Ch 8 - Classification of Goods and Services | GST Saral by CA Dhruv Aggarwal PDF Download

 Page 1


CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
 
 
 
 
 
 
 
 
 
 
CHAPTER 8 - Cl assifi cation of goods and servi ces 
 
 
 
 
 
CHAPTER 8 
 
Classification of goods and services 
 
EXECUTIVE SUMMARY 
 
?   Rate  of  GST  is  determined  based  on  Classification  of  goods  read  with  relevant  exemption 
notification. 
?   Classification is done on basis of Customs Tariff Act. Tari ffs is based on HSN (Harmonised System 
of Nomenclature) developed by World Customs Organisation. 
?   HSN Tariff of goods is required to be indicated in invoice and return. 
?   Goods are classified in 21 sections. Each section consists of various chapters. 
?   A 'section' is a grouping of a number of Chapters which codify a particular class of goods. Each of 
the sections is related to a broader class of goods e.g. Section I is 'Animal Products', Section VII is 
'Plastics and Articles thereof'. 
?   Each of the sections is divided into various Chapters and each Chapter contains goods of one class. 
?   Tariff is based on 8 digit classification of goods. First two digits indicate chapter number, next two 
digits  indicate  heading  and  next  two  indicate  sub-heading.   Last  two  digits  are  for  further 
classification. Single, double and triple dashes are used to group and sub-group the headings. 
?   Ei ght digit classification is termed as 'tariff item'. 
?   Classification is done on basis of GIR (General Interpretative Rules) which are part of Tari ff. Titles 
of sections and chapters are only for reference. Section notes and chapter notes have overriding 
effect. 
?   Incomplete or unfinished goods having essential character of finished goods are classified under same 
heading as finished goods. 
?   Specific description prevails over general description. 
?   Trade parlance is important in classification of goods. End use is norma ly not relevant. 
8.1 Need for classification 
 
There are innumerous variety of goods and services. It is not possible to apply one common tax rate to a l 
goods and services. It is also not possible to list a l types of goods and services and specify GST rate against 
each of such goods and services. 
Hence, the only option is to classify the goods on basis of groups and sub-groups and specify GST rate 
against each sub-group of items. In case of service also, only broad description can be given for providing 
abatements and exemptions to various type of services. 
The most scientific way of classifying goods is on basis of HSN. The HSN classification is used in customs, 
central excise and Foreign Trade Policy. The classification is also fo lowed by DGCIS (Director General of 
Page 2


CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
 
 
 
 
 
 
 
 
 
 
CHAPTER 8 - Cl assifi cation of goods and servi ces 
 
 
 
 
 
CHAPTER 8 
 
Classification of goods and services 
 
EXECUTIVE SUMMARY 
 
?   Rate  of  GST  is  determined  based  on  Classification  of  goods  read  with  relevant  exemption 
notification. 
?   Classification is done on basis of Customs Tariff Act. Tari ffs is based on HSN (Harmonised System 
of Nomenclature) developed by World Customs Organisation. 
?   HSN Tariff of goods is required to be indicated in invoice and return. 
?   Goods are classified in 21 sections. Each section consists of various chapters. 
?   A 'section' is a grouping of a number of Chapters which codify a particular class of goods. Each of 
the sections is related to a broader class of goods e.g. Section I is 'Animal Products', Section VII is 
'Plastics and Articles thereof'. 
?   Each of the sections is divided into various Chapters and each Chapter contains goods of one class. 
?   Tariff is based on 8 digit classification of goods. First two digits indicate chapter number, next two 
digits  indicate  heading  and  next  two  indicate  sub-heading.   Last  two  digits  are  for  further 
classification. Single, double and triple dashes are used to group and sub-group the headings. 
?   Ei ght digit classification is termed as 'tariff item'. 
?   Classification is done on basis of GIR (General Interpretative Rules) which are part of Tari ff. Titles 
of sections and chapters are only for reference. Section notes and chapter notes have overriding 
effect. 
?   Incomplete or unfinished goods having essential character of finished goods are classified under same 
heading as finished goods. 
?   Specific description prevails over general description. 
?   Trade parlance is important in classification of goods. End use is norma ly not relevant. 
8.1 Need for classification 
 
There are innumerous variety of goods and services. It is not possible to apply one common tax rate to a l 
goods and services. It is also not possible to list a l types of goods and services and specify GST rate against 
each of such goods and services. 
Hence, the only option is to classify the goods on basis of groups and sub-groups and specify GST rate 
against each sub-group of items. In case of service also, only broad description can be given for providing 
abatements and exemptions to various type of services. 
The most scientific way of classifying goods is on basis of HSN. The HSN classification is used in customs, 
central excise and Foreign Trade Policy. The classification is also fo lowed by DGCIS (Director General of 
CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
Commercial Inte ligence & Statistics). 
 
In case of some States, some part of HSN is used in their Vat laws. 
 
The common classification reduces transaction costs and reduce diversion of classification among di fferent 
agencies. 
Under GST, goods will have to be classified on basis of HSN. There is no other scientific way the goods can 
be classified. 
The Customs Tariff Act is based on HSN. That Tariff will be used to classify goods under GST. 
 
8.1-1 Background of HSN 
 
As international trade increased, need was felt to have universal standard system of classification of goods to 
facilitate trade flow and analysis of trade statistics. Hence, Harmonised Commodity Description and Coding 
System (Genera ly referred to as 'Harmonised System of Nomenclature' or simply 'HSN') was developed by 
World Customs Organisation (WCO) [www.wcoomd.org]. 
This is an International Nomenclature  standard  adopted  by about 200  Countries  to ensure  uniformity in 
classification in International Trade. 
HSN   is   multi-purpose   international   product   nomenclature   developed   by   WCO   (World   Customs 
Organisation). It comprises about 5,000 commodity groups, each identified by a six digit code, arranged in a 
legal and logical structure. The system is used by more than 200 countries. Over 98% of the merchandise in 
international trade is classified in terms of HS - WCO website - quoted in Hitachi Home and Life Solutions 
v. CC  (2012) 285 ELT 504 (CESTAT),  where  it was held that HSN  automatica ly classifies  the trade 
parlance test. 
Harmonised System (HS) provides commodity/product codes and description upto 4-digit (Heading) and 6- 
digit (Sub-Headi ng) levels only and member countries of WCO are a lowed to extend the codes upto any level 
subject to the condition that nothing changes at the 4-digit or 6-digit levels. India has developed 8-digit level 
classification to indicate specific statistical codes for indigenous products and also to monitor the trade volumes 
- Chapter 4 Para  2.2 of Customs Manual, 2011. 
 
HSN is amended periodica ly in a cycle of 4/6 years, taking note of the trade flow, technological progress etc. 
Member countries including India are under obligation to amend the Tariff Schedules in alignment with HS - 
Chapter 4 Para  2.3 of Customs Manual, 2011. 
For purpose of uniform interpretation of HS, the WCO has published detailed Explanatory Notes to various 
headings/sub-headings. WCO in its various committees discusses classification of individual products and gives 
classification opinion on them. Such information, though not binding in nature, provides a useful guideline for 
classifying goods - Chapter 4 Para  2.4 of Customs Manual, 2011. 
8.1-2 Sections, Chapters and headings in Tariff 
 
A 'section' is a grouping of a number of Chapters which codify a particular class of goods. Each of the sections 
is related to a broader class of goods e.g. Section I is 'Animal Products', Section VII is 'Plastics and Articles 
thereof',  Section  XI  is  'Textile  and  Textile  Articles',  Section  XVII  is  'Vehicles,  Aircrafts,  Vessels  and 
associated transport equipment', etc. Section Notes are given at the beginning of each Section, which govern 
entries in that Section. These notes are applicable to a l Chapters in that section. 
Central Excise Tariff is divided in 20 sections, while there are 21 sections in case of Customs Tariff. 
 
Section divided in Chapters  and chapters  in sub-chapters - Each of the sections is divided into various 
Chapters and each Chapter contains goods of one class. For example, Section XI relates to Textile and 
Page 3


CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
 
 
 
 
 
 
 
 
 
 
CHAPTER 8 - Cl assifi cation of goods and servi ces 
 
 
 
 
 
CHAPTER 8 
 
Classification of goods and services 
 
EXECUTIVE SUMMARY 
 
?   Rate  of  GST  is  determined  based  on  Classification  of  goods  read  with  relevant  exemption 
notification. 
?   Classification is done on basis of Customs Tariff Act. Tari ffs is based on HSN (Harmonised System 
of Nomenclature) developed by World Customs Organisation. 
?   HSN Tariff of goods is required to be indicated in invoice and return. 
?   Goods are classified in 21 sections. Each section consists of various chapters. 
?   A 'section' is a grouping of a number of Chapters which codify a particular class of goods. Each of 
the sections is related to a broader class of goods e.g. Section I is 'Animal Products', Section VII is 
'Plastics and Articles thereof'. 
?   Each of the sections is divided into various Chapters and each Chapter contains goods of one class. 
?   Tariff is based on 8 digit classification of goods. First two digits indicate chapter number, next two 
digits  indicate  heading  and  next  two  indicate  sub-heading.   Last  two  digits  are  for  further 
classification. Single, double and triple dashes are used to group and sub-group the headings. 
?   Ei ght digit classification is termed as 'tariff item'. 
?   Classification is done on basis of GIR (General Interpretative Rules) which are part of Tari ff. Titles 
of sections and chapters are only for reference. Section notes and chapter notes have overriding 
effect. 
?   Incomplete or unfinished goods having essential character of finished goods are classified under same 
heading as finished goods. 
?   Specific description prevails over general description. 
?   Trade parlance is important in classification of goods. End use is norma ly not relevant. 
8.1 Need for classification 
 
There are innumerous variety of goods and services. It is not possible to apply one common tax rate to a l 
goods and services. It is also not possible to list a l types of goods and services and specify GST rate against 
each of such goods and services. 
Hence, the only option is to classify the goods on basis of groups and sub-groups and specify GST rate 
against each sub-group of items. In case of service also, only broad description can be given for providing 
abatements and exemptions to various type of services. 
The most scientific way of classifying goods is on basis of HSN. The HSN classification is used in customs, 
central excise and Foreign Trade Policy. The classification is also fo lowed by DGCIS (Director General of 
CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
Commercial Inte ligence & Statistics). 
 
In case of some States, some part of HSN is used in their Vat laws. 
 
The common classification reduces transaction costs and reduce diversion of classification among di fferent 
agencies. 
Under GST, goods will have to be classified on basis of HSN. There is no other scientific way the goods can 
be classified. 
The Customs Tariff Act is based on HSN. That Tariff will be used to classify goods under GST. 
 
8.1-1 Background of HSN 
 
As international trade increased, need was felt to have universal standard system of classification of goods to 
facilitate trade flow and analysis of trade statistics. Hence, Harmonised Commodity Description and Coding 
System (Genera ly referred to as 'Harmonised System of Nomenclature' or simply 'HSN') was developed by 
World Customs Organisation (WCO) [www.wcoomd.org]. 
This is an International Nomenclature  standard  adopted  by about 200  Countries  to ensure  uniformity in 
classification in International Trade. 
HSN   is   multi-purpose   international   product   nomenclature   developed   by   WCO   (World   Customs 
Organisation). It comprises about 5,000 commodity groups, each identified by a six digit code, arranged in a 
legal and logical structure. The system is used by more than 200 countries. Over 98% of the merchandise in 
international trade is classified in terms of HS - WCO website - quoted in Hitachi Home and Life Solutions 
v. CC  (2012) 285 ELT 504 (CESTAT),  where  it was held that HSN  automatica ly classifies  the trade 
parlance test. 
Harmonised System (HS) provides commodity/product codes and description upto 4-digit (Heading) and 6- 
digit (Sub-Headi ng) levels only and member countries of WCO are a lowed to extend the codes upto any level 
subject to the condition that nothing changes at the 4-digit or 6-digit levels. India has developed 8-digit level 
classification to indicate specific statistical codes for indigenous products and also to monitor the trade volumes 
- Chapter 4 Para  2.2 of Customs Manual, 2011. 
 
HSN is amended periodica ly in a cycle of 4/6 years, taking note of the trade flow, technological progress etc. 
Member countries including India are under obligation to amend the Tariff Schedules in alignment with HS - 
Chapter 4 Para  2.3 of Customs Manual, 2011. 
For purpose of uniform interpretation of HS, the WCO has published detailed Explanatory Notes to various 
headings/sub-headings. WCO in its various committees discusses classification of individual products and gives 
classification opinion on them. Such information, though not binding in nature, provides a useful guideline for 
classifying goods - Chapter 4 Para  2.4 of Customs Manual, 2011. 
8.1-2 Sections, Chapters and headings in Tariff 
 
A 'section' is a grouping of a number of Chapters which codify a particular class of goods. Each of the sections 
is related to a broader class of goods e.g. Section I is 'Animal Products', Section VII is 'Plastics and Articles 
thereof',  Section  XI  is  'Textile  and  Textile  Articles',  Section  XVII  is  'Vehicles,  Aircrafts,  Vessels  and 
associated transport equipment', etc. Section Notes are given at the beginning of each Section, which govern 
entries in that Section. These notes are applicable to a l Chapters in that section. 
Central Excise Tariff is divided in 20 sections, while there are 21 sections in case of Customs Tariff. 
 
Section divided in Chapters  and chapters  in sub-chapters - Each of the sections is divided into various 
Chapters and each Chapter contains goods of one class. For example, Section XI relates to Textile and 
CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
Textile Articles and within that Section,  Chapter 50 is Silk, Chapter 51 is Wool, Chapter 52 is Cotton, 
Chapter 53 is other vegetable textile fabrics, Chapter 61 is Articles of Apparel and so on. 
Some Chapters are divided into sub-chapters e.g. Chapter 72 (Iron and Steel) is divided into I - Primary 
Materials, II - Iron and Non-A loy Steel, III - Stainless Steel and IV - Other A loy Steel. 
 
Chapter  Notes - Chapter Notes are given at the begi nning of each Chapter, which govern entries in that 
Chapter. 
 
Headings  and  sub-headings within the Chapter  - Each chapter and sub-chapter is further divided into 
various headings depending on di fferent types of goods belonging to same class of products. 
For instance, Chapter 50 relating to Silk is further divided into 5 headi ngs. 5001 relates to Silk worm cocoons, 
5002 relates to raw silk, 50.03 relates to silk waste etc. The headings are sometimes divided into further sub- 
headings. For example 5003 10 means 'silk waste not carded or combed', while 5003 90 means 'other silk 
waste'. These are preceded by single dash. 5003 90 is further classified as 5003 90 10 (Mulberry silk waste), 
5003 90 20 (Tussar waste) and 5003 90 90 (Other). 
 
Grouping  of goods - In the HSN, commodities/products are arranged in a fixed pattern with the duty rates 
specified against each of them. The pattern of arrangement of goods in the HSN is in increasing degree of 
manufacture of commodities/products in the sequence of natural products, raw materials, semi finished goods 
and fully  manufactured goods/article/machinery etc. - Chapter  4 Para  1.2 of CBE&C's Customs Manual, 
2011. 
 
Eight Digit classification  in excise and customs - A l goods are classified using 4 digit system. These are 
ca led 'headings'. Further 2 digits are added for sub-classification, which are termed as 'sub-headings'. Further 
2 digits are added for sub-classification, which is termed as 'tariff item'. Rate of duty is indicated against each 
'tariff item' and not against heading or sub-heading. 
 
8.2 Overview of HSN 
 
Fo lowing is broad grouping of goods in HSN. 
 
?   Animal Products (Section I - Chapters 1 to 6) 
?   Vegetable Products (Section II - Chapters 6 to 14) 
?   Animal or vegetable fats and oils (Section III - Chapter 15) 
?   Prepared foodstuffs, beverages (Section IV - Chapters 16 to 24) 
?   Mineral Products (Section V - Chapters 25 to 27) 
?   Products of Chemicals and a lied industries (Section VI - Chapters 28 to 38) 
?   Plastics and Rubber and their articles (Section VII - Chapters 39 and 40) 
?   Raw hides and Skins, Leather and articles (Section VIII - Chapters 41 to 43) 
?   Wood, cork, straw and their articles (Section IX - Chapters 44 and 46) 
?   Pulp of wood, Paper, Paper-board and articles (Section X - Chapters 47 to 49) 
?   Textile and Textile Products (Section XI - Chapters 50 to 63) 
?   Footwear, Headgear, Umbre las, Articles of human hair (Section XII - Chapters 64 to 67). 
?   Articles of stone, plaster, ceramic, mica, glass (Section XIII - Chapters 68 to 70) 
?   Pearls, precious metals (Section XIV - Chapter 71) 
?   Base metals and articles of base metal (Iron, Steel, Copper, Nickel, Zinc, Tin etc.). (Section XV - 
Chapters 72 to 83) 
Page 4


CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
 
 
 
 
 
 
 
 
 
 
CHAPTER 8 - Cl assifi cation of goods and servi ces 
 
 
 
 
 
CHAPTER 8 
 
Classification of goods and services 
 
EXECUTIVE SUMMARY 
 
?   Rate  of  GST  is  determined  based  on  Classification  of  goods  read  with  relevant  exemption 
notification. 
?   Classification is done on basis of Customs Tariff Act. Tari ffs is based on HSN (Harmonised System 
of Nomenclature) developed by World Customs Organisation. 
?   HSN Tariff of goods is required to be indicated in invoice and return. 
?   Goods are classified in 21 sections. Each section consists of various chapters. 
?   A 'section' is a grouping of a number of Chapters which codify a particular class of goods. Each of 
the sections is related to a broader class of goods e.g. Section I is 'Animal Products', Section VII is 
'Plastics and Articles thereof'. 
?   Each of the sections is divided into various Chapters and each Chapter contains goods of one class. 
?   Tariff is based on 8 digit classification of goods. First two digits indicate chapter number, next two 
digits  indicate  heading  and  next  two  indicate  sub-heading.   Last  two  digits  are  for  further 
classification. Single, double and triple dashes are used to group and sub-group the headings. 
?   Ei ght digit classification is termed as 'tariff item'. 
?   Classification is done on basis of GIR (General Interpretative Rules) which are part of Tari ff. Titles 
of sections and chapters are only for reference. Section notes and chapter notes have overriding 
effect. 
?   Incomplete or unfinished goods having essential character of finished goods are classified under same 
heading as finished goods. 
?   Specific description prevails over general description. 
?   Trade parlance is important in classification of goods. End use is norma ly not relevant. 
8.1 Need for classification 
 
There are innumerous variety of goods and services. It is not possible to apply one common tax rate to a l 
goods and services. It is also not possible to list a l types of goods and services and specify GST rate against 
each of such goods and services. 
Hence, the only option is to classify the goods on basis of groups and sub-groups and specify GST rate 
against each sub-group of items. In case of service also, only broad description can be given for providing 
abatements and exemptions to various type of services. 
The most scientific way of classifying goods is on basis of HSN. The HSN classification is used in customs, 
central excise and Foreign Trade Policy. The classification is also fo lowed by DGCIS (Director General of 
CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
Commercial Inte ligence & Statistics). 
 
In case of some States, some part of HSN is used in their Vat laws. 
 
The common classification reduces transaction costs and reduce diversion of classification among di fferent 
agencies. 
Under GST, goods will have to be classified on basis of HSN. There is no other scientific way the goods can 
be classified. 
The Customs Tariff Act is based on HSN. That Tariff will be used to classify goods under GST. 
 
8.1-1 Background of HSN 
 
As international trade increased, need was felt to have universal standard system of classification of goods to 
facilitate trade flow and analysis of trade statistics. Hence, Harmonised Commodity Description and Coding 
System (Genera ly referred to as 'Harmonised System of Nomenclature' or simply 'HSN') was developed by 
World Customs Organisation (WCO) [www.wcoomd.org]. 
This is an International Nomenclature  standard  adopted  by about 200  Countries  to ensure  uniformity in 
classification in International Trade. 
HSN   is   multi-purpose   international   product   nomenclature   developed   by   WCO   (World   Customs 
Organisation). It comprises about 5,000 commodity groups, each identified by a six digit code, arranged in a 
legal and logical structure. The system is used by more than 200 countries. Over 98% of the merchandise in 
international trade is classified in terms of HS - WCO website - quoted in Hitachi Home and Life Solutions 
v. CC  (2012) 285 ELT 504 (CESTAT),  where  it was held that HSN  automatica ly classifies  the trade 
parlance test. 
Harmonised System (HS) provides commodity/product codes and description upto 4-digit (Heading) and 6- 
digit (Sub-Headi ng) levels only and member countries of WCO are a lowed to extend the codes upto any level 
subject to the condition that nothing changes at the 4-digit or 6-digit levels. India has developed 8-digit level 
classification to indicate specific statistical codes for indigenous products and also to monitor the trade volumes 
- Chapter 4 Para  2.2 of Customs Manual, 2011. 
 
HSN is amended periodica ly in a cycle of 4/6 years, taking note of the trade flow, technological progress etc. 
Member countries including India are under obligation to amend the Tariff Schedules in alignment with HS - 
Chapter 4 Para  2.3 of Customs Manual, 2011. 
For purpose of uniform interpretation of HS, the WCO has published detailed Explanatory Notes to various 
headings/sub-headings. WCO in its various committees discusses classification of individual products and gives 
classification opinion on them. Such information, though not binding in nature, provides a useful guideline for 
classifying goods - Chapter 4 Para  2.4 of Customs Manual, 2011. 
8.1-2 Sections, Chapters and headings in Tariff 
 
A 'section' is a grouping of a number of Chapters which codify a particular class of goods. Each of the sections 
is related to a broader class of goods e.g. Section I is 'Animal Products', Section VII is 'Plastics and Articles 
thereof',  Section  XI  is  'Textile  and  Textile  Articles',  Section  XVII  is  'Vehicles,  Aircrafts,  Vessels  and 
associated transport equipment', etc. Section Notes are given at the beginning of each Section, which govern 
entries in that Section. These notes are applicable to a l Chapters in that section. 
Central Excise Tariff is divided in 20 sections, while there are 21 sections in case of Customs Tariff. 
 
Section divided in Chapters  and chapters  in sub-chapters - Each of the sections is divided into various 
Chapters and each Chapter contains goods of one class. For example, Section XI relates to Textile and 
CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
Textile Articles and within that Section,  Chapter 50 is Silk, Chapter 51 is Wool, Chapter 52 is Cotton, 
Chapter 53 is other vegetable textile fabrics, Chapter 61 is Articles of Apparel and so on. 
Some Chapters are divided into sub-chapters e.g. Chapter 72 (Iron and Steel) is divided into I - Primary 
Materials, II - Iron and Non-A loy Steel, III - Stainless Steel and IV - Other A loy Steel. 
 
Chapter  Notes - Chapter Notes are given at the begi nning of each Chapter, which govern entries in that 
Chapter. 
 
Headings  and  sub-headings within the Chapter  - Each chapter and sub-chapter is further divided into 
various headings depending on di fferent types of goods belonging to same class of products. 
For instance, Chapter 50 relating to Silk is further divided into 5 headi ngs. 5001 relates to Silk worm cocoons, 
5002 relates to raw silk, 50.03 relates to silk waste etc. The headings are sometimes divided into further sub- 
headings. For example 5003 10 means 'silk waste not carded or combed', while 5003 90 means 'other silk 
waste'. These are preceded by single dash. 5003 90 is further classified as 5003 90 10 (Mulberry silk waste), 
5003 90 20 (Tussar waste) and 5003 90 90 (Other). 
 
Grouping  of goods - In the HSN, commodities/products are arranged in a fixed pattern with the duty rates 
specified against each of them. The pattern of arrangement of goods in the HSN is in increasing degree of 
manufacture of commodities/products in the sequence of natural products, raw materials, semi finished goods 
and fully  manufactured goods/article/machinery etc. - Chapter  4 Para  1.2 of CBE&C's Customs Manual, 
2011. 
 
Eight Digit classification  in excise and customs - A l goods are classified using 4 digit system. These are 
ca led 'headings'. Further 2 digits are added for sub-classification, which are termed as 'sub-headings'. Further 
2 digits are added for sub-classification, which is termed as 'tariff item'. Rate of duty is indicated against each 
'tariff item' and not against heading or sub-heading. 
 
8.2 Overview of HSN 
 
Fo lowing is broad grouping of goods in HSN. 
 
?   Animal Products (Section I - Chapters 1 to 6) 
?   Vegetable Products (Section II - Chapters 6 to 14) 
?   Animal or vegetable fats and oils (Section III - Chapter 15) 
?   Prepared foodstuffs, beverages (Section IV - Chapters 16 to 24) 
?   Mineral Products (Section V - Chapters 25 to 27) 
?   Products of Chemicals and a lied industries (Section VI - Chapters 28 to 38) 
?   Plastics and Rubber and their articles (Section VII - Chapters 39 and 40) 
?   Raw hides and Skins, Leather and articles (Section VIII - Chapters 41 to 43) 
?   Wood, cork, straw and their articles (Section IX - Chapters 44 and 46) 
?   Pulp of wood, Paper, Paper-board and articles (Section X - Chapters 47 to 49) 
?   Textile and Textile Products (Section XI - Chapters 50 to 63) 
?   Footwear, Headgear, Umbre las, Articles of human hair (Section XII - Chapters 64 to 67). 
?   Articles of stone, plaster, ceramic, mica, glass (Section XIII - Chapters 68 to 70) 
?   Pearls, precious metals (Section XIV - Chapter 71) 
?   Base metals and articles of base metal (Iron, Steel, Copper, Nickel, Zinc, Tin etc.). (Section XV - 
Chapters 72 to 83) 
CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
?   Machinery and mechanical appliances, electrical equipments, television etc. (Section XVI - Chapters 
84 and 85) 
?   Vehicles, Aircrafts, vessels and associated transport equipment (Section XVII - Chapters 86 to 89) 
?   Optical, photographic, medical, surgical instruments, clocks, musical instruments (Section XVIII - 
Chapters 90 to 92) 
?   Arms and Ammunition (Section XIX - Chapter 93) 
?   Misc. Manufactured articles like Furniture, toys etc. (Section XX - Chapters 94 to 96) 
?   Works of Art, co lectors' pieces and antiques (Section XXI - Chapters 97 to 99). 
8.2-1 Rules for Interpretation of HSN 
 
Rules for Interpretation of HSN are given in the HSN itself. These are termed as 'General Interpretative Rules' 
(GIR). 
GIR (General Interpretative Rules) are to be applied for interpretation of Tari ff, if classification is not possible 
on the basis of tariff entry and relevant chapter notes and section notes. 
Fo lowing are the steps of classification of a product as per GIR. 
 
(1)   The titles of Sections and Chapters are provided for ease of reference only; for legal purposes, refer 
the heading and sub-headi ng.  Read corresponding Section Notes and Chapter Notes (Rule 1 of 
GIR). If there is no ambi guity or confusion, the classification is final. You do not have to look to 
classification rules or trade practice or dictionary meani ng. If classification is not possible, then only 
go to GIR. The rules are to be applied sequentia ly. 
(2)   If meaning of word is not clear, refer to trade practice. If trade understanding of a product cannot be 
established, find technical or dictionary meaning of the term used in the tari ff. You may also refer to 
BIS or other standards, but trade parlance is most important. 
(3)   If goods are incomplete or un-finished, but classification of finished product is known, find if the un- 
finished item has essential characteristics of finished goods. If so, classify in same heading - Rule 
2(a). 
(4)   If ambiguity persists, find out which heading is specific and which heading is more general. Prefer 
specific heading.- Rule 3(a). 
(5)   If problem is not resolved  by Rule  3(a),  find  which material or component  is giving 'essential 
character' to the goods in question - Rule 3(b). 
(6)   If both are equa ly specific, find which comes last in the Tariff and take it - Rule 3(c). 
(7)   If you are unable to find any entry which matches the goods in question, find goods which are most 
akin - Rule 4. 
(8)   In case of mixtures or sets too, the procedure is more or less same, except that each ingredient of 
the mixture or set has to be seen in above sequence. As per rule 2(b), any reference to a material or 
substance includes a reference to mixtures or combinations of that material or substance with other 
material or substance. 
(9)   Packing material is classified along with the goods except when the packing is for repetitive use - 
Rule 5 
8.3 Classification of services 
 
There is no international classification of services similar to HSN for goods. 
 
However, principles of classification are same i.e. (a) specific description prevails over general description (b) 
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CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
 
 
 
 
 
 
 
 
 
 
CHAPTER 8 - Cl assifi cation of goods and servi ces 
 
 
 
 
 
CHAPTER 8 
 
Classification of goods and services 
 
EXECUTIVE SUMMARY 
 
?   Rate  of  GST  is  determined  based  on  Classification  of  goods  read  with  relevant  exemption 
notification. 
?   Classification is done on basis of Customs Tariff Act. Tari ffs is based on HSN (Harmonised System 
of Nomenclature) developed by World Customs Organisation. 
?   HSN Tariff of goods is required to be indicated in invoice and return. 
?   Goods are classified in 21 sections. Each section consists of various chapters. 
?   A 'section' is a grouping of a number of Chapters which codify a particular class of goods. Each of 
the sections is related to a broader class of goods e.g. Section I is 'Animal Products', Section VII is 
'Plastics and Articles thereof'. 
?   Each of the sections is divided into various Chapters and each Chapter contains goods of one class. 
?   Tariff is based on 8 digit classification of goods. First two digits indicate chapter number, next two 
digits  indicate  heading  and  next  two  indicate  sub-heading.   Last  two  digits  are  for  further 
classification. Single, double and triple dashes are used to group and sub-group the headings. 
?   Ei ght digit classification is termed as 'tariff item'. 
?   Classification is done on basis of GIR (General Interpretative Rules) which are part of Tari ff. Titles 
of sections and chapters are only for reference. Section notes and chapter notes have overriding 
effect. 
?   Incomplete or unfinished goods having essential character of finished goods are classified under same 
heading as finished goods. 
?   Specific description prevails over general description. 
?   Trade parlance is important in classification of goods. End use is norma ly not relevant. 
8.1 Need for classification 
 
There are innumerous variety of goods and services. It is not possible to apply one common tax rate to a l 
goods and services. It is also not possible to list a l types of goods and services and specify GST rate against 
each of such goods and services. 
Hence, the only option is to classify the goods on basis of groups and sub-groups and specify GST rate 
against each sub-group of items. In case of service also, only broad description can be given for providing 
abatements and exemptions to various type of services. 
The most scientific way of classifying goods is on basis of HSN. The HSN classification is used in customs, 
central excise and Foreign Trade Policy. The classification is also fo lowed by DGCIS (Director General of 
CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
Commercial Inte ligence & Statistics). 
 
In case of some States, some part of HSN is used in their Vat laws. 
 
The common classification reduces transaction costs and reduce diversion of classification among di fferent 
agencies. 
Under GST, goods will have to be classified on basis of HSN. There is no other scientific way the goods can 
be classified. 
The Customs Tariff Act is based on HSN. That Tariff will be used to classify goods under GST. 
 
8.1-1 Background of HSN 
 
As international trade increased, need was felt to have universal standard system of classification of goods to 
facilitate trade flow and analysis of trade statistics. Hence, Harmonised Commodity Description and Coding 
System (Genera ly referred to as 'Harmonised System of Nomenclature' or simply 'HSN') was developed by 
World Customs Organisation (WCO) [www.wcoomd.org]. 
This is an International Nomenclature  standard  adopted  by about 200  Countries  to ensure  uniformity in 
classification in International Trade. 
HSN   is   multi-purpose   international   product   nomenclature   developed   by   WCO   (World   Customs 
Organisation). It comprises about 5,000 commodity groups, each identified by a six digit code, arranged in a 
legal and logical structure. The system is used by more than 200 countries. Over 98% of the merchandise in 
international trade is classified in terms of HS - WCO website - quoted in Hitachi Home and Life Solutions 
v. CC  (2012) 285 ELT 504 (CESTAT),  where  it was held that HSN  automatica ly classifies  the trade 
parlance test. 
Harmonised System (HS) provides commodity/product codes and description upto 4-digit (Heading) and 6- 
digit (Sub-Headi ng) levels only and member countries of WCO are a lowed to extend the codes upto any level 
subject to the condition that nothing changes at the 4-digit or 6-digit levels. India has developed 8-digit level 
classification to indicate specific statistical codes for indigenous products and also to monitor the trade volumes 
- Chapter 4 Para  2.2 of Customs Manual, 2011. 
 
HSN is amended periodica ly in a cycle of 4/6 years, taking note of the trade flow, technological progress etc. 
Member countries including India are under obligation to amend the Tariff Schedules in alignment with HS - 
Chapter 4 Para  2.3 of Customs Manual, 2011. 
For purpose of uniform interpretation of HS, the WCO has published detailed Explanatory Notes to various 
headings/sub-headings. WCO in its various committees discusses classification of individual products and gives 
classification opinion on them. Such information, though not binding in nature, provides a useful guideline for 
classifying goods - Chapter 4 Para  2.4 of Customs Manual, 2011. 
8.1-2 Sections, Chapters and headings in Tariff 
 
A 'section' is a grouping of a number of Chapters which codify a particular class of goods. Each of the sections 
is related to a broader class of goods e.g. Section I is 'Animal Products', Section VII is 'Plastics and Articles 
thereof',  Section  XI  is  'Textile  and  Textile  Articles',  Section  XVII  is  'Vehicles,  Aircrafts,  Vessels  and 
associated transport equipment', etc. Section Notes are given at the beginning of each Section, which govern 
entries in that Section. These notes are applicable to a l Chapters in that section. 
Central Excise Tariff is divided in 20 sections, while there are 21 sections in case of Customs Tariff. 
 
Section divided in Chapters  and chapters  in sub-chapters - Each of the sections is divided into various 
Chapters and each Chapter contains goods of one class. For example, Section XI relates to Textile and 
CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
Textile Articles and within that Section,  Chapter 50 is Silk, Chapter 51 is Wool, Chapter 52 is Cotton, 
Chapter 53 is other vegetable textile fabrics, Chapter 61 is Articles of Apparel and so on. 
Some Chapters are divided into sub-chapters e.g. Chapter 72 (Iron and Steel) is divided into I - Primary 
Materials, II - Iron and Non-A loy Steel, III - Stainless Steel and IV - Other A loy Steel. 
 
Chapter  Notes - Chapter Notes are given at the begi nning of each Chapter, which govern entries in that 
Chapter. 
 
Headings  and  sub-headings within the Chapter  - Each chapter and sub-chapter is further divided into 
various headings depending on di fferent types of goods belonging to same class of products. 
For instance, Chapter 50 relating to Silk is further divided into 5 headi ngs. 5001 relates to Silk worm cocoons, 
5002 relates to raw silk, 50.03 relates to silk waste etc. The headings are sometimes divided into further sub- 
headings. For example 5003 10 means 'silk waste not carded or combed', while 5003 90 means 'other silk 
waste'. These are preceded by single dash. 5003 90 is further classified as 5003 90 10 (Mulberry silk waste), 
5003 90 20 (Tussar waste) and 5003 90 90 (Other). 
 
Grouping  of goods - In the HSN, commodities/products are arranged in a fixed pattern with the duty rates 
specified against each of them. The pattern of arrangement of goods in the HSN is in increasing degree of 
manufacture of commodities/products in the sequence of natural products, raw materials, semi finished goods 
and fully  manufactured goods/article/machinery etc. - Chapter  4 Para  1.2 of CBE&C's Customs Manual, 
2011. 
 
Eight Digit classification  in excise and customs - A l goods are classified using 4 digit system. These are 
ca led 'headings'. Further 2 digits are added for sub-classification, which are termed as 'sub-headings'. Further 
2 digits are added for sub-classification, which is termed as 'tariff item'. Rate of duty is indicated against each 
'tariff item' and not against heading or sub-heading. 
 
8.2 Overview of HSN 
 
Fo lowing is broad grouping of goods in HSN. 
 
?   Animal Products (Section I - Chapters 1 to 6) 
?   Vegetable Products (Section II - Chapters 6 to 14) 
?   Animal or vegetable fats and oils (Section III - Chapter 15) 
?   Prepared foodstuffs, beverages (Section IV - Chapters 16 to 24) 
?   Mineral Products (Section V - Chapters 25 to 27) 
?   Products of Chemicals and a lied industries (Section VI - Chapters 28 to 38) 
?   Plastics and Rubber and their articles (Section VII - Chapters 39 and 40) 
?   Raw hides and Skins, Leather and articles (Section VIII - Chapters 41 to 43) 
?   Wood, cork, straw and their articles (Section IX - Chapters 44 and 46) 
?   Pulp of wood, Paper, Paper-board and articles (Section X - Chapters 47 to 49) 
?   Textile and Textile Products (Section XI - Chapters 50 to 63) 
?   Footwear, Headgear, Umbre las, Articles of human hair (Section XII - Chapters 64 to 67). 
?   Articles of stone, plaster, ceramic, mica, glass (Section XIII - Chapters 68 to 70) 
?   Pearls, precious metals (Section XIV - Chapter 71) 
?   Base metals and articles of base metal (Iron, Steel, Copper, Nickel, Zinc, Tin etc.). (Section XV - 
Chapters 72 to 83) 
CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
?   Machinery and mechanical appliances, electrical equipments, television etc. (Section XVI - Chapters 
84 and 85) 
?   Vehicles, Aircrafts, vessels and associated transport equipment (Section XVII - Chapters 86 to 89) 
?   Optical, photographic, medical, surgical instruments, clocks, musical instruments (Section XVIII - 
Chapters 90 to 92) 
?   Arms and Ammunition (Section XIX - Chapter 93) 
?   Misc. Manufactured articles like Furniture, toys etc. (Section XX - Chapters 94 to 96) 
?   Works of Art, co lectors' pieces and antiques (Section XXI - Chapters 97 to 99). 
8.2-1 Rules for Interpretation of HSN 
 
Rules for Interpretation of HSN are given in the HSN itself. These are termed as 'General Interpretative Rules' 
(GIR). 
GIR (General Interpretative Rules) are to be applied for interpretation of Tari ff, if classification is not possible 
on the basis of tariff entry and relevant chapter notes and section notes. 
Fo lowing are the steps of classification of a product as per GIR. 
 
(1)   The titles of Sections and Chapters are provided for ease of reference only; for legal purposes, refer 
the heading and sub-headi ng.  Read corresponding Section Notes and Chapter Notes (Rule 1 of 
GIR). If there is no ambi guity or confusion, the classification is final. You do not have to look to 
classification rules or trade practice or dictionary meani ng. If classification is not possible, then only 
go to GIR. The rules are to be applied sequentia ly. 
(2)   If meaning of word is not clear, refer to trade practice. If trade understanding of a product cannot be 
established, find technical or dictionary meaning of the term used in the tari ff. You may also refer to 
BIS or other standards, but trade parlance is most important. 
(3)   If goods are incomplete or un-finished, but classification of finished product is known, find if the un- 
finished item has essential characteristics of finished goods. If so, classify in same heading - Rule 
2(a). 
(4)   If ambiguity persists, find out which heading is specific and which heading is more general. Prefer 
specific heading.- Rule 3(a). 
(5)   If problem is not resolved  by Rule  3(a),  find  which material or component  is giving 'essential 
character' to the goods in question - Rule 3(b). 
(6)   If both are equa ly specific, find which comes last in the Tariff and take it - Rule 3(c). 
(7)   If you are unable to find any entry which matches the goods in question, find goods which are most 
akin - Rule 4. 
(8)   In case of mixtures or sets too, the procedure is more or less same, except that each ingredient of 
the mixture or set has to be seen in above sequence. As per rule 2(b), any reference to a material or 
substance includes a reference to mixtures or combinations of that material or substance with other 
material or substance. 
(9)   Packing material is classified along with the goods except when the packing is for repetitive use - 
Rule 5 
8.3 Classification of services 
 
There is no international classification of services similar to HSN for goods. 
 
However, principles of classification are same i.e. (a) specific description prevails over general description (b) 
CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
Predominant nature in case of bundled services and (c) trade parlance. 
 
Most probably, the definitions as per present service tax law may be used to classify various taxable services. 
 
8.3-1 Broad Classification of Services 
 
Services  have  been  classified  into  12  broad  sectors  e.g.  Business  Services,  Comm unication  Services, 
Distribution Services, Financial Services etc. Each sector is divided into sub-sectors and codes have been 
given. 
The classification can be used for statistical purposes but not for taxation purposes. 
The classification is as fo lows— 
1.   Business Services - A. Professional Services, B. Computer and related services, C. Research and 
development services, D. Real estate services, E. Rental/leasing services without operators, F. Other 
Business Services 
2.   Communication Services  -  A.  Postal  Services,  B.  Courier  Services,  C.  Telecommunication 
Services, D. Audiovisual Services, E. Others 
3.   Construction and related engineering services - A. General Construction work for buildi ng, B. 
General Construction work for Civil Engineering,  C. Insta lation and assembly work, D. Building 
completion and finishing work, E. Others 
4.   Distribution Services   -  A.  Commission  Agents'  Services,  B.  Wholesale  trade  services,  C. 
Retailing Services, D. Franchising, E. Others 
5.   Educational Services 
6.   Environmental Services 
7.   Financial Services  - A.  A l Insurance  and  insurance-related  services,  B.  Banking  and  other 
Financial Services (excluding insurance), C. Other 
8.   Health related and social services 
9.   Tourism and travel-related services 
10.   Recreational, cultural and sporting services 
11.   Transport Services  - A. Maritime  transport services,  B. Internal waterways  transport,  C. Air 
transport services, D. Space transport, E. Rail transport services, F. Road transport services, G. 
Pipeline transport, H. Services Auxiliary to A l modes of transport. 
12.   Other services not included elsewhere.