff. However, the rate mentioned in the Customs Tariff would be the rate of Customs
Duty. Those are not rate of GST. For rate of GST we should refer to the rate notifications
issued under GST law.

Ground Rules for determining HSN Code: For determining the classification we need to take
note of the following:

1 Actually it is the first schedule to the Customs Tariff Act, 1975. For convenience sake we refer to it simply as
‘Customs Tariff’.
2 http://www.wcoomd.org/en/topics/nomenclature/overview/what-is-the-harmonized-system.aspx
  There are a few rules called ‘General Rules for the Interpretation of Import Tariff’.
These rules provide the principles governing the classification3.

 The Customs Tariff is divided into twenty one sections. Each Section is divided into
many chapters. In all there are 98 chapters.

 There are certain ‘notes’ given at the beginning of the sections and chapters. These
‘notes’ are law for classifying a product, and cannot be overlooked.

 Generally, meaning of an item should be understood in the manner in which it is

understood by the trade and the people dealing in it. Thus, scientifically tomato may
be a fruit, but in trade parlance it is a vegetable. Hence if there are separate codes for
fruit and vegetables, then tomato has to be classified as vegetable and not as fruit.

 However, if a word is defined in the tariff then the definition would prevail. The
common meaning has to be discarded.

 WCO also publishes ‘Explanatory Notes’ to the HS Code. These notes are helpful in
ascertaining the correct classification.

 Although the Tariff is based on the system developed by WCO, there might be some
differences between the two. Therefore for all legal purposes we should refer to the
Customs Tariff of India and the explanatory notes of WCO should be used only as a
support.

An example of HSN Code: Chapter 84 of the Tariff enlists various machineries and mechanical
appliances. Text of the heading 8467, its sub-headings and tariff items is reproduced below.

Tools for working in the hand, pneumatic, hydraulic

8467 or with self-contained electric or non-electric motor
- Pneumatic:
- - Rotary type (including combined rotary
8467 11 percussion) :
8467 11 10 - - - Drills
8467 11 20 - - - Hammers
8467 11 90 - - - Other
8467 19 00 - - Other
- With self-contained electric motor:
8467 21 00 - - Drills of all kinds
8467 22 00 - - Saws
8467 29 00 - - Other
- Other tools:

3 http://www.cbec.gov.in/resources//htdocs-cbec/customs/cst1617-300616/cst-act16-17.pdf
(see page 27)
 8467 81 00 - - Chain ways
8467 89 - - Other :
- - - Compressed air grease guns, lubricators
8467 89 10 and similar appliances
8467 89 20 - - - Vibrators
8467 89 90 - - - Other
- Parts :
8467 91 00 - - Of chain saws
8467 92 00 - - Of pneumatic tools
8467 99 00 - - Other

Meaning of the digits in the HS Code

Digits Refer to Explanation

First two Chapter In all there are 98 chapters

digits

First four Chapter heading Chapters are divided into

digits headings

First six digits Chapter sub- Headings are further

heading divided into ‘sub-headings’

Eight Digits Tariff Items Sub-headings are further

divided into ‘tariff items’

Meaning of the dashes: The dashes used before the terms of the heading, sub-heading etc. have
meaning. A double dash ‘- -‘ is a sub-group of a single dash  Notification prescribing
‘-‘. A triple dash ‘- - -‘ is a sub-group of a double dash ‘- -‘ rate or granting
etc. exemption, is not the legal
basis to determine
Thus, 8467 is a chapter heading, 8467 11 is a sub-heading.
classification.
8467 19 is another sub-heading. Both of these sub-headings
are preceded by double dashes and fall under the single  Notification using a
dash entry ‘- Pneumatic’. particular code, is no
guarantee that the goods
Most of the time exemption notifications too refer to
would fall under that
classification of products. It should however be
code.
remembered that an exemption notification is not a legal
basis to determine classification.

Service Accounting Code: Similar to goods, there is a system for classification of services.
The grouping is into Chapter, Section, Heading, group and Service Code. All the services fall
under chapter 99. These have been divided into five sections as under:
  Construction Services
 Distributive Trade Services; Accomodation, Food & Beverage Service; Transport
Services; Gas & Electricity Distribution Services
 Financial and related services; real estate services; and rental and leasing services
 Business and Production Services
 Community, Social & Personal Services and other miscellaneous services
The classification of services is at six digit level. Meaning of the digits is as under:

Digits Refer to Explanation

First two digits Chapter There is only one chapter viz.

Chapter 99 covering all services

The third digit Section In all there are 5 Sections viz.

from Section 5 to 9

First four digits Heading Sections are divided into

headings. In all there are 31
headings

First five digits Group Headings are further divided into

Groups

Six Digits SAC Sub-headings are further divided

into ‘tariff items’

For instance, the code 998843 refers to "Pharmaceutical product manufacturing services".
The breakup of the code is as under:

- Chapter 99
- Section 8
- Heading 9988
- Group 99884
- Service code 998843

The notifications prescribing rate of Tax for services refer to SAC only up to 4 digits i.e. till
the headings. Therefore, for all practical purposes determining the SAC up to 4 digits is
sufficient.

There are totally 568 entries grouped into the above 5 sections. The highest number of
entries (241) fall under the section 8 which is “Business and Production Services”. This
section is divided into following 9 headings which are further divided into 48 groups.
Within each heading there are multiple groups and within each of the groups that are
multiple service codes.