Under GST law, one of the most important elements is the classification of goods/services for the purpose of determination of rate of tax to be levied on them. The rate of tax to be charged on a particular product depends on the HSN/SAC codes specified under the GST law. Also, for the availability of exemptions, we need to classify the goods/services properly and accurately.

What is HSN/SAC code?

HSN code is Harmonized System of Nomenclature for classification of different commodities.

SAC code is Services Accounting Code for classification of different services.

Effects of wrong classification of goods/services

Wrong classification leads to wrong valuation which further leads to wrong payment of taxes. Here are a few cases with their significant effects:

CASE	EFFECT
GST charged at higher rate	More ITC Taken by the recipient
GST charged at lesser rate	Short payment of Tax to the Government
Wrong exemption claimed	Non-Payment or Short-Payment of Tax
Goods/services classified under Reverse Charge Mechanism where they are not supposed to be so classified or Vice-versa	Short-payment of Tax or Ineligible ITC taken
Non-payment of Compensation Cess on specified goods/services	Penal proceedings over and above interest cost
Wrong classification of export/import	Denial of benefits under Foreign Trade policy such as Duty drawback, Incentives