CA Bimal Jain

CA Bimal JainDetailed Report of CEA led Panel on RNR released – The Report bats for lower exemptions and higher threshold for GST

The Committee headed by the Chief Economic Adviser Dr. Arvind Subramanian (“the Committee”), had given its recommendations to the Finance Minister last week, recommending a four-tier rate structure wherein some essential items will be taxed at 12%, gold and precious metals at 2-6%, some so-called sin or demerit goods like luxury cars and tobacco products at 40% and most goods and all services at 17-18%.

These rates were derived from a Revenue Neutral Rate (“RNR”) of 15%-15.5%. RNR is a single tax rate wherein there will be no revenue losses to States and the Centre from transition to Goods and Services Tax (“GST”). However, the Report added that revenue neutrality may not be enough to guarantee that there will be no price impact across all categories of goods and services.

Summary of Recommended Rate Options (in %)
RNR Rate on precious metals “Low” rate (goods) “Standard” rate (goods and services) “High/Demerit” rate or Non-GST excise (goods)
Preferred  

15

6  

12

16.9  

40

4 17.3
2 17.7
Alternative  

15.5

6  

12

18.0  

40

4 18.4
2 18.9

Source: Committee’s calculations.

Note: All rates are the sum of rates at Centre and States

In its detailed Report released on Wednesday on the RNR under GST, the Committee favoured keeping exemptions to a minimum, pointing out that India loses revenue equivalent to around 2.7% of gross domestic product on account of exemptions. Per the Committee, keeping exemptions to a minimum under the GST will be key to keeping tax rates low and checking the inflationary impact of the proposed new indirect taxation regime. It also favoured adopting the States’ list for exemptions to bring down the overall exemptions to less than 100. It also pointed out that while a standard rate of 18% will not have any impact on inflation, a higher rate of 22% will increase inflation by up to 0.7%.

On thresholds, the Committee batted for a high revenue threshold of Rs. 40 lakhs to exclude small traders from the GST net and to minimize the burden on small taxpayers.

The Committee acknowledged that keeping GST rates low is also important given the “perception issue”, especially when it comes to taxing services. A lower rate will be seen as more politically acceptable and will help taxpayer compliance.

Highlighting the advantages of GST, the Committee also said the Government’s anti-black money initiative can be complemented by GST, especially if it is extended to as many goods and services as possible, especially alcohol, real estate and precious metals.

At the same time, the Committee also lists out several risks in GST implementation. One risk of setting an RNR that is low is the re-emergence of a trust deficit between the Centre and the States as happened in relation to compensation for lost CST revenues after the global financial crisis. It further observed that revenue shortfall could result in a “double whammy” for Centre as it would also affect the fiscal deficit and might delay compensation to the states, resulting in “trust deficit”.

The Committee further suggested that, the revenue shortfall, could be overcome by raising non-GST taxes (petroleum, tobacco and tobacco products, and alcohol). The Centre may also relax the deficit targets, the Report said, adding, “A moderately higher fiscal deficit due to a low GST will benefit consumers, especially poorer ones.

To access complete Report of the Committee, please click on the link below:

https://taxguru.in/goods-and-service-tax/download-report-revenue-neutral-rate-gst-rate-structure.html

In order to read our last article on RNR recommendations by the Committee, please click on the link below:

https://taxguru.in/goods-and-service-tax/cea-led-panel-recommends-rnr-1718-eliminating-additional-tax-1-interstate-supply-goods.html

(Author can be reached at Email: bimaljain@hotmail.com)

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