Updates on Mandatory Six-Digit HSN Codes for B2B Transactions and Exporters

The changes were implemented in 2024 on Goods and Services Tax (GST) in India concerning operating and providing the HSN codes. CBIC has for now enforced that for B2B and export supplies, the least-digit codes a business should apply are the six-digit HSN codes. This policy change is intended to improve objectivity and consistency of the classification of goods to enable better conformity and supervisory and penal measures on the tax laws. This article discusses these changes and identifies the different sectors’ tax tips and compliance strategies. 

Understanding HSN Codes 

HSN codes are an internationally recommended system of names and codes assigned to traded products used by the World Customs Organization (WCO). HSN system is applied in more than 200 countries to provide optimum efficiency in world trade and to avoid differences in the classification of goods. 

 Changes in the Reference No. ranging from Six Dig HSN Codes 

1. Required Use when transactions are between two businesses 

From the 1st of April 2024, businesses having receipts of more than Rs. 5 crores must use six-digit HSN codes on B2B invoices. The requirement used to be the four HSN digits only. The shift to six digits is proposed to give a refined differentiation of products, which should help to increase compliance and decrease the cases of disagreement as to the classification of taxes. 

2. Mandatory Use for Exporters 

Exporters are also needed to put the six-digit HSN codes on their invoices and shipping documents. This closely follows international practices enhances export documents of India, and reduces frequent classification mismatches and cases of under or over-invoicing of goods. 

Sector-Specific Tax Insights

Manufacturing Sector:

Manufacturers must ensure their inventory management systems are updated to incorporate six-digit HSN codes. This process involves revising product catalogues, updating ERP systems, and training staff on the new requirements. Accurate classification is crucial to prevent potential disputes with tax authorities and ensure smooth audits.

Trading Sector:

Those traders who deal with multiple product categories, particularly must be careful while updating their HSN codes. Misclassification may cause the application of incorrect tax rates, leading to penalties. Regular reviews and audits should be carried out on the use of HSN codes to help mitigate such risks.

Export Sector:

To be in line with the new requirements, it is incumbent on all exporters to carry out some additions and alterations in their documentation. So it goes beyond just updating invoices, it is important to see that even all customs-related documents bear correct six-digit HSN codes. Working very closely with freight forwarders and also customs brokers will be of help in making sure compliance and as well avoiding shipping delays.

Best Practices for Compliance

This blog will seek to provide you with the standard guidelines on compliance practice to assist you:

Obstacles and Strategies for Mitigation

The following list of typical problems or challenges and suggested solutions is provided:

Future Outlook

Transitioning to a framework incorporating six-digit HSN codes represents a notable advance in synchronizing India’s GST protocol with global norms. This initiative is anticipated to foster enhanced transparency and operational efficiency in tax administration, diminish the incidence of disputes, and streamline international trade transactions. Enterprises that take a proactive stance in revising their systems and procedures to meet these new stipulations are likely to be more adept at manoeuvring through the shifting tax.

Detailed Compliance Strategies for Businesses

Inventory and ERP System Updates

A pivotal measure for businesses aiming to conform to the six-digit HSN code directive lies in the revamp of their inventory management and ERP systems. This task encompasses the revision of HSN codes within the system and ensuring such modifications permeate all interconnected processes. A methodical approach includes the following steps:

1. Execute a Comprehensive Inventory Analysis: Initiate by executing an exhaustive analysis of inventory to locate all products necessitating HSN codes. This action facilitates determining the extent of requisite updates.
2. Amend HSN Codes in ERP Infrastructure: Collaborate with IT personnel or ERP solution providers to amend HSN codes within the system. Confirm substitution of prior four-digit codes with the new six-digit equivalents.
3. Conduct System Testing: After code amendments, embark on extensive testing to verify the appropriateness of the new codes throughout all transactional data and reports.
4. Staff Training: Impart training to personnel concerning modifications within the ERP system and the criticality of utilising correct HSN codes.

Staff Training and Development 

You must train your staff so that they adhere to the new HSN code requirements, so training should be encouraged. 

Here are some strategies for effective training: 

1. Develop Training Materials: Develop detailed written instructions beginning with the concepts of HSN codes, purposes of the change as well as the requirements necessary for your type of organization. 
2. Conduct Training Sessions: Schedule training to all the concerned staff. These sessions can be face-to-face or virtual, based on the organization’s team size as well as its geographical dispersion. 
3. Provide Ongoing Support: Develop a framework of accountability where the staff will seek clarification on the matters concerning the HSN code. This can be based on a help desk, or through the use of bulletin boards. 

 Auditing and compliance assessment forms a significant part of the management of healthy payroll practices. 

The legal compliance checks and audits should be conducted for your business to continue following the standards of the HSN code. Here is how to implement an effective audit system:

1. Internal Audits: The HSN code should perform internal audits frequently to evaluate the levels of compliance with the set HSN code standards. They should encompass every section of your business, purchase, stock, procedures, and exportation papers included. 
2. External Audits: Have outsiders conduct audits regularly/ Hire people from outside to conduct regular audits. Suppliers and other external auditors can help you look at your compliance from the outside looking in and advise on any improvements that should be made. 
3. Corrective Actions: Depending on the findings made during the audit exercise, it may be necessary to make some corrections in non-compliance cases. This may include things like changing HSN codes, retraining personnel and enhancing documentation. 

Using Technology to Ensure Compliance 

Organizations can appropriately implement all of the steps indicated by the six-digit HSN code by making efficient use of technology. Here are a few strategies for using technology to ensure compliance: 

1. Automation Tools: Use tools like HSN code search tools and other tools to automate the classification process. These tools can assist in classifying products based on predetermined criteria, hence removing the possibility of incorrect classification. 
2. Data Analytics: Use data analytics to monitor compliance and identify, over time, any individuals who are not following the prescribed standards. By using analytics, you may stop disruptions before they become serious issues. 
3. Integration with Government Systems: Make sure their systems are linked to the systems of the government for easy reporting and compliance. This can include facilitating the linking of the GST portal where various firms and businesses report the HSN codes in real-time. 

 Collaboration with Tax Experts 

Seeking professional assistance on tax matters will be useful in keeping you abreast with the current requirements of the HSN code as well as structuring the compliance program according to the current legal provisions.

 Here is  how to make the most of this collaboration:

1. Regular Consultations: This makes it important to make consultation appointments with the tax consultants as often as possible, to have a status check on your compliance and get counsel on any compliance issues you may be having. 
2. Stay Updated on Regulations: You should consult tax experts with any changes to the HSN code or any other tax-related issues. 
3. Dispute Resolution: When engaging in a dispute with the tax authorities, tax advisors can give some useful suggestions on how to address such disputes. 

Documentation and Record Keeping 

It is critical to keep thorough records of all of the HSN code classifications you have made, as well as all of the communications you have had with tax authorities.

 Here are some best practices for documentation and record-keeping:

1. Maintain Comprehensive Records: It is also important to retain records of all assignments made to HSN code classifications together with reasons for such classification. This can also assist you in the realization of compliance when undertaking auditing. 
2. Document Correspondence: Keep files of any communications made to or received from the tax authorities about HSN codes. These include E-mails, Letters and meeting documents. 
3. Regularly Update Records: Make sure that the records show the HSN code changes or any compliance policies that might have changed at your company. 

 Sector-Specific Compliance Checks 

Some industries might have peculiarities in the application of HSN codes and or may encounter unique difficulties. It is recommended to perform compliance checks about the particular sector of your business operations as this will assist in the identification of common practices within the respective sector. 

Here is  how to implement sector-specific compliance checks:

1. Identify Sector-Specific Requirements: Aspired of the new specific HSN code requirements as well as its challenges in the related field of your business. This might require the use of a professional body in the intending business or the government regulations. 
2. Tailor Compliance Practices: This means that one should adopt specific compliance structures that match the field in which the company operates. This might entail the use of specific HSN codes or documentation processes and procedures. 
3. Conduct Regular Sector-Specific Audits: Carry out the general and specific inspections for confirmation of sectorial HSN code compliance. Such audits should be done by personnel with adequate knowledge about the sector demand in your region. 

 Future Outlook 

The switch to six-digit harmonised system numbers is a giant leap towards achieving compliance for India’s GST structure with the global HSN classification. It is believed to enhance the internal controls in tax administration, help to decrease controversy and make cross-border trade easier. Those industries that have made it their organisational culture to stock up for the change that is expected to hit the tax system will probably emerge out of the change stronger than their counterparts who are yet to realise the need to change. 

Hence, due to the dynamic development of the GST structure, companies have to be energetic and versatile in the future constantly. Hence, as shown in this article, the application of the best practices ensures the business achieves its compliance objective and operates as per the law thus avoiding instances where it may engage in or be associated with practices that are against the legal provisions and thus attract penalties or disputes. This change is not easy but it does mean that the companies can improve their reinforcement of the compliance structure and make a positive impact on the transparency of the tax system in India. 

Read More : GSTR-9 Form Dynamic on the GST Entry for 2023-24: A Total Report

Conclusion 

The implementation of a six-digit HSN code for B2B sales and exports has introduced a significant change in India’s GST system. Through compliance with the rules and regulation guidelines as well as being knowledgeable of the new set of measures in the sectors, businesses will be in a good position to seek compliance with the new measures. The successful management of this change is in terms of routine training, additional systems upgrades, and working with tax specialists. Looking at the future trends, one will have to remain vigilant and adjust strategies when it comes to compliance and operation as well. 

Concerning these best practices and adopting the use of technology, and professional advice, businesses shall not only avoid engaging in noncompliance but also prevent disputes and penalties and therefore optimise their operations. Changing to six-digit HSN codes is somewhat a concern but is an opportunity through which business entities can improve their compliance systems to ensure a good and transparent Indian tax system. 

FAQ (Frequently Asked Questions)

What is the main purpose of the mandatory six-digit HSN codes for B2B transactions and exports?

The main purpose is to enhance transparency, uniformity, and compliance in the classification of goods, making tax administration more efficient and reducing disputes.

Who is required to use six-digit HSN codes?

Businesses with an annual turnover exceeding Rs. 5 crores for B2B transactions and all exporters must use six-digit HSN codes on their invoices and shipping documents.

What steps should businesses take to comply with the new HSN code requirements?

Businesses should update their ERP and accounting systems, conduct staff training, perform regular audits, leverage technology for accurate classification, and maintain detailed documentation and records.

Saeeda Nausheen Freelance Writer

I am Saeeda Nausheen, a seasoned content writer who loves to write about GST finance, marketing, and accounting. Over the years, I've gained valuable experience, bringing a mix of insight and creativity to my writing. It's my passion to make these topics engaging and accessible.

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