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)
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
Summary of Recommended Rate Options (in
"Low" rate (goods)
"Standard" rate (goods and services)
"High/Demerit" rate or
Non-GST excise (goods)
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 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
Precious metals not to be
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.
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