HSN (Harmonized System of Nomenclature) codes classify goods, while SAC (Services Accounting Code) codes classify services, for GST purposes. Every invoice must carry the correct HSN or SAC code for what's being sold, since the code determines the applicable GST rate and is used for reporting in GSTR-1. HSN codes are internationally standardized (originally developed for customs and trade classification). Under the current CBIC rule (in force since 1 April 2021), businesses with annual aggregate turnover above ₹5 crore must report 6-digit HSN codes, while businesses at or below ₹5 crore must report 4-digit HSN codes, mandatory on B2B invoices and optional on B2C invoices. Using the wrong HSN/SAC code, or the wrong digit length for your turnover band, is a common, often overlooked compliance error: it can result in charging the wrong GST rate, mismatches during audits, or issues claiming correct ITC on the buyer's side, since the code is part of what's matched between GSTR-1 and GSTR-2B. Businesses selling a wide range of products, or products that could plausibly fall under multiple classifications, need to be especially careful, since HSN classification disputes are a recurring source of GST litigation.
Example: A business selling cotton fabric needs to use the correct HSN code for that specific type of textile, not a generic "textile" code, since different fabric types can carry different GST rates under the HSN classification system.
Accounting Baba's AI Powered Accounting Course covers GST, Tally, Excel and AI tools together.
See the Course →