India: Report On Revenue Neutral Rate

Last Updated: 6 January 2016
Article by SKP  

In the backdrop of a political hiatus in the Indian Parliament regarding Goods and Services Tax (GST), the Committee headed by the Chief Economic Adviser (CEA) Dr Arvind Subramanian, submitted their report on Revenue Neutral Rate (RNR) for GST on 4 December 2015. With an objective of achieving three important macroeconomic goals (governance, institutional reforms and 'Make in India by Making one India'), the Committee estimated an RNR which would preserve the revenue of the government at the desired (current) level.

Key recommendations of the Committee

With a recommendation of RNR at 15–15.5%, the Committee has suggested a standard rate of 16.9-18.9%. The following table summarises the RNR and the rate structure in both preferred and alternative scenarios as:

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

Source: Committee's calculations

  • The Committee, while strongly suggesting to plug exceptions, in order to bring an uninterrupted value chain that facilitates compliance, a buoyant source of revenue and leads to a successful GST regime in India, recommended the following:

    • The exemptions list to be narrow and restricted to a few goods (merit goods) which feature prominently in the consumption basket of the poor such as food items;
    • Exemptions to be common across the Centre and states;
    • Exemptions to be confined to final goods because taxes on intermediates are in any case reclaimable as input credits;
    • Precious metals not to be exempted;
    • Area-based and countervailing duty exemptions to be phased out.
  • The Committee also suggested that all additional taxes on inter-state trade (including the 1% additional duty) should be eliminated and replaced by GST.
  • Conversely, with a recommendation on pruning exemptions, the Committee, in order to minimise the burden on small taxpayers, proposed to increase the threshold exemption from INR 2.5 million to INR 4 million.
  • The Committee also recommended that the rate for sin/demerit goods be fixed at 40% and apply to luxury cars, aerated beverages, paan masala and tobacco and tobacco products (for the states). Also, the Committee suggested that the Centre should have the flexibility to levy an additional excise on tobacco and tobacco products over and above the higher rate.
  • The Committee has put forward their reservations against flexible rate bands given to the states as proposed in the GST Bill. They have provided multiple reasons as to why the decision of rate flexibility between states in the GST Bill may be reassessed.

Apart from the above key recommendations, the report stressed on the benefits of the implementation of GST and stated that GST could play a crucial role in curbing black money in India through self-policing incentives which is inherent to a valued added tax and through the dual monitoring structure—one by the states and one by the Centre.


As the timing of the report on RNR has been very promising, the proposed RNR at 15-15.5% and the other recommendations of the Committee could be crucial in GST deliberations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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