Dr. Sanjiv Agarwal, FCA, FCS
In 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.
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).
- 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%
- CVD rate on import of goods
- Service tax rate, presently 14 %
- State VAT rate, varies from 0% to 20% (0, 5, 12.5, 20)
- Collection of the Government from 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 may be between Rs. 10 lacs and Rs. 20 lacs.
Excise duty would be levied up to retail point instead of at manufacturing point resulting in
- More services would come into net
- Withdrawal of various exemptions
- Minimizing the number of tax rates.
Coverage of GST:
- Share of revenue from such commodities, which would be kept outside the GST structure, e.g., petroleum products, tobacco, liquor, etc. However, Central Govt. can charge excise duty on tobacco products over and above GST.
- Number of taxes to be subsumed in the GST, for example stamp duty, property tax, toll tax, etc. might be kept outside the GST structure.
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.
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 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.
The idea of a perfect GST, however, does not appear a reality anymore. Therefore , compromise have to be done to only a less perfect dual GST. Even as GST is a game changer in shifting the incidence of tax from the place of origin to the place of consumption , there has to be change in the perception of looking at the Gross Domestic Expenditure as the new tax base instead of Gross Domestic Product.
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.
Recommendation of GST Rates Committee
The Committee headed by the Chief Economic Adviser on GST rates has submitted its reports 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” rateor Non-GST excise (goods)|