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. 24/09/2024 7:24 PM
The Revenue Neutral Rate (RNR) is a critical concept in the Goods and Services Tax (GST) framework, designed to ensure that the government’s revenue remains unaffected during the transition from the old indirect tax regime to the new GST system. The RNR plays a pivotal role in balancing revenue collection for the central and state governments while simultaneously not overburdening taxpayers.
The Revenue Neutral Rate refers to the tax rate that allows the government to maintain the same level of revenue as it did before the implementation of GST. In essence, it is the rate at which tax revenues post-GST implementation equal the revenues collected from the old indirect taxes such as excise duty, service tax, VAT, etc.
The idea is to neither under-tax nor over-tax. If the RNR is set too high, it can lead to inflationary pressures on the economy and undue burden on taxpayers. If it's too low, it might result in a revenue shortfall, forcing the government to borrow or cut spending.
RNR is crucial because it ensures fiscal neutrality for both the central and state governments. Before GST, India had a complex indirect tax system with multiple taxes levied at different levels. The central government collected taxes such as excise duty and service tax, while state governments imposed taxes like VAT. The RNR was necessary to ensure that the revenue loss from subsuming these taxes under GST would be neutralized.
If the RNR is not well-calculated, the government might either experience a revenue shortfall (affecting public services and fiscal policies) or surplus (leading to economic inefficiencies).
The calculation of RNR is complex and depends on various factors. Broadly, it is computed based on the total indirect taxes collected by the central and state governments before GST implementation. The formula includes:
Total Indirect Taxes Collected Pre-GST: This includes central excise, service tax, VAT, and other indirect taxes.
Estimation of Base under GST: This refers to the total taxable value of goods and services under GST.
Tax Buoyancy: This measures how much tax revenue increases with economic growth.
Exemptions and Zero-rated Goods: Items like food grains, essential commodities, and public services may be exempted or zero-rated under GST, impacting RNR calculation.
The GST Council engaged experts and economists, such as the Vijay Kelkar Task Force and the 15th Finance Commission, to determine an appropriate RNR. The Rangarajan Committee and the National Institute of Public Finance and Policy (NIPFP) also contributed to the debate around the rate.
The Vijay Kelkar Committee recommended an RNR of 12-15%. However, subsequent discussions and adjustments due to different states' concerns led to an effective GST rate structure with multiple slabs (5%, 12%, 18%, 28%) rather than a single rate, as initially envisaged.
India’s GST regime, implemented on 1st July 2017, is structured into multiple tax slabs:
5%: For essential goods.
12% and 18%: For most goods and services.
28%: For luxury and sin goods.
This multi-rate structure deviates from the theoretical idea of a single RNR but reflects the socio-economic realities of a diverse country like India. However, the weighted average GST rate has been around 11.6%, lower than the initial RNR estimate of 15.5% by the Arvind Subramanian Committee.
