RNR – Revenue Neutral Rate under GST

Last Update Date : October 05, 2018

rnr

You don’t get gushers of revenue by raising taxes. You get it through expansion. The main motive behind the implementation of GST was to expand the operations of business especially small and medium scale ones. The concept of GST combines all forms of indirect taxes into one single tax which is applied all over the country. Has this change brought any change in the amount of revenue that is collected by the government? What happens if this amount of revenue collected is different from that collected during previous policies? Is there any way to keep the revenue collection same as it was before and not reduce it? Let us discuss it in this article.

What is Revenue Neutral Rate?

Any change in the tax reforms may result in a deficit in the amount of revenue collected by the country. Therefore there must be a method through which the change in these system does not affect the collections by the government. Revenue Neutral Rate or RNR as commonly known is the tax rate which ensures that the revenue collected by new tax regime is same as that collected by the previous one. The new tax rates are designed according to the Revenue Neutral Rate.

Salient Features of Revenue Neutral Rate

Let us see some salient features of RNR under GST:

  • It is the rate which collects the same amount of revenue as an earlier system.
  • Generally, it ranges from 16% to 27% over the world.
  • The committee led by Dr Arvind Subramaniam suggested an RNR from 15% to 15.50%.
  • RNR indicates the future requirements by calculation of adequate compensation to central and state government.
  • The RNR is kept slightly high to ensure no loss in the revenue generation.

Factors determining Revenue Neutral Rate

Threshold Limit

Any business having turnover below the amount of threshold limit need not pay taxes to the government. The lower the threshold limit, the government reduces tax rates on the taxable amount and the higher the threshold limit, the government has to increase the tax rates on the taxable amount to collect the same revenue. Therefore the revenue neutral rate is directly proportional to the threshold limit.

Exempted and Zero-rated Supplies

The increase in exempted supplies increases the tax rates for supplies other than exempted and zero-rated supplies thus increasing the revenue neutral rate.

Exempted supplies for Special Economic Zones

The exemptions are given for encouraging more manufacturing businesses to increase the GST rates for other goods and services thus increasing the revenue neutral rate.

Tax Base

Revenue neutral rate is inversely proportional to the tax base. As the tax base increases, the RNR reduces.
• Higher the incentives, abetments, rebates provided to businesses, increases the revenue neutral rate.
• Previous tax policies like the amount of excise duty, service tax rate, VAT implied on various goods determine the revenue neutral rate.

Estimation and Calculation of Revenue Neutral Rate

The revenue neutral rate is calculated as follows:
RNR = (Total tax collections by central and state governments) / (Estimated Tax Base under GST)
The tax base under GST is calculated by three ways, which are as follows:

GDP adjusted for import and exports

The sum of amount of GDP of the country, the amount of goods and services imported, amount of intermediary goods and services and capital goods for exempted supplies including the supplies used in government and agriculture minus the sum of amount of goods and services exported, government wages, fixed capital formation gives the tax base under GST.

Consumption Expenditure from goods and services

The sum of the amount of goods and services by non-profit organisations and private households, government expenditures excluding admin salaries and investment by private parties and government in infrastructure minus the total amount of threshold limit gives the tax base under GST.

Tax Turnover Method

The revenue is calculated as per the taxes policy which is to be replaced by GST and then adjusting the taxes as follows:

  • Exempted supply is included in the net tax, and taxable supply is excluded.
  • Eligibility of Input supplies for Input Credit against the Output Liability,
  • Tax paid on raw materials which are used for manufacturing supplies which are exempted.
  • Taxes on imports and exports as per the new tax policy

Consider the following example

Indirect Taxes before implementation of GST

Description Taxable Base (Rs.) Tax collected (Rs.)
Sales Tax Taxable 50,000 10000
Exempted 50,000
Service Tax Taxable 50,000 15000
Exempted 50,000
Excise Duty Taxable 50,000 10000
Exempted 50,000
Total 3,00,000 35,000

Revenue Neutral Rate = Tax revenue / Taxable base
= 35000 / 3,00,000
= 11.67%

The rates under GST will then be designed in such a way that its revenue neutral rate will compute to 11.67% as it was before the implementation of GST.

Recommendations of Subramanian Committee

The Dr Arvind Subramanian committee has recommended the revenue neutral rate of 15% to 15.50%.

Distribution of RNR is as per the central to state ration which is 1:1, i.e. 50% central government revenue and 50% state government revenue.

Summary of Recommended Rate Options (%)

RNR Rate on precious metals Low rate

(goods)

Standard Rate

(goods and services)

High/ Demerit rate

Non-GST excise

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

All rates are the sum of rates at centre and states

These rates have been revised now after the various GST council meetings.

Challenges Involved

There are a lot of challenges involved that affects RNR. Some of them are:

  • It is very difficult to determine the revenue neutral rate because of the numerous permutations and combinations involved of the different tax slabs under GST.
  • All the industries from various sectors grow at different rates. Therefore it is very difficult to compute the RNR.
  • Another factor which affects the RNR is inflation rate. If inflation is growing, the demand is high, and supply is low. Therefore the prices of the commodities increases and the sales reduce. This causes a change in the RNR. The inflation rate cannot be kept under control always.
  • Different taxes are levied for different goods and services, therefore, deciding a single RNR is very impractical.
  • Also, inter-state GST has to be considered which makes the calculation very tedious.
  • GST will have common rates for all states, so earning of one state can be the losses of another state. This consideration makes the computing of RNR difficult.

Currently, the RNR under GST is 15.5% which includes all the tax rates under GST, exemptions and the government is trying to maintain this rate constant. The challenges need to be overcome so that the RNR is welcomed by everybody. If you are facing problems with filing your GST returns, earlyGST by H&R Block is the right place for you.