Mandatory HSN Code Reporting in GSTR-1 & GSTR-1A

The department expects businesses to report HSN codes in GSTR-1 and GSTR-1A, which is filed either monthly or quarterly based on turnover. Table 12 in the return captures a summary of these codes. The aggregate annual turnover (AATO) determines the specific requirements for HSN reporting, ensuring tailored guidelines for each size and scale taxpayer.

Phase-Wise Changes in GSTR 1

The government introduced HSN reporting in a systematic way to streamline GST compliance and improve reporting accuracy. Each phase reflects the evolving vigilance of tax administration and the increasing need for standardised reporting among businesses. While balancing regulatory standards with practical business needs, it also ensures better data quality for tax authorities.

Here’s a breakdown of each phase and its key requirements:

Phase 1: (Part 1 - Effective April 2022; Part 2 - Effective August 2022)

• In April 2022, the GST framework implemented Phase 1 (Part 1) of the HSN code reporting system. Businesses below the ₹5 crore AATO threshold were only required to file 2-digit codes, while those above ₹5 crore were to report 4-digit codes in GSTR-1. 
• From August 2022, Phase 1 (Part 2) was implemented. Taxpayers above ₹5 crore AATO were required to file 6-digit codes while it was still 2-digits for those below ₹5 crore. 
• HSN entry was permissible, with the system flagging errors but still allowing for submission of the return.

Phase 2: (Effective November 2022)

• Phase 2 required businesses with a turnover up to ₹5 crore to use 4-digit HSN codes, while businesses above ₹5 crore maintained 6-digit codes. 
• Manual entry continued to be allowed, with the system flagging errors but still allowing for submission of the return.

Phase 3: (Effective May 2025 Return Period Onwards)

• Phase 3 marks a strict shift. Taxpayers will no longer be allowed to manually enter HSN codes. 
• HSN codes must be selected from a dropdown list on the GST portal. Once selected, the corresponding HSN description will auto-populate and cannot be edited.
• This shift ensures accurate categorisation, reduces errors, and maintains consistency across all GST submissions.

HSN Reporting Mandate Across All Phases: At a Glance

Smarter HSN for B2B/B2C and its Impact on GSTR-1 Filing

With Phase 3, the GST portal moves beyond generic HSN summary reporting and now requires businesses to separately declare HSN codes for both B2B (business-to-business) and B2C (business-to-consumer) supplies. For the first time, Table 12 of GSTR-1 is dynamically split, so you must provide specific HSN details for each type of transaction.

This granular level of reporting allows the system to run real-time validations. As you input HSN summary data for B2B and B2C, the system will automatically cross-check it against the supply values reported elsewhere in your return (such as in invoices and summary tables for B2B/B2C).

Let us assume that there is some discrepancy between your report in Table 12 and the underlying supply data. In that case, there is a notification that is raised in the portal that helps identify the discrepancies so that one can make corrections before the return is submitted. 

With the additions that have been made, Phase 3 not only guarantees transparency and compliance but also helps reduce errors that occur downstream. It prevents the need for complex reconciliations and lowers the likelihood of receiving mismatch GST notices., and reduces the likelihood of receiving mismatch GST notices. For both the businesses and the tax authorities, the end outcome is cleaner, more trustworthy data.

Benefits of Mandatory HSN Reporting

Reduces Classification Errors

HSN codes help standardise the classification of goods and services, lowering the risk of misinterpretation and mistakes in tax calculation.

Enables Faster Processing

Correct HSN codes, system-driven validations, and auto-population features reduce manual checks, enabling quicker filing and reconciliations.

Enhances Data Consistency

Standardised reporting across industries and taxpayers ensures more accurate, reliable data for compliance, audits, and analytics.

Facilitates International Trade Alignment

HSN is a globally recognised system used in customs and trade. Its adoption simplifies cross-border compliance and reporting.

Prevents Tax Evasion

Mandatory, detailed HSN disclosure makes hiding or misreporting transactions harder, helping authorities track taxable activities more accurately.

Reduces Notices and Disputes

Accurate, mandated classification significantly decreases GST mismatch notices, audits, and back-and-forth queries with authorities.

Supports Data-driven Policymaking

Clean and structured HSN data gives the government and industry better insights for designing sector-specific tax and trade policies.

Penalties for Failing to Report HSN Codes Correctly on GSTR-1

HSN codes are unique identifiers closely linked to specific GST rates. As return filing becomes more system-driven, simply selecting the correct HSN can allow the portal to auto-populate tax rates and remove the need for manual descriptions. 

However, selecting the wrong HSN not only triggers incorrect tax calculation and compliance discrepancies but can also result in a mismatch between supplier and buyer records, inviting further scrutiny.

Failure to comply can lead to tax assessments, may draw penalties up to ₹50,000 (₹25,000 each under CGST and SGST, as per Section 125), and in some cases, lead to the blocking or reversal of input tax credit for your customers. In summary, inaccurate HSN reporting can expose suppliers and buyers to regulatory risk, disrupt cash flow, and damage business relationships.

Challenges Faced by Taxpayers

• No Manual Entry, Only Dropdown Selection: Phase 3 removes the option to manually enter HSN codes and requires selection from a pre-defined dropdown list. Taxpayers must adapt to the portal’s interface, which can be time-consuming for those with a wide variety of goods and services.
• Master Data Updates: Businesses must correctly map all products and services to the official HSN codes in their systems. Errors or outdated data can prevent successful filing, making early and accurate master data maintenance a must.
• Loss of Flexibility in Descriptions: With auto-populated HSN-based descriptions, businesses can no longer tailor item names or details as per their internal or customer-facing needs.
• Real-Time Portal Validations: The GST portal performs instant cross-checks between HSN summary details and supply values (B2B, B2C) in other return tables. Any inconsistencies trigger immediate system warnings, requiring prompt rectification before filing.
• Increased Need for Staff Training: Employees who are accustomed to referring to internal code sheets or memory will need training on code selection, understanding official HSN descriptions, and navigating the portal.
• Return Filing Delays: Errors or warnings triggered by the system can slow down the return filing process, potentially causing last-minute delays or blocking you from filing until all issues are resolved.