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A finance analyst at an Indian aluminium products company is reviewing the new sales orders for the quarter. One order is Rs 40 lakh of aluminium wire rod for a customer building electrical conductors. Another is Rs 35 lakh of aluminium bare foil for a customer manufacturing capacitors. Both look like commodity aluminium. Both attract the same 18 per cent GST rate under the current schedule. The analyst is about to raise both invoices under HSN 7605 (aluminium wire) as the simpler code. The controller flags the invoicing choice — HSN 7605 covers aluminium wire (drawn from a round cross-section not exceeding 7 millimetres); HSN 7607 covers aluminium foil, plates, sheets and strip. Same 18 per cent output GST, but different sub-heading treatment on the raw-material inputs, different customs entry heading for the export leg, and different Rule 89(5) inverted-duty-refund eligibility on the input-side ITC accumulation. A single-code shortcut on the invoicing turns into a Section 74 misclassification allegation three years later when the department cross-references the shipping bills and the ITC refund claims against the invoice HSN. The question — which HSN, and how do you decide?
The Harmonised System of Nomenclature is the World Customs Organization's product classification system covering roughly 200 countries. India's Customs Tariff Act 1975 adopts the WCO Harmonised System with an India-specific 8-digit extension. The structure has 21 sections (Roman numerals I through XXI, grouping cognate industries), 99 chapters (India's tariff extends the WCO's 97 chapters with national Chapters 98 and 99 for special classifications), a 4-digit heading, a 6-digit sub-heading, and an 8-digit tariff item. Section 9(1) of the CGST Act 2017 imports the same classification system for the GST rate schedule under Notification 1/2017-Central Tax (Rate) — the rate applied on a supply is the rate against the HSN of that supply in the schedule. Notification 78/2020-Central Tax dated 15 October 2020 fixes the reporting requirement — 4-digit HSN for B2B supplies where turnover is up to Rs 5 crore, 6-digit HSN for turnover above Rs 5 crore, and 8-digit HSN for every export, every import, and every e-invoice under Rule 48(4). Classification itself is governed by the General Rules for the Interpretation of the First Schedule — Rule 1 makes section notes and chapter notes binding, Rule 2(a) covers incomplete or unfinished articles with the essential character of the finished article, Rule 3(a) prefers the most specific description over the general one, Rule 3(b) classifies mixtures and composite goods by essential character, Rule 3(c) is the last-in-order tie-breaker, and Rule 6 extends the same logic to the sub-heading level. Where the classification is disputed, Section 96 through Section 106 of the CGST Act 2017 provide the Advance Ruling machinery — a Section 97 application, an Authority for Advance Ruling ruling binding under Section 103, and an appeal to the Appellate Authority under Section 100.
A product classification working paper against every distinct SKU that captures the 8-digit HSN, the section notes and chapter notes read, the General Rules applied in sequence, the specific-versus-general reasoning under Rule 3(a) where relevant, and the essential-character reasoning under Rule 2(a) or Rule 3(b) where the product is a component or a composite good. A rate-master schedule that ties the 8-digit HSN to the applicable output GST rate under Notification 1/2017-CTR (as amended). A cross-check against the input-side HSNs on the purchase register to identify Rule 89(5) inverted-duty-structure candidates — where the output rate is lower than the aggregate input rate, the accumulated ITC becomes refundable under Rule 89(5), and the refund eligibility hinges on the HSN classification of both the output supply and the input materials. A Section 97 Advance Ruling escalation calendar for prospective transactions where the classification is genuinely ambiguous — the ruling application filed before the transaction converts a Section 74 misclassification exposure into a Section 103 binding ruling. A defect log that captures any historical misclassification identified during monthly review, escalated to a Section 73 voluntary payment (10 per cent penalty ceiling) with interest under Section 50 before the department picks it up as a Section 74 wilful misstatement (100 per cent penalty ceiling).
Every SKU on the sales master carries a defensible 8-digit HSN classification with the working paper attached — the section notes read, the chapter notes read, the General Rules applied in sequence. Every invoice — B2B or B2C, domestic or export — carries the correct HSN at the correct digit level per Notification 78/2020. The Rule 89(5) inverted-duty-refund eligibility on each output line is documented against the input-side HSN pattern, and the refund claim under Rule 89(5) reconciles to the invoice HSN. The Section 97 Advance Ruling calendar tracks every prospective classification that is genuinely unclear — the ruling application filed before the transaction, the ruling received before the invoicing pattern is scaled, and the Section 103 binding ruling documented against the SKU. Any historical misclassification identified during monthly review is regularised through a Section 73 voluntary payment with interest under Section 50, capped at the 10 per cent penalty ceiling, rather than left open to a Section 74 allegation at the 100 per cent ceiling — the tenfold penalty gap that the classification discipline on the finance function's side is expected to hold.
You are looking at a product about to ship. The sales team has raised the delivery challan and the invoice request is on your desk. Someone asks — which HSN code do we invoice at? Is it four digits or six or eight? Which chapter? What if the product is a component of something else, or a mixture of materials, or something the schedule does not describe in the exact words your ERP uses?
The HSN classification is not a lookup exercise on a spreadsheet. It is a structured determination that decides your output GST rate, your inverted-duty-refund eligibility, your customs entry, and — three years later at an audit — whether the department reads a misclassification as a bona fide dispute at 10 per cent penalty or as a wilful misstatement at 100 per cent.
The quick answer
The Harmonised System of Nomenclature (HSN) is the World Customs Organization’s product classification system that India’s Customs Tariff Act 1975 adopts with an India-specific 8-digit extension. The structure is 21 sections, 99 chapters, a 4-digit heading, a 6-digit sub-heading, and an 8-digit tariff item. Section 9(1) of the CGST Act 2017 uses the same classification for the GST rate schedule.
To find the right HSN — read the section notes and chapter notes for your product area (Rule 1 of the General Rules for Interpretation makes them binding); walk down to the 4-digit heading that describes your product most specifically (Rule 3(a) prefers specific over general); apply Rule 2(a) if your product is an incomplete or unfinished version of a finished article that already has the essential character; apply Rule 3(b) if your product is a mixture or composite good and classify by the material giving essential character; and, only when the classification is genuinely irresolvable, apply Rule 3(c) — the last-in-numerical-order tie-breaker — or file a Section 97 Advance Ruling application before the transaction.
Step 1 — Understand the HSN structure
The First Schedule to the Customs Tariff Act 1975 has five layers:
- 21 Sections (Roman numerals I to XXI), grouping cognate industries. Section VI covers products of the chemical or allied industries; Section VII covers plastics and rubber; Section XV covers base metals and articles of base metal; Section XVI covers machinery and mechanical appliances.
- 99 Chapters (2-digit). India’s tariff adopts the WCO’s 97 chapters and adds national Chapters 98 and 99 for special classifications (project imports, laboratory chemicals, and similar residuals). Chapter 76 within Section XV covers aluminium and articles thereof.
- 4-digit headings — the primary classification unit. HSN 7605 covers aluminium wire; HSN 7607 covers aluminium foil, plates, sheets and strip.
- 6-digit sub-headings — the international specialisation layer that every WCO member country carries in common.
- 8-digit tariff items — the India-specific extension. HSN 7605 21 00 covers aluminium wire of aluminium alloys, not of round cross-section not exceeding 7 mm. HSN 7607 11 90 covers aluminium foil (not backed), rolled but not further worked, of a thickness not exceeding 0.2 mm.
The Notification 1/2017-Central Tax (Rate) GST rate schedule is aligned to the same 4-digit / 6-digit / 8-digit structure. The rate you apply on a supply is the rate against the HSN of that supply in the schedule.
Step 2 — Match the reporting requirement to your turnover band
Notification 78/2020-Central Tax dated 15 October 2020 fixes three reporting bands:
- Turnover up to Rs 5 crore in the preceding FY — 4-digit HSN on B2B tax invoices. B2C is optional at this band.
- Turnover above Rs 5 crore in the preceding FY — 6-digit HSN on every tax invoice, B2B or B2C. This band also crosses the e-invoicing threshold under Rule 48(4), which in turn requires the 8-digit HSN for the Invoice Reference Number (IRN) generation on every B2B invoice.
- Every export, every import, every e-invoice — 8-digit HSN, irrespective of turnover.
The band is anchored to the preceding-year turnover. A company that crossed Rs 5 crore in FY 2024-25 moves to 6-digit invoicing for FY 2025-26 and does not fall back to 4-digit even if the current year’s turnover dips below Rs 5 crore. Getting the reporting digit level wrong is a Section 122 offence (Rs 25,000 penalty per invoice at the ceiling) that surfaces at the invoice-level audit rather than at the return-level review.
Step 3 — Apply the General Rules for Interpretation
The classification itself is governed by six rules that sit at the top of the First Schedule.
Rule 1 — read the section notes and chapter notes first
The titles of Sections, Chapters and sub-Chapters are provided for ease of reference only; for legal purposes, classification is determined according to the terms of the headings and any relative Section or Chapter Notes. This is the load-bearing rule — the section notes and chapter notes bind the classification, not merely the descriptive text of the headings. Section XV has notes excluding electrical machinery (which sits in Section XVI); Chapter 76 has notes clarifying that unwrought aluminium falls in a specific heading and articles of aluminium fall elsewhere; skipping the notes and going straight to the heading text is where most self-classifications fail at audit.
Rule 2(a) — incomplete or unfinished articles
Any reference in a heading to an article shall be taken to include that article incomplete or unfinished, provided that as presented it has the essential character of the complete or finished article. A partly-machined aluminium casting delivered in near-final shape for a specific engine block may be classified as the engine block even if it still requires final machining, because the casting already carries the essential character of the finished component.
Rule 3(a) — specific over general
The heading which provides the most specific description shall be preferred to headings providing a more general description. Where a product is described in narrow, specific terms in one heading and in broader, generic terms in another, the specific heading applies. A specialised aluminium heat-sink extrusion for a semiconductor cooler is not classified under the generic Chapter 76 aluminium bars-and-rods heading if a more specific heading for heat-exchange articles applies.
Rule 3(b) — essential character for mixtures
Mixtures, composite goods consisting of different materials or made up of different components shall be classified as if they consisted of the material or component which gives them their essential character. A gold-and-diamond ring is classified as gold jewellery under HSN 7113 rather than as a diamond article under HSN 7102, because the gold is the essential character of the finished ring. The making-charge treatment on gold jewellery — an issue the Bombay High Court and the AAAR have visited more than once — is a specific application of Rule 3(b) that the sales tax cell of a jewellery business needs to hold ready.
Rule 3(c) — last in numerical order
When Rules 3(a) and 3(b) do not resolve the classification, the heading that occurs last in numerical order among those which equally merit consideration applies. Rule 3(c) is a tie-breaker of last resort. Reaching it means the classification is genuinely ambiguous — the safer play is to file a Section 97 Advance Ruling application before the transaction and take the department’s binding ruling rather than a self-classification.
Rule 6 — the sub-heading logic
The classification of goods in the sub-headings of a heading shall be determined according to the terms of those sub-headings and any related sub-heading Notes and, mutatis mutandis, to the above Rules — but only sub-headings at the same level are comparable. You cannot compare a 6-digit sub-heading of one heading against an 8-digit tariff item of another heading; the comparison must be at the same digit level.
Step 4 — the illustrative aluminium wire rod vs foil case
Take the sales analyst’s Rs 40 lakh aluminium wire rod order and the Rs 35 lakh aluminium bare foil order.
- Aluminium wire rod — HSN 7605 (aluminium wire), with the specific 8-digit tariff item depending on alloy composition (7605 21 00 for aluminium alloys, 7605 11 00 for aluminium not alloyed, of round cross-section not exceeding 7 mm). Output GST rate — 18 per cent under Schedule III of Notification 1/2017-CTR.
- Aluminium bare foil — HSN 7607 (aluminium foil, plates, sheets and strip), with the specific 8-digit tariff item depending on thickness and whether backed (7607 11 90 for aluminium foil not backed, rolled but not further worked, thickness not exceeding 0.2 mm). Output GST rate — 18 per cent under Schedule III of Notification 1/2017-CTR.
Same output rate. Different HSN — and therefore different classification against Notification 5/2017-Central Tax (Rate), which lists the goods for which the Rule 89(5) inverted-duty-refund is restricted. Under Rule 89(5) of the CGST Rules, where the aggregate input-side ITC rate is higher than the output-side GST rate for a supply, the accumulated ITC becomes refundable — but only for the eligible HSN categories, and only after the Rule 89(5) formula walkthrough for a specialty chemicals exporter is applied against the specific input-output pattern for the tax period.
A single-code shortcut on the invoicing — putting both the wire rod and the foil under HSN 7605 for convenience — turns into an audit exposure. The shipping bill for the foil export goes out at HSN 7607; the invoice says HSN 7605; the Rule 89(5) refund claim is computed against a mismatched HSN pair. Three years later a Section 74 show-cause notice arrives against the wilful misstatement allegation, and the tenfold penalty gap between Section 73 (10 per cent, bona fide) and Section 74 (100 per cent, wilful) is what the classification working paper has to answer.
Step 5 — the AAR route for disputed classifications
Where your classification and the department’s classification diverge — or where you have to invoice a new SKU whose classification is genuinely ambiguous — the Section 97 Advance Ruling application is the statutory route.
Section 96 of the CGST Act 2017 constitutes the Authority for Advance Ruling in each state. Section 97 lists the questions eligible for advance ruling — the first of which is “classification of any goods or services or both.” An applicant files an application in Form GST ARA-01 with the prescribed fee, stating the specific question. The AAR issues a ruling that is binding on the applicant and on the jurisdictional officer under Section 103. An appeal against the AAR ruling sits with the Appellate Authority for Advance Ruling under Section 100.
The AAR path is prospective. It is not a mechanism to regularise a past misclassification (that runs through Section 73 or Section 74). But for a new SKU launch, a new export contract, or a new composite good where Rule 3(b) essential-character is finely balanced, the AAR route is what converts a prospective Section 74 exposure into a Section 103 binding ruling before the invoicing pattern is scaled across the year.
What the wrong HSN actually costs
Four downstream costs stack up behind a misclassification:
- Wrong output GST rate. A supply at 5 per cent when the schedule says 12 per cent surfaces at the annual GSTR-9 reconciliation as a short-payment, with Section 50 interest at 18 per cent per annum from the original monthly due date.
- Wrong inverted-duty-refund eligibility. The Rule 89(5) refund computed against an HSN that Notification 5/2017-CTR restricts is a bad refund, recoverable under Section 74 with interest and penalty.
- Wrong customs entry. A shipping bill filed under the wrong HSN affects the Basic Customs Duty computation on imports and the drawback rate on exports — and, on the export side, feeds into the LUT export-without-payment-of-tax discipline that a Rule 96A bond covers.
- Section 74 escalation risk. A sustained pattern of misclassification into a lower-rate HSN reads as wilful misstatement at the 100 per cent penalty ceiling. A one-off bona fide dispute reads as Section 73 at 10 per cent. The documentation on the finance function’s side is what the difference turns on.
For an industry-specific worked example of how the HSN structure interacts with sector-level input-output costing and refund accumulation, the aluminium refinery cost reconciliation walkthrough traces the bauxite-alumina-metal chain through the Chapter 26 (ores and concentrates) to Chapter 76 (aluminium articles) transition, which is where the biggest rate spreads and the biggest refund pools sit.
When the manual HSN classification outgrows itself
A small manufacturer with 20 SKUs on a single chapter — say a plastic-injection-moulding house with everything sitting in Chapter 39 — can hold the HSN classification in a spreadsheet: SKU, description, 8-digit HSN, output rate, notification reference, working paper attached. The controller signs off annually and refreshes on a schedule change.
A multi-product manufacturer with 500 SKUs across five chapters (aluminium and copper articles, chemical intermediates, electrical machinery, packaging, and finished consumer durables), with monthly new-SKU additions, with a mix of B2B and export sales pulling the reporting requirement between 4-digit and 8-digit, and with Rule 89(5) inverted-duty-refund exposure on multiple input-output pairs, is running a rolling exception queue that a spreadsheet cannot hold reliably. Each miss compounds — the wrong HSN on the invoice, the wrong HSN on the shipping bill, the wrong HSN on the refund claim, the wrong HSN on the GSTR-9 annual reconciliation — and the Section 74 exposure sits open across the four-year Section 74 limitation window.
At that scale, moving the SKU-to-HSN mapping, the section-note and chapter-note working paper, the rate-schedule cross-check, and the Rule 89(5) refund-eligibility computation onto continuously refreshed detection — where Terra Insight’s GST reconciliation software treats the HSN classification queue and the refund-eligibility register as first-class monthly outputs rather than a spreadsheet the tax executive reconstructs at year-end — is what keeps the tenfold Section 73 versus Section 74 penalty gap closed by design rather than by post-audit firefighting. Below that scale, the annual controller-signed HSN master and the discipline of running the General Rules by hand is what builds the reconciler’s judgement for when scale demands the shift.
Go deeper
- Rule 89(5) inverted duty refund — the specialty chemicals worked case
- How do I claim refund under Rule 89(5) for inverted duty structure?
- What is an LUT and when do I need one for exports?
- Aluminium refinery cost reconciliation — the Chapter 26 to Chapter 76 transition and the HSN 7605 versus 7607 split
- GST reconciliation software for India
Frequently Asked Questions
My turnover is Rs 4 crore. Do I invoice at 4-digit HSN or 6-digit?
4-digit for B2B supplies. Notification 78/2020-Central Tax dated 15 October 2020 fixes the reporting requirement at three bands — a registered person with aggregate turnover in the preceding financial year up to Rs 5 crore mentions the 4-digit HSN code on tax invoices for B2B supplies (B2C is optional at that band); a registered person with turnover above Rs 5 crore mentions the 6-digit HSN code on every invoice; and every export, every import, and every e-invoice under Rule 48(4) carries the 8-digit HSN code regardless of turnover. The band is anchored to the preceding FY turnover, so a company that crossed Rs 5 crore in FY 2024-25 moves to 6-digit invoicing for FY 2025-26 and does not fall back even if the current year’s turnover dips. E-invoicing itself is mandatory once turnover crosses Rs 5 crore in any preceding financial year, which pulls the 8-digit HSN discipline into every invoice for that band irrespective of what Notification 78/2020 would otherwise require.
How do I actually decide which HSN chapter my product sits in?
Read the section notes and the chapter notes first — Rule 1 of the General Rules for Interpretation makes them binding on the classification, not merely descriptive. The 21 sections of the First Schedule to the Customs Tariff Act 1975 group cognate industries — Section VI is chemicals, Section VII is plastics and rubber, Section XV is base metals and articles of base metal, Section XVI is machinery and mechanical appliances. Each section carries notes that either include or exclude specific product categories from that section’s coverage. Within a section, the chapters (2-digit) further specialise — Chapter 76 within Section XV covers aluminium and articles thereof. Within a chapter, the heading (4-digit) narrows further — HSN 7605 covers aluminium wire and HSN 7607 covers aluminium foil, plates, sheets and strip. Within a heading, the sub-heading (6-digit) and the tariff item (8-digit) specialise by form, alloy, and thickness. Work top-down through the notes at each level before you land on the 8-digit tariff item; a classification arrived at without reading the notes is a Section 74 misclassification exposure waiting to surface at audit.
The product could fit two different HSN codes. Which one do I pick?
Apply Rule 3 of the General Rules for Interpretation in sequence. Rule 3(a) — the heading which provides the most specific description shall be preferred to headings providing a more general description. A product that is described in narrow, specific terms in one heading and in broader, generic terms in another falls under the specific heading. Rule 3(b) — where a product is a mixture or a composite of different materials or components, classify by the material or component that gives it its essential character. A gold-and-diamond ring classified as gold jewellery under HSN 7113 rather than as a diamond article under HSN 7102 because the gold is the essential character of the finished ring. Rule 3(c) — where Rules 3(a) and 3(b) do not resolve the classification, the heading that occurs last in numerical order among the equally-meriting headings applies. Rule 3(c) is a tie-breaker of last resort — reaching it means the classification was genuinely ambiguous and a Section 97 Advance Ruling application is the safer route than a self-classification that the department may later reopen.
My product is a component of a larger machine. Do I classify it as the component or the finished article?
Classify by the component’s own description unless Rule 2(a) applies. Rule 2(a) says any reference in a heading to an article shall be taken to include that article incomplete or unfinished, provided that as presented it has the essential character of the complete or finished article. An unfinished aluminium casting delivered in near-final shape for a specific engine block may be classified as the engine block under Section XVI even if it still requires machining, because the casting already has the essential character of the finished component. A raw ingot delivered to a foundry does not — it is generic aluminium under Chapter 76. The essential-character test is fact-specific and turns on how far along the manufacturing process the article is when the invoice is raised. This is one of the most common disputes at customs entry — a partly-machined spare part invoiced as a spare part when the department reads it as a finished sub-assembly, or vice versa. When the essential-character judgement is finely balanced, apply for an Advance Ruling under Section 97 before scaling the invoicing across the year.
The department is disputing my HSN. What are my options?
Two paths sit in parallel — Section 74 or Section 73 depending on the department’s characterisation of the misclassification, and Section 100 (Appellate Authority for Advance Ruling) if you already hold an AAR ruling that the department is now contesting. Where there is no AAR ruling on file and the department issues a show-cause notice under Section 74 (wilful misstatement or suppression, 100 per cent penalty ceiling), the defence is a documented classification working paper — the section notes read, the chapter notes read, the General Rules applied in sequence, the specific-versus-general reasoning under Rule 3(a), and (where applicable) the essential-character reasoning under Rule 2(a) or Rule 3(b). A defensible working paper collapses the department’s Section 74 allegation into a Section 73 bona fide dispute (10 per cent penalty ceiling), which is the tenfold penalty gap that the documentation alone drives. For prospective classifications where the answer is genuinely unclear, the Section 97 Advance Ruling application filed before the transaction is the cleanest defence — the ruling is binding on the department under Section 103 for the applicant and the jurisdictional officer, and it eliminates the Section 74 risk on the underlying invoicing pattern.
Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →
- ▸ First Schedule to the Customs Tariff Act 1975 read with Section 9(1) of the CGST Act 2017 — The Customs Tariff Act 1975 adopts the World Customs Organization Harmonized Commodity Description and Coding System (Harmonised System, or HS) with an India-specific 8-digit extension. The structure is 21 sections (Roman numerals I to XXI, grouping cognate industries), 99 chapters (India's tariff includes national Chapters 98 and 99 alongside the WCO's 97 chapters), a 4-digit heading, a 6-digit sub-heading, and an 8-digit tariff item that is the India-specific extension. Section 9(1) of the CGST Act 2017 makes the same HSN structure the basis for the GST rate schedule under Notification 1/2017-Central Tax (Rate) — the rate applied on a supply is the rate against the HSN of that supply in the schedule.
- ▸ General Rules for the Interpretation of the First Schedule, Customs Tariff Act 1975 — The classification of goods in the First Schedule shall be governed by the following principles. Rule 1 — the titles of Sections, Chapters and sub-Chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes. Rule 2(a) — any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. Rule 3(a) — the heading which provides the most specific description shall be preferred to headings providing a more general description. Rule 3(b) — mixtures, composite goods consisting of different materials or made up of different components shall be classified as if they consisted of the material or component which gives them their essential character. Rule 3(c) — when goods cannot be classified by reference to (a) or (b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration. Rule 6 — the classification of goods in the sub-headings of a heading shall be determined according to the terms of those sub-headings and any related sub-heading Notes and, mutatis mutandis, to the above Rules.
- ▸ Notification 78/2020-Central Tax dated 15 October 2020 — A registered person having aggregate turnover in the preceding financial year exceeding rupees five crores shall mention 6-digit HSN Code on tax invoices issued by him. A registered person having aggregate turnover in the preceding financial year up to rupees five crores shall mention 4-digit HSN Code on tax invoices issued by him in respect of B2B supplies. In case of exports and imports, HSN Code is required at 8-digit level. E-invoicing under Rule 48(4) requires the 8-digit HSN Code on the invoice reference number (IRN) generation. The notification is what fixes the three reporting bands — 4-digit (turnover between Rs 1.5 crore and Rs 5 crore), 6-digit (turnover above Rs 5 crore), and 8-digit (all exports, all imports, and every e-invoice).
- ▸ Section 96 and Section 97, Central Goods and Services Tax Act 2017 — Section 96 — the Authority for Advance Ruling constituted under the provisions of a State Goods and Services Tax Act or Union Territory Goods and Services Tax Act shall be deemed to be the Authority for Advance Ruling in respect of that State or Union territory. Section 97 — an applicant desirous of obtaining an advance ruling under this Chapter may make an application in such form and manner and accompanied by such fee as may be prescribed, stating the question on which the advance ruling is sought. Sub-section (2) enumerates the questions eligible for advance ruling — classification of any goods or services or both; applicability of a notification; determination of time and value of supply; admissibility of input tax credit; determination of the liability to pay tax on any goods or services or both; whether registration is required; and whether any particular thing done by the applicant amounts to a supply. The AAR route is the statutory mechanism for a disputed classification — the ruling is binding on the applicant and on the jurisdictional officer under Section 103, and appealable to the Appellate Authority for Advance Ruling under Section 100.
- ▸ Section 74, Central Goods and Services Tax Act 2017 — Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid. The penalty under Section 74 is 100 per cent of the tax found short — the ceiling that a sustained misclassification of a product into a lower-rate HSN attracts if the department reads the pattern as wilful misstatement rather than as a bona fide interpretation dispute. The Section 73 counterpart — bona fide short-payment without fraud or wilful misstatement — is capped at 10 per cent of the tax, or Rs 10,000, whichever is higher. The tenfold gap between the two penalty ceilings is what a documented classification working paper on the deductor's side is expected to hold.