HSN Code vs SAC Code: What’s the Difference and When to Use Them?

HSN and SAC codes ensure that the goods and services of a business are classified properly, helping avoid tax miscalculations and penalties. Therefore implementing proper HSN and SAC codes is extremely important for businesses to stay compliant RBIs regulations and guidelines for GST.

In this article, we will discuss what HSN codes and SAC codes are, their differences, challenges, best practices and use cases in different industries. 

HSN code is an eight-digit code that classifies goods. It was introduced by the World Customs Organization (WCO) to categorize over 5000 goods worldwide and was adopted in India for Customs and Excise duties.

The structure of HSN code is divided into 21 sections with 99 chapters, which broadly describe the category of the goods. The chapters are then divided into 1,244 headings, which are further classified into 5,224 subheadings. Headings and subheadings offer detailed information of the products. 

The first two digits of the HSN code represent the chapter number, the following two are for heading number, the next two indicate the subheading, and the last two digits provide details about the tariff item. This example of HSN code 10063010 will clear this up more.

Here,

• 10 denotes chapter, which is Cereals
• 06 is the heading Rice
• 30  indicates Semi-milled or wholly milled rice, whether polished or glazed
• 10 represents the item, which is Basmati rice

SAC code helps in classifying services. It was developed by India’s GST Department to categorize services and fix GST rates on them. It is a six-digit code where the first two digits are 99, and the subsequent digits provide the specifics of the service. 

The structure of a SAC code follows the “99XXXX” format. Here, the first two-digits are always 99 and specify services. It’s always 99 because all services fall under chapter 99 in the GST classification. 

The next two digits indicate the broad category or major nature of the service, e.g., consultancy, construction, etc. and the final two digits specify the exact type or subcategory of the service within the major nature.

For example, in the code 998314,

• 99 indicates the Chapter (Services)
• 83 represent the heading, which is other professional, technical and business services
• 14 describe the exact type of service, which is Information technology (IT) design and development services

The full form of HSN is Harmonized System of Nomenclature, while SAC stands for Service Accounting Code. The goods vs services classification systems have some differences relating to their purpose, structure, issuing body, and usage, which are mentioned below: 

HSN codes and SAC codes help in classifying goods and services properly, determining accurate GST rates, invoicing under GST, and filing GST returns, making them absolutely necessary for GST compliance.

1. GST registration

GST registration is important for businesses to maintain compliance. In order to register, businesses need to provide the correct HSN codes and SAC codes for the proper classification of the goods and services. This allows authorities to keep a check on the business operations and ensure that regulatory standards are being met. 

2. Determining GST rates

The HSN codes or SAC codes are each linked to a specific GST tax slab, such as 5%, 12%, 18%, or 28%. By making use of the right code, businesses can make sure that they are charging the correct amount of tax and avoiding underpayment or overpayment errors.

3. GST invoices

Invoicing under GST refers to the invoice a business, that has undergone GST registration, must provide when supplying a good or a service or both. This benefits consumers as well as tax authorities by helping them avoid disputes and providing them with detailed product and service information. 

4. GST credit 

GST credit, also called Input Tax Credit (ITC) or GST returns, refers to the amount of money a business can claim back from its purchases. This reduces the amount of tax payment they have to make. Proper and accurate HSN  codes and SAC codes are important for the error-free classification and application of GST rates on goods and services. If the codes are inaccurate then they may cause penalties which can ultimately lead to a negative impact on a business’ cash flow and compliance.

Using HSN codes and SAC codes has multiple benefits, ranging from GST compliance, accurate tax rates, invoicing and returns, global trade advantage, and efficiency of your business. 

1. GST compliance

Through proper use of HSN codes and SAC codes, you can ensure that your business follows the GST rules and standards and avoid penalties. 

2. Accurate tax rates

Using HSN codes and SAC codes helps in linking a product or service to specific GST tax slabs. This makes the application of the GST rate to a product or service easier, which helps in preventing underpayment and overpayment of taxes. 

3. Invoicing and returns

Including the HSN codes and SAC codes in invoices and GST returns, such as GSTR-1 AND GSTR-3B,  helps in ensuring transparent purchases, reducing disputes, and allowing proper record keeping. GSTR-1 shows details of all the sales made by a business each month or a quarter, while GSTR-3B is a monthly summary of the sales made by your business, GST credit claimed, and taxes that have to be paid. 

4. Global trade advantage

HSN codes are an international requirement. Using them can help make your cross-border transactions more organized.

5. Business efficiency

HSN and SAC codes help increase the efficiency of a business by making transactions smoother, audits simpler, and business operations better.

HSN codes help goods be classified under different GST rate classification slabs, such as 5%, 12%, 18%, and 28%. To ensure that businesses pay a consistent tax across all their products, they should use the HSN codes. 

GST or Goods and Services Tax can be divided into CGST, SGST, and IGST. The major GST tax slabs are 5%, 12%, 18%, and 28%, with some additional special rates such as 3% and 0.25%.

HSN codes help structure the GST rates of products by classifying them so they can be taxed uniformly. They classify goods into different tiers, based on a business’ turnovers. HSN codes are not required for businesses up to ₹1.5 crores. For businesses with turnover ranging from ₹1.5-₹5 crores, a 2-digit HSN code is required. An 8-digit code is required for turnovers exceeding ₹5 crores.

Both HSN and SAC code provide a standardized way in which goods and services can be divided under the GST regime. The common features of both SAC and HSN are discussed below:

1. Both the codes follow a proper, hierarchical numeric structure. HSN, for instance, is clearly divided into sections, chapters, headings, and subheadings that differentiate each category of goods. Similarly SAC is divided into the major nature and subcategory of services. 

2. Each code classification further helps to decide applicable GST rates. They are also mandatory to be mentioned on invoices based on your turnover.

3. Lastly, these codes simplify inventory management and lead to accurate tax calculation. 

There are various challenges in identifying the correct HSN code or SAC code, such as the complexity of the code structure, inadequate knowledge, and technical challenges:

1. Complexity in code structure

The various sections, categories and sub-categories of the HSN code can cause businesses to make mistakes during the classification process, especially for those dealing with different goods, which can lead to overpayment or underpayment of GST taxes. 

2. Inadequate knowledge among businesses

Small or medium-sized enterprises often do not have the expert knowledge required to go through the HSN codes or SAC codes in an effective manner. This can cause errors in invoicing and transactions, leading to the businesses getting fined.

3. Technical challenges with GST portal

The GST portals might glitch, which can cause issues for businesses searching for HSN codes or SAC codes. This can impact GST returns, such as GSTR-1 and GSTR-3B, and cause compliance issues. 

Some best practices for HSN codes and SAC codes include using GST-compliant software, regularly referring to the GST portal, consulting with tax professionals, and ensuring accurate coding. 

1. Using GST-compliant software

Using GST-compliant software can help in automatically assigning the correct HSN  codes and SAC codes to products or services, which can reduce manual errors.

2. Regularly referring to the GST portal

Regularly referring to the official GST portal for updates on code classifications and tax rates can help keep you and your business updated. 

3. Consulting with tax professionals

Consulting tax professionals can help solve problems when facing unclear or ambiguous product or service categories.

4. Ensuring accurate coding

Accurate coding ensures smooth GST filing, prevents penalties, and helps claim the correct input tax credit.

You need to use both HSN and SAC codes accurately for GST compliance in India, as there are strict rules and penalties for incorrect reporting. Let’s look at these regulatory requirements. 

• HSN and SAC codes are required for GST registration, proper classification, and compliance with applicable GST rate slabs. The codes must appear on tax invoices and GSTR-1 monthly returns.

• Mentioning HSN code is mandatory for goods suppliers. The required code length depends on annual turnover. A 6 digits HSN code is needed for businesses having a turnover of more than Rs. 5 crores and small businesses having turnover of up to 5 crore are required to mention the 4-digit code. 

• Just like HSN code, SAC is also required for service suppliers on invoices and GSTR-1 filings, with requirements based on turnover. All six digits are mandatory for businesses with turnover above  Rs. 5 crore and 4 digits code for businesses with a turnover of less than Rs. 5 crore.

• Not mentioning or wrongly mentioning HSN/SAC codes in GST returns or invoices results in penalties of ₹50,000 (₹25,000 under CGST and ₹25,000 under SGST) under Section 125 of the CGST Act.

• An additional fine of up to ₹50 per day for late or incorrect reporting, capped at ₹5,000 is also charged. Plus, invoices without correct codes may be declared invalid, affecting input credits and regulatory standing.

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