Understanding Phased HSN Code Reporting for GSTR-1 Submissions

The tax department mandates businesses to report HSN (Harmonised System of Nomenclature) codes in GSTR-1 and GSTR-1A, which are filed either monthly or quarterly based on turnover. Table 12 of the return form summarizes these codes. The aggregate annual turnover (AATO) dictates the specific HSN reporting requirements, providing tailored guidelines for taxpayers of different sizes and scales.

Evolution of GSTR-1 Reporting Requirements

The government progressively implemented HSN reporting to streamline GST compliance and enhance reporting accuracy. Each phase reflects the tax administration's increasing oversight and the growing demand for standardized business reporting. This approach balances regulatory standards with practical business needs, ensuring improved data quality for tax authorities.

Below is a summary of each phase and its key mandates:

Phase 1: (Part 1 - Effective April 2022; Part 2 - Effective August 2022)

• In April 2022, Phase 1 (Part 1) of the HSN code reporting system was introduced under the GST framework. Businesses with an AATO below ₹5 crore were required to file 2-digit codes, while those exceeding ₹5 crore had to report 4-digit codes in GSTR-1.
• From August 2022, Phase 1 (Part 2) became effective. Taxpayers with an AATO above ₹5 crore were mandated to file 6-digit codes, while the requirement remained 2-digits for those below ₹5 crore.
• Manual entry of HSN was permitted, with the system issuing warnings for errors but still allowing the return submission.

Phase 2: (Effective November 2022)

• Phase 2 required businesses with a turnover up to ₹5 crore to use 4-digit HSN codes, while businesses above ₹5 crore continued to use 6-digit codes.
• Manual entry remained permissible, with the system flagging errors but still allowing the submission of the return.

Phase 3: (Effective May 2025 Return Period Onwards)

• Phase 3 introduces a stringent change. Taxpayers will no longer be able to manually enter HSN codes. Instead, HSN codes must be selected from a dropdown list on the GST portal. Once chosen, the corresponding HSN description will automatically populate and cannot be modified.
• This change aims to ensure precise categorization, minimize errors, and maintain consistency across all GST submissions.

HSN Reporting Requirements Across All Phases: A Summary

Advanced HSN Reporting for B2B/B2C and Its Impact on GSTR-1 Filings

With Phase 3, the GST portal moves beyond general HSN summary reporting, now requiring businesses to declare HSN codes separately for both B2B (business-to-business) and B2C (business-to-consumer) supplies. For the first time, Table 12 of GSTR-1 is dynamically divided, necessitating specific HSN details for each transaction type.

This detailed level of reporting enables the system to conduct real-time validations. As HSN summary data for B2B and B2C is entered, the system automatically cross-checks it against the supply values reported elsewhere in the return (such as in invoices and summary tables for B2B/B2C).

If any discrepancy arises between the report in Table 12 and the underlying supply data, the portal issues a notification. This helps identify and rectify inconsistencies before the return is submitted.

These enhancements in Phase 3 not only guarantee transparency and compliance but also aid in minimizing downstream errors. It eliminates the need for complex reconciliations and reduces the likelihood of receiving GST notices. The result is cleaner, more reliable data for both businesses and tax authorities.

Advantages of Mandatory HSN Reporting

• Reduces Classification Errors: HSN codes standardize the classification of goods and services, significantly lowering the risk of misinterpretation and mistakes in tax calculations.
• Enables Faster Processing: Accurate HSN codes, coupled with system-driven validations and auto-population features, minimize manual checks, allowing for quicker filing and reconciliations.
• Enhances Data Consistency: Standardized reporting across various industries and taxpayers ensures more accurate and reliable data for compliance, audits, and analytics.
• Facilitates International Trade Alignment: HSN is a globally recognized system utilized in customs and international trade. Its adoption simplifies cross-border compliance and reporting.
• Prevents Tax Evasion: Mandatory and detailed HSN disclosure makes it more challenging to hide or misreport transactions, helping authorities track taxable activities with greater precision.
• Reduces Notices and Disputes: Precise, mandated classification substantially decreases GST mismatch notices, audits, and ongoing queries with tax authorities.
• Supports Data-driven Policymaking: Structured HSN data provides governments and industries with better insights for developing sector-specific tax and trade policies.

Consequences of Incorrect HSN Code Reporting in GSTR-1

HSN codes are unique identifiers directly linked to specific GST rates. As return filing becomes increasingly system-driven, selecting the correct HSN enables the portal to auto-populate tax rates, eliminating the need for manual descriptions.

However, choosing the wrong HSN can lead to incorrect tax calculations and compliance discrepancies. It can also cause a mismatch between supplier and buyer records, attracting further scrutiny.

Non-compliance may result in tax assessments, penalties up to ₹50,000 (₹25,000 each under CGST and SGST, as per Section 125), and in some instances, the blocking or reversal of input tax credit for your customers. In summary, inaccurate HSN reporting exposes both suppliers and buyers to regulatory risks, disrupts cash flow, and can harm business relationships.

Difficulties Encountered by Taxpayers

• No Manual Entry, Only Dropdown Selection: Phase 3 eliminates the ability to manually enter HSN codes, requiring selection from a predefined dropdown list. Taxpayers must adapt to this portal interface, which can be time-consuming for those dealing with a broad range of goods and services.
• Master Data Updates: Businesses need to accurately map all their products and services to the official HSN codes within their systems. Errors or outdated data can hinder successful filing, making timely and precise master data maintenance essential.
• Loss of Description Flexibility: With auto-populated HSN-based descriptions, businesses can no longer customize item names or details to suit their internal or customer-facing requirements.
• Real-Time Portal Validations: The GST portal performs immediate cross-checks between HSN summary details and supply values (B2B, B2C) reported in other return tables. Any inconsistencies trigger instant system warnings, necessitating prompt correction before filing.
• Increased Need for Staff Training: Employees accustomed to using internal code sheets or memory will require training on proper HSN code selection, understanding official descriptions, and navigating the portal.
• Return Filing Delays: System-triggered errors or warnings can slow down the return filing process, potentially leading to last-minute delays or preventing submission until all issues are resolved.