Difference Between HSN and SAC Code under GST Law

The Goods and Services Tax (GST) system in India uses HSN (Harmonized System of Nomenclature) codes and SAC (Service Accounting Code) to classify goods and services, respectively. These codes streamline international trade and facilitate accurate GST invoicing and record-keeping. In this article, we are going to discuss the difference between HSN and SAC Code.

Effective from July 1, 2017, India implemented the Goods and Services Tax (GST), an indirect tax designed to unify the nation under a single taxation system. GST is applied to the supply of goods and services, following the principle of "one nation, one tax."

What are HSN Codes in GST?

HSN codes are globally recognized product classification numbers developed by the World Customs Organization (WCO). India adopted HSN codes in 1986 for Customs and Central Excise duties, and they now play a central role in GST invoicing.

What is the Harmonized System of Nomenclature (HSN)?

The Harmonized System of Nomenclature (HSN) is a globally standardized system for classifying goods. Developed by the World Customs Organization (WCO) and introduced in 1988, HSN assigns a unique 6-digit code to over 5,000 products. This system ensures consistent product classification across international borders, facilitating global trade and tariff negotiations.

HSN codes are highly recognized and used by entities such as the World Trade Organization (WTO) and traders to streamline international commerce.

Structure:

-6 or 8 Digits: HSN codes typically have six digits. For better specificity in India, Customs authorities extended them to 8 digits.

• First 2 Digits: Chapter number

• Next 2 Digits: Chapter heading

• Following 2 Digits: Subheading

• Last 2 Digits: Further classification

Applicability Based on Revenue: 

• Below Rs.1.5 Crore: HSN code usage is optional.

• Between Rs.1.5 Crore - Rs.5 Crore: Use 2-digit HSN codes.

• Above Rs.5 Crore: Use 4-digit HSN codes.

• Import/Export: 8-digit HSN codes mandatory. 

Example:

For aerated water, the HSN code is 22021010:

-22: Chapter for beverages

-02: Specific category within beverages

-10: Product subheading

Various Sections of HSN Codes 

This classification system enhances global trade efficiency by providing a standardized approach to identify and categorize goods, ensuring smoother import/export operations.

SAC Codes in GST

SAC codes classify services under GST and are derived from the modified UNCPC (United Nations Central Product Classification) system. These codes ensure services are categorized accurately for taxation.

What is a Service Accounting Code (SAC)?

The Service Accounting Code (SAC) is a classification system issued by the Central Board of Indirect Taxes and Customs (CBIC) to categorize and identify different types of services. Similar to the HSN code used for goods, each service has a unique SAC code. These codes help standardize service classification and streamline taxation under the Goods and Services Tax (GST) framework.

Service providers use SAC codes to accurately determine the applicable tax rates on services rendered or received.

Use of the Service Accounting Code (SAC) in GST

The Service Accounting Code (SAC) in GST serves several important functions:

1. Service Identification 

SAC codes provide a unique identifier for each service, making it easier to categorize and differentiate various services. This structured approach aids in the classification and tracking of services for taxation purposes.

2. Determining GST Rate 

SAC codes play a critical role in determining the GST rate applicable to specific services. By referencing the correct SAC code, businesses can easily identify the appropriate tax rate for the services they offer.

3. GST Registration 

When registering for GST, taxpayers are required to specify the services they provide using the corresponding SAC codes. This ensures that businesses comply with GST rules and accurately report their services.

4. Invoicing For GST-compliant invoicing, businesses must include the relevant SAC code on their bills. This provides clarity on the tax calculation and allows clients to understand the GST charges applicable to the services they receive.

5. GST Returns Filing 

When submitting GST Returns, businesses must report service-related transactions with the correct SAC codes. This is crucial for ensuring accurate reporting and maintaining compliance with GST regulations.

Relation to HSN System

SAC codes are derived from the Harmonized System of Nomenclature (HSN), a globally accepted system for classifying goods. This alignment ensures that GST compliance in India adheres to international standards, facilitating consistency and transparency in service taxation.

By using SAC codes, businesses and service providers can ensure clear, accurate classification and better tax management under GST.

What is the SAC Number?

In the Goods and Services Tax (GST) system, the Service Accounting Code (SAC) is a six-digit code used to classify services. All SAC codes begin with "99," which represents the chapter covering services. The remaining four digits provide specific details about the type of service. Let's break this down with an example.

For instance, the SAC code 995411 corresponds to general construction services for multi-story residential buildings, single dwellings, or multi-dwelling units.

Here's the analysis:

-99: Represents the chapter, which indicates services and is common to all SAC codes.

-54: Refers to the heading that defines the broader category of the service, in this case, "construction services."

-11: Specifies the unique service code for the exact nature of the service, which here is "general construction services for buildings." 

This systematic structure helps classify services under GST accurately and efficiently. 

Where to Mention HSN/SAC Codes?

Businesses must include HSN codes for goods and SAC codes for services in several key cases under the GST framework:

1. GST Registration: 

During the GST Registration process, businesses must declare the specific types of goods and services they handle. Including the correct HSN or SAC code is essential to ensure accurate classification and compliance.

2. Determining GST Rates: 

By using the correct HSN or SAC code, taxpayers can easily identify the applicable GST rates for their goods or services. This ensures accurate tax calculations and avoids classification errors.

3. GST Invoices: 

When issuing invoices for goods or services, businesses must include the relevant HSN or SAC code. The specific number of digits required depends on the company's annual turnover, ensuring proper documentation and transparency in transactions.

4. Filing GST Returns: 

While filing GST returns, taxpayers must report the HSN/SAC code summary, which details the classified goods and services sold during the reporting period. This summary helps streamline compliance and audit processes.

Importance of HSN and SAC Codes for Businesses:

-Accurate Tax Calculation: HSN and SAC codes help businesses determine the correct GST rate applicable to specific goods or services.

-Mandatory for Registration: Including these codes during registration is a compliance requirement.

-Efficient Classification: Among thousands of goods and services, these codes provide a standardized method to identify and categorize items accurately.

-Key Differences:

• HSN Codes: Used for goods; typically consist of 8 digits.

• SAC Codes: Used for services; contain 6 digits. 

By correctly applying HSN and SAC codes, businesses ensure compliance with GST regulations, streamline their operations, and avoid potential legal issues.

Differences Between HSN Codes and SAC Codes

1. Nature of Goods vs. Services 

The primary distinction between HSN and SAC codes lies in their application: HSN codes classify goods, while SAC codes are used for services. This differentiation is important for businesses involved in both sectors to maintain GST Compliance.

2. Code Structure and Length 

HSN codes typically consist of 8 digits, whereas SAC codes have 6 digits. This difference in format helps in accurately classifying goods or services under the GST framework.

3. Application and Usage 

HSN codes are used by manufacturers, traders, and importers to classify their products, while service providers use SAC codes to categorize their offerings. For example, a company producing electronics would use HSN codes, whereas a software consultancy firm would rely on SAC codes.

4. Impact on GST Compliance 

Using the correct HSN or SAC code ensures accurate GST filing. Misclassification can lead to errors in returns, potential penalties, and compliance issues. Therefore, understanding these codes is essential for businesses to fulfill their GST obligations correctly.

Comparison Table: HSN vs. SAC Codes  

Practical Implications for Businesses

Compliance Requirements

Businesses need to correctly identify and apply HSN or SAC codes to their goods or services. Tools like the official GST portal and guidance from tax consultants can help ensure accurate classification.

Common Mistakes and Prevention

Errors such as incorrect codes or failure to update them after regulatory changes are common. Regular reviews and consulting tax professionals can help businesses avoid these pitfalls.

Real-Life Applications

For instance, textile companies using the correct HSN code ensure they pay the appropriate GST rate, reducing tax burdens and avoiding penalties. Proper classification of goods and services demonstrates the importance of accurate code usage in real-world scenarios.

Conclusion

Knowing  the differences between HSN and SAC codes is important for GST Compliance in India. HSN codes apply to goods, while SAC codes classify services, forming a vital part of GST administration. Businesses must stay updated with code changes to avoid penalties and streamline their GST processes. Utilizing available resources and professional advice can simplify tax management and ensure smooth operations.

Frequently Asked Questions (FAQs)

1. What Does SAC Stand For? 

Ans. SAC stands for Services Accounting Code. Similar to how HSN codes classify goods under India’s GST system, SAC codes are used to categorize services. These codes are standardized and issued by the Central Board of Indirect Taxes and Customs (CBIC).

2. What is the Difference Between 4-Digit and 8-Digit HSN Codes? 

Ans. In an 8-digit HSN code, the structure is divided into segments:

-The first two digits represent the Chapter.

-At the 4-digit level, they indicate the headings.

-At the 6-digit level, they identify subheadings.

-The complete 8-digit code specifies the tariff items. 

Using 8-digit HSN codes is mandatory for all exports and imports under the GST system.

3. What is the Requirement for 4-Digit HSN Codes? 

Ans. Taxpayers need to report HSN codes based on their annual turnover:

-For businesses with a turnover between INR 1.5 crore and INR 5 crore, reporting a 2-digit HSN code is required.

-For those with an annual turnover exceeding INR 5 crore, a 4-digit HSN code is mandatory.

4. How is the SAC Code Used in an Invoice? 

Ans. In an invoice, the SAC code is used to represent the specific service offered by the GST taxpayer. This numeric code ensures the correct classification of services, which supports accurate tax calculations. For a detailed list of SAC codes and their descriptions, refer to official resources.

5. Is It Necessary to Include the HSN Code in an Invoice? 

Ans. HSN codes are used to classify goods for GST return filings. Including the HSN code in an invoice is mandatory only when the taxpayer's annual turnover exceeds 1.5 Crores.

6. Do All Countries Use the Same HSN Code? 

Ans. The Harmonized System of Nomenclature (HSN) was developed by the World Customs Organization (WCO) for classifying products. While most countries following WCO guidelines use a standard six-digit HSN code, some nations may apply an eight-digit code to provide more detailed sub-classifications.