Implementation of Mandatory HSN Codes in GSTR-1 & GSTR-1A

What You Need to Know

From January 2025, GSTN started phasing in the implementation of mandatory HSN codes in Table 12 of both GSTR 1 and GSTR 1A. It is a step based on the correct reporting of tax that has minimal human errors and simplifies compliance for businesses across the nation.

Below is a blog that has broken down what HSN codes are, change that has been introduced in Phase III, and compliance steps that need to be followed by businesses in India.

What Are HSN Codes and Why Are They Important?

It is, in fact the Harmonized System of Nomenclature, or HSN-an internationally accepted classification of goods and services. It classifies products or services with a unique numerical code, thereby standardizing trade and tax systems.

HSN is important for Goods and Services Tax in India in the following manners:

Determines the applicable rate of GST
Uniform tax treatment across states and businesses
Easier filing of returns and easier tracking of compliance.
International standard standards for global trade.
Penalties, higher scrutiny and troubles arising while auditing if HSN code gets filed wrong.

The implementation of HSN codes must be done correctly, and GST registered entities should cover it.

Phase III Implementation: Key Changes

GSTN has brought phase III in the process of reporting of HSN Codes in GSTR -1 and GSTR-1A. Here are the critical changes in the same:

Segmentation of Table 12
- Table 12 divided into two heads:
  - B2B Supplies: Business-to-business.
  - B2C Supplies: Sales to consumers.
- Separation gives clear clarity and easy reporting of supplies.
Validations Rules of Supplies and Value of Taxation
- These supplies and taxation reported values have the new validations developed which cross-matching will happen on this reported value of supplies.
- The business must complete the submission during this time period, so the rule will initially serve as a warning due to the mismatching.
Features associated with the upgraded user
- Download HSN Code List now with a new button whereby taxpayers can download the latest HSN and SAC codes along with descriptions in the Excel format.
- My Master now facilitates search on product descriptions, making it easy to decide which HSN codes to use.

Change in Detail

Verification for B2B Supplies
- Verification rules will be applicable on tables like:
  - 4A, 4B, 6B and 6C for registered recipient.
  - 9A, 9B, and 15A for Exports or to registered recipient.
- This verification is an adjustment of tax values with correct tax amount.
Verification in B2C Supplies
- We will verify the non-registered recipient on the table such as.
  - 5A, 6A, 7A, and 7B. Domestic Supplies for non-registered recipient.
  - 9A (Ex) and 10 or 15 for unregistered recipient.

Addressing Amendments

If they conduct a revaluation, they will compare it based on differential value to eliminate the reuse of similar data.

Business Implication

Phases III Changes to GST registered will have more substantial effects for tax payers as follows -What Businesses should know:

Benefits of the new system

Typographical Error : There will be no manual entries; hence, there will be reduced typographical errors.
Validation : The validation rules will ensure that the taxable value and amount of taxes collected are submitted correctly.
Better User Experience: "Download HSN Code List" and searchable "My Master" will allow businesses to find and apply the right HSN codes easily

Challenges to be Overcome

Learning Curve: Taxpayers and their teams will learn the new drop-down selection process and validation rules.
System Upgrades: Businesses would require up-gradation of their accounting and billing software to remain in pace with the new functionalities of the GST portal.

Steps to comply with Phase III

To align the business to the new needs and ensure compliance, the businesses need to do:

Study the Advisory
- Read the official advisory given by GSTN in detail and understand what is changed and its implications.
- The complete guidance is available on the GST portal that can be referred to.
Accounting System
- Check whether your accounting and billing software has the facility of dropping down the codes of HSN.
- If yes then collaborate with the software vendor also to make the changes
Train Your Employee
- Train those employees who are handling GST return, which will file returns along with new updations.
- Completely educate them about the drooping system as well as newly implemented validation rule and all change
Validation Warnings Monitoring
- Develop a procedure in order to trace the validation warnings that are arising while filing of returns.
- Clear up the mismatches at once so no further penalties should arise.

FAQs on HSN Code Implementation

Q1: Will the validation warnings prevent the returns from being filed?

No, in the initial days, the validation warnings will not stop the filing of returns. However, the business needs to correct the warnings so as not to incur improper compliance in the future.

Q2: How can I get the new list of HSN codes?

You can download the latest HSN and SAC codes from the GST portal by clicking on the "Download HSN Code List" button on Table 12.

Q3: Is the drop-down selection compulsory for all taxpayers?

No, HSN code entry cannot be done manually. All the taxpayers must choose the appropriate HSN codes available in the list.

Why Compliances Are Important

In case of non-compliance with the latest rule, among other issues, the following may be faced:

Delay in processing returns.
More scrutiny in the audit.
Penalty for wrong or incomplete reporting.

Companies can avoid such issues and maintain smooth compliance with GST regulations by raising awareness and taking proactive measures.

Conclusion
The introduction of HSN codes in GSTR-1 and GSTR-1A in Phase III is a major step toward the betterment of GST compliance and accuracy. Mandatory drop-down selection, validation rules, and enhanced features make the process easy for businesses and promote transparency in taxation.
For that, companies should update their systems, train the teams, and be vigilant for validation warnings. Need help?
Contact Book My Accountant for expert assistance with GST compliance, tax planning, and more. Together, let's simplify your tax journey!
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55th GST Council Meeting Brings Relief to GST- Registered Taxpayer

Important to know for taxpayers concerning GST

It's a big thing for registered GST taxpayers who want to minimize the hassle of claiming input credit. Taxpayers under GST who filed GSTR-3B from 2017-2018 to 2020-2021 must be cautious, as authorities are issuing demands for late ITC claims. According to the GST law, they cannot claim ITC until return filing that affected many. They have missed the advantage of ITC and, thus, their output tax liability went high. Now is the new opportunity to correct the same and obtain the available ITC.

The 2024 Budget addresses taxpayer issues and simplifies the rectification of outstanding input tax credits from previous years. It was released on 8th October, 2024 in this regard. GSTN has permitted businesses to file amendments online until January 7, 2025. It mentions that Taxpayer has to complete the process before 9th April and up to 8th April to avail its benefits from it.

Understanding the Process of GST ITC Rectification

A Simple Guide to Businesses GST. It is one of the essentials involved in conducting any business in India. Input Tax Credit, as per the scheme, enables one to recover any tax that may have been levied on buying. Companies may get an ITC demand from the tax department to repay claimed ITC with penalties and interest. Well, it is again due to the process developed by the government which enables a company to rectify this mistake. Let us tell you how is GST ITC rectification and what this is to be used to correct it with reduced penal cost on businesses.

A GST ITC Demand Order: Something Went Wrong?

As a taxpayer, you monthly filed your GST returns, only to be shocked by a portal demand stating you exceeded your input tax credit limit, despite everything seeming fine on paper, necessitating further investigation. An error on the GST portal wrongly marked specific invoices. That is why a recovery demand order for excess ITC was sent.

The New Solution: GST Rectification Process

So, instead of paying the demanded amount, businesses have the option to file for rectification under the newly introduced GST ITC rectification process. This will provide the proper rectification of the errors that arise because of technical bugs without penalty and interest.

Step-by-Step Guide to Rectify an ITC Demand Order:

Here comes Step By step-by-step guide to File a rectification application on the GST portal as per the advisory of January 7, 2025

GST Portal Login Go to www.gst.gov.in and login through User Id and Password
Proceed Further Dashboard > Services > User Services > My Applications In the next,
Select "Application for rectification of order," then click "NEW APPLICATION."
Fill All the Details Download Annexure A from the portal. Fill in details of your demand order and provide details of ITC wrongly claimed by you. Upload Annexure A in complete detail now.
Check Your Application: Check your application once and then click on "FILE".
Last step: On the specified date, one application under three months will be shown for review. Cancellation of verification for old GST claims now allows outstanding ITCs to be credited to the GST ledger.

BMA Insight

This current trend of GST advisory measures in our views, at BMA, seems progressive ones aimed more towards improving issues of compliance problems and subsequently pre-ITC errors. IThis ability to correct unadjusted ITC is a relief for trade, but it highlights the need for flexible time limits to prevent future issues. Stiff rules around e-way bills and combined multi-factor authentication are strengthening security and transparency but sometimes raise a concern for compliance for small business enterprises.

We at BMA believe that if the government makes smooth implementation and support toward taxpayers sufficient, then these initiatives could bring out positive outcomes. The thrust must be towards easier compliance rather than introducing new complexities.