HSN (Harmonised System of Nomenclature)

HSN (Harmonised System of Nomenclature) is the internationally standardised product classification code system developed by the World Customs Organization (WCO) and adopted by 200+ countries for customs, trade statistics and indirect tax. India aligned with HSN in 1986 for customs and from 1 July 2017 made HSN central to Goods and Services Tax — every invoice issued under GST must carry the HSN code of the goods being sold, and the GST rate applicable to that supply is determined by its HSN classification.

The code structure is hierarchical. The first 2 digits identify the broad chapter (e.g. 39 = plastics, 40 = rubber, 84 = machinery, 85 = electrical machinery). The next 2 digits identify the heading within that chapter. Two more digits give the sub-heading (the WCO 6-digit code). India adds a further 2 digits (the tariff item) to reach 8 digits, used in Customs Tariff and GST Tariff Schedules. Indian GST law requires 4-digit HSN on B2B invoices for turnover above Rs 5 crore, 6-digit for export invoices, and 8-digit for traders dealing in chapter 24, 71, 84, 85, 90, 94, 95 and a few others.

For recycling plants, HSN classification is the single most-litigated tax issue. 3915 covers "waste, parings and scrap of plastics" — GST at 5% input rate for buyers, 18% on processed regranulate. 4004 covers "waste, parings and scrap of rubber" at 5% GST; recovered crumb rubber under 4017 attracts 18%. 7204 covers "ferrous waste and scrap" at 18% GST. 8548 covers "waste and scrap of primary cells, primary batteries and electric accumulators; spent primary cells, spent primary batteries and spent electric accumulators" at 18% GST. 854810 specifically covers spent lead-acid batteries; 854890 covers other spent batteries including lithium-ion. 854810/854890 also covers "electrical and electronic waste" — though most e-waste is classified by the original device category (8517 for phones, 8471 for computers) when sold as functional refurb.

Misclassification triggers two risks: under-payment of GST (penalty 100% of short tax plus interest at 18% p.a.) and excess input tax credit claims (recovery with 24% interest plus 100% penalty under Section 74 of CGST Act). For recyclers, the most common errors are: classifying processed regrind as "scrap" to attract 5% rather than 18% (reclassified by GST audit), and treating recovered metal as untaxed input (CGST does not allow ITC reversal on inputs from unregistered scrap dealers — the well-known "scrap dealer GST trap"). The 2017 reverse-charge mechanism on scrap purchases under Notification 4/2017 (now superseded) and subsequent partial RCM frameworks address this gap.