The Goods and Service Tax regime was introduced to the citizens of India in July 2017. The Senate had to ensure that the revenue neutrality of GST of the Central and State Governments are not compromised/reduced because of the new tax structure. It was a known fact that Revenue Neutral Rate UPSC which is RNR full form in GST would not be the same in comparison with the then-existing tax structure due to the enhanced tax credit mechanism and other modifications. Therefore, an adjustment in the tax rate was required to avoid a reduction in the revenue of the Government and revenue neutral rate in GST.
To ensure that the revenue does not reduce, an RNR in GST tax rate was required. This rate was termed as the ‘Revenue Neutral Rate’ (RNR). In case you want to know what is revenue neutral rate then in other words, RNR is the rate at which tax revenue remains the same despite giving credit of duty paid on inputs and other factors. Revenue neutral rate meaning is the rate of tax that allows the Government to receive the same amount of money despite changes in the tax laws. The essence of calculating the RNR is highlighted in the simple equation: t=R/B Here,
Note: Basically, the RNR exercise attempts to calculate B, As per the recommendations from the Subramanian committee, revenue neutral tax rate in GST can be calculated with 3 different approaches:
The Macro approach makes use of the national income accounts data and supply-use tables to arrive at base B. It uses the following formula: ? = ∑(? + ? − ?) − [(1 − ?)∑(? + ?)] Here,
Note: The summation is over 140 goods and services and 66 sectors, based on the 2011-12 national accounts. The following assumptions were made for this formula:
Under the approach, the RNR was found to be 11.6% after factoring the compliance of GST at 80%.
This approach estimates the base in a three-step process.
This base, in turn, yields a single RNR of 17.69 per cent under the scenario of having to compensate the States for the 2 percent CST.
Under this approach, the income tax data which is available for about 94.3 lakh registered entities (including companies, partnerships, and proprietorships but not charitable organizations) is used. The data is classified into 10 sectors and 75 sub-sectors to calculate the potential base for GST. Unlike the indirect tax turnover approach but like the macro approach, this approach yields a combined base for goods and services, rather than separating bases for goods and services. This approach yields a combined RNR of 11.98 per cent. The estimated RNR of the three approaches for estimating RNR are summarised herein below:
|Approach||GST Base (in lakh crore INR)||RNR (percent)|