# Classification under GST

Classification determines the applicable rate of GST. The wrong heading → wrong rate → potential demand, interest and penalty.

## A. Classification of GOODS

1. Goods are classified using the First Schedule to the Customs Tariff Act, 1975, based on HSN codes.

2. Hierarchy:

Sections → Chapters → Headings → Sub-headings → Tariff items

3. HSN (Harmonized System of Nomenclature) is an international classification developed by the World Customs Organization (WCO).

Comprises ~5,000 commodity groups identified by a 6-digit code (extendable).
India extends HSN to 8 digits for greater granularity.

4. Indian Customs Tariff includes:

Rules of Interpretation, and
General Explanatory Notes.

These rules guide classification, and GST rate is then determined based on the classified heading.

## B. Classification of SERVICES

1. A new Scheme of Classification of Services is used — a modified version of the United Nations Central Product Classification (UN CPC).

2. Hierarchy:

Chapter → Section → Heading → Group → Tariff item / Service Code

3. The major Sections are:

Section 5 – Construction services
Section 6 – Distributive trade services; accommodation, food and beverage service; transport services; gas and electricity distribution services
Section 7 – Financial & related services; real estate; rental and leasing services
Section 8 – Business and production services
Section 9 – Community, social and personal services and other miscellaneous services

4. Rate of tax = rate specified for the Service Code under which the service is classified.

## Practical Significance

A correctly identified HSN/SAC ensures the right rate notification entry is applied.
Different headings can attract very different rates (e.g., 5% vs 18%).

Worked example

### Example 1

Example 1 (Goods): A textile fabric is classified under Chapter 52 of the Customs Tariff (Cotton). Its 8-digit HSN code is identified, and the rate from the GST rate notification corresponding to that heading is applied.

### Example 2

Example 2 (Services): A construction service for a residential complex falls under Section 5 of the Service Classification Scheme. The applicable Service Code carries the rate notified for construction services.

⚠️ Common exam mistakes

Using HSN classification meant only for customs without checking the GST rate notification entry.
Picking a heading by description alone without consulting Rules of Interpretation when the goods could fall in multiple headings.
Treating a 'works contract' as goods — under GST, works contract is classified as a service.

Reference: — First Schedule to Customs Tariff Act, 1975; Scheme of Classification of Services under GST

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Classification under GST – Goods and Services

Worked example

⚠️ Common exam mistakes