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Neha Somani (CA, B.Com)

CA Neha SomaniIn the proposed GST regime, the revenue of the Government would not be the same in comparison with the present tax structure due to tax credit mechanism or otherwise. Therefore, an adjustment in tax rate is required to avoid reduction in revenue of the Government. Hence, the rate of tax will have to be suitably adjusted to ensure that tax revenue does not reduce. This rate is termed as ‘Revenue Neutral rate’ (RNR). It is the rate at which tax revenue remains the same despite giving credit of duty paid on inputs and other factors.

RNR, in layman terms, is the rate that allows the Centre and states to sustain the current revenues from tax collections and, therefore, takes within its ambit, amongst others, any tax losses because of taxes subsumed and/or phased out, grant of input tax credits as well as sharing of the tax base, i.e. taxation of goods and services.

It is the tax rate that will allow the Government to receive the same amount of money despite of changes in tax laws. In the GST regime, the revenue of the government would not be same in comparison with the present tax structure due to tax credit mechanism, removal of cascading effect, or otherwise. Therefore an adjusted in tax rate is required to avoid reduction in revenue of the government. This adjusted Rate is termed as Revenue Neutral Rate (RNR).

Salient Features

  • Rate which will give at-least the same level of revenue, which the Centre and States are presently earning from Indirect taxes.
  • A case of no revenue loss to exchequer
  • Proposed / talked about @ 16% to 27%

(likely to be much lower in the present circumstances due to opposition)

  • Committee on GST rates has suggested RNR of 15 % to 15.5%
  • States want higher RNR but it may not be desirable

In the process of determining the tax rate various facts, figures and factors are taken into consideration before arriving at revenue neutral rate. RNR is the good indicator of future requirement in calculating the adequate compensation to both state as well as central government.

For the determination of RNR, the National Institute of Public Finance and Policy had undertaken a study on Revenue Implications of GST and Estimation of Revenue Neutral Rate. NIPFP recommends that GST rate will be same as the combined central and state taxes on Goods at present but it should be lower than the combined central and state taxes on services.

The Sub-committee had proposed a total RNR of almost 27 percent for the dual – structure GST. While the state GST component is proposed to be 13.91% , the central GST component is proposed at 12.77 %. This rate computation work in progress and its need to be updated as per the latest figures of revenue collection. As per Dr . P. Shome , the RNR rates would be fixed at little higher level to ensure that there would be no revenue loss from the proposed changes and a normal growth is maintained.

Factors for Determination of RNR

Present tax rates and collection in absolute numbers:

  • Excise duty, which is levied at various rates, median rate is 12.5%
  • CVD rate on import of goods
  • Service tax rate, presently 14 % (excluding cesses)
  • State VAT rate, varies from 0% to 20% or even more (0, 5, 12.5, 20)
  • Collection of various Government cesses on these levies

Broadening of tax base in GST:

Excise duty may be levied on a lower base by the States. Present threshold limit under CENVAT is Rs. 1.5 crores, whereas under GST, it is Rs. 10 lacs all over India and Rs. 5 lacs in north-east states. Excise duty would be levied up to retail point instead of at manufacturing point. Broader tax base would imply :

  • More services would come into net
  • Withdrawal of various exemptions
  • Minimizing the number of tax rates.

The deadlock in the passage of the GST Bill is not entirely due to opposition in the Parliament. It is largely due to the apprehensions of the States which are, to a great extent, real. It is therefore, hard to tell between the concerns of the opposition and the States that really led to the stalling of the proceedings in the Parliament. The 13th Finance Commission wanted a perfect GST with uniform tax rates across the States and the Centre and after due compensation provided to the States.

If the GDP or Income is unequal among the States, where is the disposable income to assume it as the tax base and proceed to estimate one’s tax income ? This would lead to erroneous conclusions. That is why a balance needs to be struck between the absolutely uniform tax rate and an adjustable tax rate by having a via media option of a combination of a floor rate and a band of adjustable rates which will act as the Revenue Neutral Rate for the purpose of GST which is also the recommendation of the Empowered Committee while introducing the 122nd Amendment. It is quite logical and realistic approach of moving forward in the stated circumstances of our economy.

On a common tax base, the extent of tax occupied by the multiple taxes that the States and the Centre levy in their own taxing jurisdiction has to be estimated and factored into the total tax income to arrive at a realistic GST rate . Like there is need for a dual GST, there is also perhaps a concomitant need for a dual Central and State RNR – one to be reckoned on tax to Gross Domestic Product and the other on tax to Gross Domestic Expenditure as a back room exercise to be assured of revenue neutrality in real time economic mode. That will be real Revenue Neutral Rate.

The GST rates would be fixed after ensuring that there would be no revenue loss from the proposed changes and a normal growth is maintained.

The success of GST will largely depend on the determination of ideal rate at Central level as well as State level which should be acceptable to the public and revenue neutral to Government.

Recommendation of GST Rates Committee

The Committee on GST rates headed by the Chief Economic Adviser has submitted its report to the Ministry of Finance on 3 December 2015. It has recommended the Revenue Neutral Rate (RNR) in the range of 15 percent to 15.5 percent (combined rates for centre and states) with a preference for the lower end of the range.

According to the report, the term revenue neutral rate (RNR) will refer to that single rate, which preserves revenue at desired (current) levels. In practice, there will be a structure of rates, but for the sake of analytical clarity and precision it is appropriate to think of the RNR as a single rate. It is a given single rate that gets converted into a whole rate structure, depending on policy choices about exemptions, what commodities to charge at a lower rate (if at all), and what to charge at a very high rate. The RNR should be distinguished from the “standard” rate defined as that rate in a GST regime which is applied to all goods and services whose taxation is not explicitly specified. Typically, the majority of the base (i.e., majority of goods and services) will be taxed at the standard rate, although this is not always true, and indeed it is not true for the states under the current regime.

Because identifying the exact RNR depends on a number of assumptions and imponderables; because, therefore, this task is as much soft judgement as hard science; and finally also because the prerogative of deciding the precise numbers will be that of the future GST Council, this Committee has chosen to recommend a range for the RNR rather than a specific rate. For the same reason, the Committee has decided to recommend not one but a few conditional rate structures that depend on policy choices made on exemptions, and the taxation of certain commodities such as precious metals.

On the RNR, the Committee’s view is that the range should between 15 percent and 15.5 percent (Centre and states combined) but with a preference for the lower end of that range based on the analysis in this report.

On structure, in line with growing international practice and with a view to facilitating compliance and administration, India should strive toward a one-rate structure as the medium-term goal.

Meanwhile, the Committee recommends a two-rate structure. In order to ensure that the standard rate is kept close to the RNR, the maximum possible tax base should be taxed at the standard rate. The Committee would recommend that lower rates be kept around 12 per cent (Centre plus states) with standard rates varying between 17 and 18 per cent.

The recommended rates are as follows –

Summary of Recommended Rate Options (in percent)
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

The biggest hurdle in the implementation of GST in India is the consensus over the Revenue Neutral Rate. The standard rate, the rate at which most goods will be taxed, is more than the revenue neutral rate because some goods that are in the nature of public goods or targeted at deprived sections will need to be taxed at the lower rate. There will be a demerit good rate that is higher than the standard rate that will apply to goods such as tobacco, the use of which needs to be discouraged.

The aim is to create a GST with the widest possible base. The GST will replace the plethora of indirect taxes levied on goods with a single levy, which will help create a seamless national market for delivery of goods and services. The proposed GST Law should support the Government’s overall initiative of ease of doing business and offer a simplified tax regime.

Presently the opposition parties are demanding a cap on Revenue Neutral Rate (RNR) @ 18 % in the constitution itself which is being denied by the Government. This is one of the issues which is hampering the passage of Constitutional Amendment Bill.

It is hoped that the GST amendment bill may see the light of the day in the monsoon session of Parliament for its implementation in near future.

(Author is Partner at Agarwal Sanjiv & Company, Jaipur)

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July 2024