Revenue Neutral Rate (RNR) in GST Explained

The primary goal under the Goods and Services Tax (GST) framework in India is to establish tax rates that sustain the existing revenue collection levels for both central and state governments. The Revenue Neutral Rate (RNR) represents a system of varied tax rates designed to ensure that the revenue generated under GST is equivalent to the revenue collected through previous tax regimes. Calculating RNR must account for the cascading impact on specific commodities that were not subject to excise or sales tax. For instance, the price of wheat might increase if the RNR for diesel is set higher than its previous tax rate, despite wheat itself not having any direct excise or sales tax implications.

Subramanian Committee’s RNR Recommendations

The Indian government established a committee, led by Dr. Arvind Subramanian, which published a comprehensive report on RNR calculation and the proposed tax structure. This committee utilized three distinct methodologies to determine the RNR:

• Macro Approach: This method bases RNR calculation on aggregated data concerning domestic output, net imports, and capital input consumption. Key assumptions include a positive GST rate and a zero rate for exports. When an 80% GST compliance rate was considered, this approach yielded an RNR of 11.6%.
• Indirect Tax Turnover Approach: Developed by the National Institute of Public Finance Policy (NIPFP), this method involves three stages:
  1. Estimating the state-level revenue base for goods.
  2. Estimating the national-level revenue base for services.
  3. Implementing adjustments for specific goods and services exempt from GST.This methodology indicated an RNR of 18.86%.
• Direct Tax Turnover Approach: Proposed by the Thirteenth Finance Commission, this approach computes RNR using input tax data from all registered entities. It resulted in an RNR of 11.98%. Ultimately, an RNR closer to 18% was anticipated, following certain modifications to the indirect tax turnover approach.

Distribution Ratio for RNR

ASignificant challenge in determining the RNR involves establishing the appropriate distribution ratio between the central and state governments. This ratio must account for potential revenue losses incurred by various state governments. Two allocation ratios were considered for evaluation: a 60:40 ratio (Centre to State) and its inverse, a 40:60 ratio. The Subramanian Committee, in its report to the CBEC on RNR and GST rates, noted that “Coming up with an RNR is as much soft judgment as hard science.” A lower RNR could potentially impede long-term economic growth.

Summary

The Revenue Neutral Rate stands as a major obstacle in the successful implementation of GST. It is anticipated that India might adopt a comparatively higher RNR than international benchmarks. Further insights into GST rates and tax calculations will be provided.