Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST)
GST
Dated:- 19-12-2016
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Document 1Report on the Revenue Neutral Rate and
Structure of Rates for the Goods and Services Tax
(GST)
December 4, 2015
Content
Foreword
I
Introduction
II
Benefits of Proposed GST
Governance
Make in India by Making one India
The growth effect via the boost to investment
III Current Structure of Indirect Tax : Highlights
Centre
States
Centre and States
IV Estimating India's Revenue Neutral Rate (RNR) under the GST
Macro Approach
Indirect Tax Turnover Approach
Direct Tax Turnover Approach
V
Recommendations
The Magnitude of the RNR
Critical assessment of the methodology of the three approaches
Recommendations and validation
A risk analysis
Allocation of RNR between Centre and states
The structure of rates
Exemptions
Lower, standard and “demerit” rates
Assigning products to rates
Exemptions threshold
Rates or Rate Bands and
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re 1: Collection-efficiency in Major VAT/GST Economies
Figure 2: Standard rate of VAT in High and Emerging Market Economies
Figure 3: Comparing “Desirable” Taxation with Actual Taxation of Selected
Commodities
Figure 4: Food, rent and clothing have high weight in CPI
Figure 5: A large part of CPI is exempt from Excise/VAT
Figure 6: Only 15% of CPI is taxed at a “normal” rate
Figure 7: Low average tax rate on most large categories
Figure 8: Average tax rates by category for top 60%
Figure 9: Average tax rates by category for bottom 40%
Figure 10: CPI would have high sensitivity to single RNR
Figure 11: Scenario 1: some categories to see inflation
Figure 12: Dual rate sensitivity (Normal on 11% of CPI)
Figure 13: Scenario 2: Less than 3% inflation for items seeing price rise
Figure 14: Scenario 3: Only health to see high inflation
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Boxes
Box 1: Estimating the association between rates and compliance
Box 2: Will There be Large Compen
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levels of compliance and broadening of tax base under
GST.
(c) Analyse the sector-wise and State-wise impact of GST on the economy.
(d) The Committee may invite experts and stakeholders for consultations as it deems fit.
The composition of the Committee is the following:
Dr. Arvind Subramanian, Chief Economic Adviser, Ministry of Finance (Chairman)
Dr. W R Reddy, Principal Secretary, Taxes, Government of Kerala
Dr. P D Vaghela, Commissioner, Commercial Taxes, Government of Gujarat
Shri K Rajaraman, Principal Secretary and Commissioner, Commercial Taxes,
Government of Tamil Nadu (since transferred from the post)
Shri Ritvik Pandey, Commissioner, Commercial Taxes, Government of Karnataka
Shri Udai Singh Kumawat, Joint Secretary, Department of Revenue
Shri Alok Shukla, Joint Secretary, Tax Research Unit, Central Board of Excise and
Customs
Shri Upender Gupta, Commissioner, GST, Department of Revenue
Ms. Aarti Saxena, Deputy Secretary, State Taxes, Department of Revenue
The Committee met
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(Arvind Subramanian)
Chief Economic Adviser
&
Chairman of the Committee
I. INTRODUCTION
1.1
As the world economy slows, and increasing financial volatility and turbulence become
the “newest normal,” only a few economies have the resilience to be a refuge of stability and the
potential to be an outpost of opportunity. India is one of those few. As oil and commodity prices
continue to be soft, and in the wake of actions taken by the government and the Reserve Bank of
India, macro-economic stability seems reasonably assured for India. This bedrock of stability
coupled with reforms to unleash the entrepreneurial energies of India can create the policy
credibility and business environment that India is indeed seizing the historic opportunity afforded
by domestic and international developments to propel the economy to a high growth trajectory.
Key amongst these reforms is the goods and services tax (GST), which has, in some ways, been
“priced” into expectations of the government'
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ment is revealed by a comparison with the other large federal
systems European Union, Canada, Brazil, Indonesia, China and Australiathat have a VAT
(the United States does not have a VAT).
1.4 As Table 1 highlights, most of them face serious challenges. They are either overly
centralized, depriving the sub-federal levels of fiscal autonomy (Australia, Germany, and
Austria); or where there is a dual structure, they are either administered independently creating
1
too many differences in tax bases and rates that weaken compliance and make inter-state
transactions difficult to tax (Brazil, Russia and Argentina); or administered with a modicum of
coordination which minimizes these disadvantages (Canada and India today) but does not do
away with them.
Table 1: Comparison of Federal VAT Systems
Nature of VAT
Independent VATs at Centre
and States
VAT levied and administered
at Centre
Dual VAT
Country Examples
Brazil, Russia, Argentina
Australia, Germany, Austria,
Switzerland, etc.
Canada and
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er-state sales.
At the same time, the exceptions—in the form of permissible additional excise taxes on sin
goods (petroleum and tobacco for the Centre, petroleum and alcohol for the States)—will
provide the requisite fiscal autonomy to the States. Indeed, even if they are brought within the
scope of the GST, the states will retain autonomy in being able to levy top-up taxes on these
“sin/demerit” goods.
2
1.6
Provided it can be reasonably well-designed, the Indian GST will be the 21st century
standard for VAT in federal systems.
1.7 It is, therefore, imperative to ensure that the design and implementation of this policy is
done right. And, one important, perhaps critical, dimension of this is the level and structure of
tax rates on which this Committee has been asked to make recommendations.
II.BENEFITS OF PROPOSED GST
2.1 Many benefits are claimed for the GST: that it will increase growth¹; that it will increase
investment by making it easier to take advantage of inpu
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ocumentation from the dealer behind him in the value-added/tax chain. Provided, the
chain is not broken through wide ranging exemptions, especially on intermediate goods, this self-
policing feature can work very powerfully in the GST.
1 An oft-cited study by the NCAER (2010) suggested that growth would increase by 0.9-1.7 per cent of GDP, purely based on the
elimination of the cascading of taxes on exports. What is unclear is the quantitative importance of the elimination of the
embedded taxes on exports under the GST relative to the current regime of zero-rating of exports. In other words, how
incomplete is the current zero-rating of exports and how much will the GST improve upon it are questions that need further
investigation.
2 Whether cascading is a serious problem and why is discussed by Keen (2013).
3
2.4
According to Pomeranz (2013), “The Value Added Tax (VAT) is a stark example of a tax
believed to facilitate enforcement through a built-in incentive structure that gener
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ents. In a sense, the supplier, because of the
paper trail left by the VAT, knows that his evasion will be more likely to be detected once his
client is audited.
2.6
Second, the GST will in effect have a dual monitoring structureone by the States and
one by the Centre. Hence, there will be a greater probability that evasion will be detected. Even
if one set of tax authorities overlooks and/or fails to detect evasion, there is the possibility that
the other overseeing authority may not.
Make in India by Making one India
2.7
The current tax structure unmakes India, by fragmenting Indian markets along state lines.
This has the collateral consequence of also undermining Make in India, by favouring imports and
disfavouring domestic production. The GST would rectify it not by increasing protection but by
eliminating the negative protection favouring imports and disfavouring domestic manufacturing.
2.8 These distortions are caused by three features of the current system: the central sales tax
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ra Pradesh compared with goods that can be imported directly to say
Chennai from South and East Asian sources.
2.11 How quantitatively significant is the impact of the CST? We have some suggestive
evidence based on data provided by six States: Maharashtra, Andhra Pradesh, Karnataka,
Gujarat, Tamil Nadu and Kerala. In these States, stock transfers, on average, account for as
much of inter-state trade as the trade subject to the CST (in the case of Gujarat and Andhra
Pradesh, stock transfers are more than twice as much) (Table 2). In other words, the distortion
affects fifty per cent of the total trade that flows between States.
Table 2: Impact of the Central Sales Tax (In Rs. Crore)
Maharashtra
Taxable turnover
316598
Tamil
Nadu
214771
Kerala Karnataka Andhra Gujarat Total
Pradesh
293151
186045
60669 304479 1375713
Non-taxable turnover
241319
142321
44683
98300
160910 651620 1339154
(stock transfer +
consignment sales)
Ratio of non-taxable to
76%
66%
15%
53%
265%
214%
97%
taxable turnov
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s (locating closer to
suppliers/customers instead of lowest-cost location in terms of wages, rent, etc.). Further, only
about 40 per cent of the total travel time is spent driving, check points and other official
stoppages take up almost one-quarter of total travel time. Eliminating check point delays could
keep trucks moving almost 6 hours more per day, equivalent to additional 164 kms per day
pulling India above global average and to the level of Brazil. So, logistics costs (broadly defined,
and including firms' estimates of lost sales) are higher than the wage bill or the cost of power,
and 3-4 times the international benchmarks. 4
2.15
Another study shows that inter-state trade costs exceed intra-state trade costs by a factor
of 7-16, thus pointing to clear existence of border barriers to inter-state movement of goods.
Further, inter-state trade costs in India exceed inter-state costs in the US by a factor of 6,
suggesting that India's border effects are large by international comp
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s these costs that can be expected to decline with the
introduction of the GST, providing a boost to inter-state trade and hence productivity growth
within India.7
CVD and SAD Exemptions
2.18 It is insufficiently appreciated that India's border tax arrangements undermine Indian
manufacturing and the “Make in India” initiative. Eliminating exemptions in the countervailing
duties (CVD) and special additional duties (SAD) levied on imports will address this problem.
How so?
2.19 It is a well-accepted proposition in tax theory that achieving neutrality of incentives
between domestic production and imports requires that all domestic indirect taxes also be levied
on imports. So, if a country levies a sales tax, VAT, or excise or GST on domestic
sales/production, it should also be levied on imports. In India, this is achieved through the
CVD/SAD which is levied on imports to offset the impact of the excise duty levied on
domestically manufactured goods.
2.20
However, CVD/SAD exemp
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lso be gains stemming from simplification of the documentation requirements under the GST.
7
without the CVD/SAD imposed on it; and, because it is zero-rated in the source country, is not
burdened by any embedded input taxes on it. The corresponding domestic good does not face the
excise duty, but since it has been exempted, the input tax credit cannot be claimed. The domestic
good is thus less competitive vis-Ã -vis the foreign good because it bears input taxes which the
foreign good does not. In the example, the penalty on domestic producers is over 6 per cent. In
effect, a policy designed to promote domestic manufacturing through excise exemption creates a
perverse incentive for the exempt industry and its eventual decline.
2.21 The CVD/SAD, which is levied to offset the excise duty imposed on domestic producers,
is not applied on a whole range of imports. These exemptions can be quantified. The effective
rate of excise on domestically-produced non-oil goods is about 9 per cent. T
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ves
that the CVD creates. Domestic producers may have chosen not to enter because the playing
field is not level.
8 The CVD exemption strips the tax from its effective way of taxing the informal sector – where imported inputs are used directly
or indirectly by the sector.
8
Table 3: Effect of Countervailing Duty (CVD) Exemptions: An Illustration
Scenario 1:
No excise exemption for
domestically produced good, no
CVD exemption for imported
good
Scenario 2:
No excise exemption for
domestically produced good,
CVD exemption for imported
good
Domestic good Imported good Domestic good Imported good
Scenario 3:
Excise exemption for
domestically produced good,
CVD exemption for imported
good
Domestic good Imported good
Cost of raw materials
100
100
100
100
100
100
Input tax 1/
12.36
ÎΑ
12.36
NA
12.36
ÎΑ
Total cost of raw materials 2/
100
100
100
100
112.36
100
Value added
100
100
100
100
100
100
CVD (@12.36 per cent) 3/
ÎΑ
24.72
ÎΑ
0
ÎΑ
0
Excise duty (@
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ng without becoming protectionist and without
violating any of its international trade obligations under the World Trade Organization (WTO) or
under India's free trade agreements (FTAs).
2.25 In the meantime, the effect of the GST can be partially simulated even now by
eliminating the exemptions applied to CVD/SAD. The default situation should be an
exemptions-free regime. If particular sectors seek relief from the CVD/SAD, they should be
required to make their case at the appropriate forums.
2.26 In a sense, India finds itself in a de facto state of negative protection on the one hand, and
calls for higher tariffs on the other. It is win-win to resist these calls that would burnish India's
openness credentials and instead eliminate the unnecessary and costly penalty on domestic
producers.
2.27 All these three sets of costs—the CST, the CVD exemptions, and other inter-state taxes-
should be viewed as undermining Make in India because in all cases, they favour foreign
production
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ectors because
these sectors are all outside the scope of excise duties which are applicable to manufacturing
only. Similarly, no credit is allowed for the State VAT on capital goods acquired by the service
sector (e.g., telecommunications, transportation, finance, insurance, and IT services).
2.30
Estimates vary on how much of current investment in a given year suffers from non-
creditable excise duties and/or VAT. For example, indirect tax collection data for 2014-15
indicate that the total amount of capital goods purchases for which CENVAT credit was claimed
was Rs. 1.6 lakh crore, divided between goods (Rs. 1 lakh crore) and services (Rs. 0.6 lakh
crore). National income accounts data suggests that investment in plant and equipment for the
same year by the non-government, non-household sector was about Rs. 7.4 lakh crore.
Apparently, the blocked input taxes could amount to as much as 75 per cent of total investment.
What could account for the difference and could the GST fill this
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he federal level only. The extent of tax cascading in India is much greater
because of more stringent rules in India for claiming tax credits.
2.34 In sum, investment is discouraged under the current system through the application of
excise duties and VAT to capital goods, for which no set off or input tax credit is provided. This
increases the cost of capital goods and reduces investment, which in turn leads to lower
employment and output.
III. CURRENT STRUCTURE OF INDIRECT TAXES: HIGHLIGHTS
3.1 This section describes briefly the structure of current rates of domestic indirect taxes at
the Centre and the States. The key takeaways are that the current tax structure is highly complex,
highly leaky (riddled with exemptions in goods that we estimate to be about 2.7 per cent of GDP
for the Centre and States together) characterized by significant differences between the Centre
and the States, and by a rate structure that does not confirm to what the evidence suggests might
be good policy. T
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d
3.4
In relation to services too, the Centre has a complicated rate structure. Although there is
one statutory rate, in practice, there are 10 other rates because of so-called “abatement” which
amounts to fixing a rate different from the standard rate and not allowing further input tax
credits. Abatement is necessitated in some part because of uncertainty in the base, and
specifically being unable to distinguish “goods” from “services.” The exemptions threshold is
Rs. 10 lakh.
3.5 At the Centre, there is incomplete provision of input tax crediting for goods, and
incomplete cross-crediting between goods and services.
States
3.6
In relation to goods, the States have structures characterized by:
➤ a base that is complete in extending all the way to the retail stage
an exemptions threshold that varies across States between 5 and 10 lakh with a
provision for “compounding” that also varies across States in design
➤ a multiplicity of rates,
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weighted
Exempted
Description of Commodities xx/
Lower rate Higher rate
Threshold 3/
Goods 5/
Tobacco,
Exemptions
Number 4/ value
Textiles, mobile petroleum
phones;
fertilizers;
Centre (Excise) manufacturing
8
12.0
6.0
59.2
39.6
84.9
11.1
8.4
11.7
Food
States (VAT)
up to retail
3+
12.5-14.5 4-5.5
28.5
67
32.8
54.8
7.5
9.6
Food, goods
of local
importance
some
intermediates
Intermediates;
capital goods;
gold & precious
metals
products,
automobiles,
aerated
water
1.8
lakh
1.5 crores
300
crore (a)
Alcohol,
petroleum,
tobacco
1.5
5-10 lakhs
90
lakh
crore(b)
Services
Centre
States 7/
negative list
11
None
12.4
4.1
65.2
34.8
86.2
13.8
9.4
None
construction,
11.2
Education,
health,
public
services
work contract,
restaurant,
transport, life
insurance
10 lakhs
1/Number of ad valorem rates. There are also numerous specific rates on goods charged by the centre. For services, there is one standard rate and 10 abatements.
2/ At the centre, there are 2 lower rates which are akin to a turnover tax; th
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States, with implications for any
future standard rate is that the States have a much larger portion of the base (more than 65 per
cent) 10 taxed at the lower rate while the comparable number for the Centre is about 40 per cent.
One reason is that States typically place intermediate goods in the lower rate category. The
higher standard rate is therefore almost compelled by the fact of placing so much of the base at
the lower rate.
3.8
One corollary is that the weighted average statutory rate for goods is 8.4 per cent and 7.5
per cent for the Centre and States, respectively.
IV.ESTIMATING INDIA'S REVENUE NEUTRAL RATE (RNR) UNDER THE GST
4.1
The Committee had the benefit of 3 technical approaches to estimating the RNR which
are described in detail in Annexes 1-3. These will constitute the basis for the Committee's
recommendations on the RNR.11 These are briefly summarised in this section.
4.2
Before describing the recommendations, it is important to make a point relating to
terminology.
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asthan, Madhya Pradesh, West Bengal, Harayana and Puducherry
accounting for 78.5 per cent of the VAT base.
11 There have been other attempts at estimating the RNR, including by the Thirteenth Finance Commission and
NIPFP, We restrict the scope of our technical inputs to the three studies described in this section as they are the
most recent by way of data and methodology; they are also the three that were discussed within the Committee.
15
majority of the base will be taxed at the standard rate, although this is not true for the States
under the current regime.
4.3
The essence of calculating the RNR is highlighted in the simple equation:
t=R/B
where t is the RNR, R is equal to revenues (both Centre and state) generated from existing sales
and excise taxes, which will be replaced by the GST. The revenues to be replaced are estimated
to be Rs. 3.28 lakh crore for the Centre, and Rs. 3.69 lakh crore for the States, including the
revenues that will have to be compensated for the eliminatio
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sumption of intermediate and capital inputs; e is the exempt output ratio
(i.e. the tax base associated with inputs used in the production of exempt final consumption); and
the summation is over 140 goods and services and 66 sectors, based on the 2011-12 national
accounts. The following assumptions were made: (1) full compliance; (2) full pass-through of the
16
GST into prices; (3) no behavioral response; (4) the GST has a single positive rate, and a zero
rate on exports.
4.5
Under a standard scenario exempting health, education, financial intermediation and
public administration, the GST's potential base is 59 per cent of GDP. Exempting basic food
items in addition (essentially unprocessed foods) reduced the potential base to 55 per cent of
GDP. However, exempting petroleum or electricity increases the potential base to 67 per cent of
GDP—given that such items are largely consumed as inputs rather than final consumption, their
exemption increases the base due to cascading. Assu
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f the States. This
base is estimated by converting data on actual collections and statutory rates into a goods base.
In other words, the effective rate becomes the basis for the estimation of the goods base. In the
absence of data for all the States, the key assumption is that States collect revenues at the three
rates (1 per cent, 6 per cent, and 14 per cent) in such a proportion so as to yield a total taxable
base of Rs. 30.8 lakh crore.
17
4.9 In the second stage, the services base is estimated based on turnover data of 3.25 lakh
firms from the newly available MCA database (this base is estimated at Rs. 40.8 lakh crore).
4.10 In a third stage, adjustments are made to this base to remove IT-related services, because
a large part of them are exported, and to remove most of real estate and financial services from
the base because of the manner in which these items will be treated under the GST. This adjusted
base is then subject to an input-output analysis to deduct from the base taxab
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akh registered entities (including
companies, partnerships, and proprietorships but not charitable organizations). The data are
classified into 10 sectors and 75 sub-sectors. These data allow the potential base for the GST to
be calculated. Unlike the indirect tax turnover approach but like the macro approach, this
approach yields a combined base for goods and services, rather than separate bases for goods and
services.
4.13 The profit and loss accounts provide data on value of supply of goods and services
(which is equivalent to turnover) to which can be added imports of goods and services. This
12 “Revenue implications of GST and estimation of revenue neutral rate: Estimates for 2011-12” submitted to the Empowered
Committee of State Finance Ministers in February 2014.
18
yields the tax base of at about Rs. 222 lakh crore in turnover terms. Deducting the exempt sectors
from this base (petroleum, land component of real estate, the interest component of the financial
sector, elect
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first place).
4.16 Putting all these together gives a potential tax base of Rs. 58.2 lakh crore, yielding a
combined RNR of 11.98 per cent.
4.17 Table 5 highlights the estimated GST base and corresponding RNR of the three
approaches to estimating RNR.
Table 5: Summary of approaches to estimating RNR
Approach
GST Base
(in lakh crore)
RNR
(per cent)
Macro
59.9
11.6
ITT
39.4
17.7
DTT
58.2
12.0
ITT= Indirect Tax Turnover
DTT=Direct Tax Turnover
Source: Based on three approaches to estimating RNR
13 The export sector is exempt with full refund (i.e. zero-rated).
19
V. RECOMMENDATIONS
5.1
Consistent with the Committee's terms of reference, we make recommendations on a
number of issues: the RNR; the distribution of RNR between the Centre and States; the structure
of rates; and the potential price impact of the GST. In addition, we make recommendations on
other relevant issues: the bands for the GST; compensation, the treatment of precious metals, and
the tax treatment of certain commodities
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stimates for the RNR.
5.4 Our recommendation for the RNR will not be unduly guided by short-term
considerations, for example, relating to compensation. The RNR should be one that achieves the
objectives of the government over a horizon that is not short term. If compensation is necessary,
it should be found/funded from government resources elsewhere and the GST should not have to
bear the long-term burden of having to meet short-term exigencies.
5.5 The estimates presented for the national RNR, range from about 11.6 per cent under the
Macro approach to 17.7 per cent under the ITT approach. Where does the truth lie?
20
20
Critical assessment of the methodology of the three approaches
5.6 Each approach has advantages and shortcomings that are described below. The
Empowered Committee of the GST has had the benefit of familiarity only with the ITT approach
of the NIPFP and we will dwell to some extent on this analysis. The Committee would
underscore that the focus on the ITT approach does
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x base proportions of 2 per cent, 56.15 per cent, and 41.85 per cent at the 1
per cent, 5 per cent, and 14-15 per cent, respectively.
The estimation of the services base by the ITT approach does not make any allowance for
purchases from the unorganized sector. Such purchases will lead to an increase in the
base via cascadingbecause the final value will reflect the embedded taxes which
cannot be set off as input tax credit.
The estimation of the services base also ignores one potentially important issue.
Currently, States tax most intermediate goods at the lower rate. If these goods were
shifted to the normal rateas States have indicated they might be willing to do—there
would be an effective expansion of the tax base. It may be noted that taxes on
intermediates in a GST system are like withholding collecting early on in the value
added chain but refunding them later on. So, in principle, this shift of intermediate goods
should not yield any additional taxes. But to the extent th
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ized sector—a key input that drives the final result—are reasonable.
5.9 The macroeconomic approach of the IMF suffers from being too aggregate in nature and
the implied tax base of Rs. 59.9 lakh crore seems to be on the high side. One particular source of
worry is that the tax base seems to increase substantially account of the exclusion of electricity
and petroleum. This seems unlikely given that in both cases, there is some considerable sales to
the final consumer.
5.10
But these two approaches have two important merits. They help provide a cross-check for
the ITT approach; perhaps more significantly, they highlight the need to validate the estimates
generated by all three approaches. We turn to this validation in the next section.
14 The ITT approach also does not include in the base that component of imports of goods and services that is sold directly to
consumers outside the dealer network. The Committee has not been able to quantify this omission.
15 There has been
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calculation of the base uses the statutory rate of excise of 12.36% rather than the
effective rate of 9%.
22
5.11 All three approaches implicitly assume that there will be no benefits to the base and/or
revenues from improving compliance and or improved growth consequent upon implementing
the GST. But the macro approach does not assume current levels of compliance—as the other
two approaches do—but a theoretical one which may or may not correspond to current reality.
Recommendations and validation
5.12 Our recommendation is based first on making adjustments to the ITT approach:17 Rs.
3.12 lakh crore for the data-based revision to the States' VAT base; Rs. 30,000 crore for the
omission of sugar; Rs. 45,000 crore for the cascading effect; and Rs. 95,000 crore for the choice
of the statutory rather than effective excise rate in quantifying the base. Then, we add an
adjustment for compliance efficiency gains (Rs. 2 lakh crore).
5.13
What is the basis for these adjustments?
5.
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es base. The DTT approach estimates an addition to the base of
17 It is worth emphasizing that the ITT approach has itself undergone revision from a previous version. Some of the
important revisions in the latest version were adding real estate in to GST base and removing additional base on
account of unorganized sector, sugar and textile.
23
about 16%. We, conservatively, estimate that the under-statement of the base would be half that
assumed by the ITT approach which amounts to 45,000 crore.
5.18
For the compliance effect we draw upon cross-country experience. In Box 1, econometric
analysis of that experience yields an estimate that a 1 percentage point reduction in the standard
rate would increase the collection efficiency by 1 percent. The GST would lead to about a 4.1
percentage point reduction in the standard rate (in weighted terms) which would translate into a
4.1 percentage point increase in the C-efficiency or 9.3% increase in collection efficiency (based
on the current C-ef
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orate nothing for the impact of the possible growth-enhancing effect of the
GST
5.20 Under GST, the compliance gains would be the following:
•
At the Centre, the rate structure will be significantly simplified from more than 10 rates
(for both goods and services) and numerous exemptions to 2-3 rates and fewer
exemptions;
24
5.21
•
•
At the Centre and the States, significant improvements in compliance will result because
of the IT systems under which matching of supplier and purchase invoices will be
electronic and instantaneous, reducing the scope for fraud and evasion; this will also
improve compliance for direct taxes;
General compliance will improve because of dual monitoring by the Centre and the
States; and
The comprehensive definition of taxation of goods and services should result in a smaller
amount of the base falling through the cracks between “goods” and “services” as happens
currently. The elimination of abatements on services will
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ulation corresponds closest to the policy envisaged under the Constitutional Amendment Bill.
25
5.23
Our recommendation for the RNR is, therefore, a range for the RNR of 15-15.5%, with a
strong preference for the lower end of that range.
5.24 Next we validate this recommendation. Since there is the possibility of error in all the
approaches, including our recommendation, we must independently validate them against other
benchmarks. One important benchmark for validation relates to the efficiency of the tax system.
A commonly-used measure of performance of a VAT system is to compute a C-efficiency ratio.
This is measured as:
C-eff=R/(S*C)
where R stands for revenues collected, S is the standard rate and C is total final consumption (net
of value-added taxes). The denominator is a measure of the potential revenues that can be
potentially collected and the numerator actual collections. C-efficiency is simply a measure of
comparing actual against potential. The C-efficiency implied by the
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and only somewhat above
that for low-income countries.
5.26 Put differently, if the RNR, and the associated standard rate, of the ITT approach were
reasonably estimated, it would imply that India has either come up with an effective policy base
under the GST that is unusually narrow and/or Indian indirect tax administration is unusually
poor relative to comparator countries. This inference would be puzzling, if not problematic, not
least for implying that India's tax efficiency is closer to that of Mali than of Brazil, Chile,
Indonesia or Thailand. This cross-country comparison is important evidence that the RNR
estimated by the ITT approach is too high.
5.27 In contrast, the RNR estimates for the other two approaches would place India at levels
comparable to other countries. 19 Our recommendations yield estimates for the RNR that are at or
below the average of other EMEs. In that sense, they are conservative estimates for the RNR
because they too imply similar levels of efficiency of
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the magnitude of exemptions from 300 items to 90 items in line with the recommendations of the Empowered
Committee. Currently about Rs. 1.8 lakh crore are lost in central excise exemptions of which a substantial proportion can be
recovered; expansion of tax base from manufacturing to retail level; bringing precious metals, gold, etc. into the tax base and
taxed at the lower rate; reduction in the exemptions threshold from Rs. 1.5 crore in the case of goods to Rs. 25 lakh; this will
offset the raising of the exemptions threshold for services from the current level of Rs. 10 lakh. Offsetting some of these effects
will be the fact that cascading could decline because of better administrative efficiency.
27
14.4 per cent and the highest standard rate is 19 per cent; and even for the high-spending and
therefore high-taxing advanced economies it is 16.8 per cent. An RNR of anything beyond 15 –
15.5 per cent will likely result in a standard rate of about 19-21 per cent which would make India
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ndia
A risk analysis
5.30 Since we cannot be certain of the RNR-it is after all our best assessment or best guess-
a risk assessment framework poses the question: should we err on the side of an RNR that is a
little low or a little high?
28
5.31 One risk of setting an RNR that is low is the re-emergence of a trust deficit between the
Centre and the States as happened in relation to compensation for lost CST revenues after the
global financial crisis. If revenues fall short, and the fiscal position of the Centre and States is
affected, the Centre will face a double whammy, with weak revenues for itself and an additional
burden of having to compensate the States. And, if as a result, compensation is delayed or
diluted, a trust deficit could re-emerge.
5.32 The second risk of setting a low RNR is that it could interact with slower growth and/or
weaker buoyancy going forward to magnify the revenue shortfall.
5.33 On the other hand, some of these risks can be overcome. In the event of a rev
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f 1 percentage point which in the GST setting would
translate into an efficiency gain of about 15 percent.
5.35
Further, the improvement in compliance will not be restricted to indirect tax collections.
The paper trail of the GST will also help direct tax administration and improve compliance in
collections of corporate income taxes.
5.36 Third, the price consequences of a GST will be small, especially under a dual rate
structure with essential food items exempted. As the analysis in Section V reveals, an RNR in the
15-15.5 per cent range with a lower rate of 12 per cent and a standard rate of 18 per cent would
have no aggregate inflation impact. But a higher RNR with a lower rate of 12 per cent and a
29
standard rate of 22 per cent would increase inflation by between 0.3-0.7 percent. Care will have
to be taken to ensure that the GST does not become the target of popular disaffection on the
grounds that it fed higher inflation. In that respect a lower RNR is safer than a higher one,
es
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will signal the government's confidence in the GST as a medium
term tax reform. This would re-inforce the signal that the government has already sentۥin a
sense under-writing the GST-by committing to compensation for five years (despite the fact
that when the state VATs were implemented, compensation was not required beyond the second
year.)
Allocation of RNR between Centre and States
5.39
The Committee's recommendations on rates are all national rates, comprising the sum
of central and state GST rates. How these combined rates are allocated between the center and
states will be determined by the GST Council. This allocation must reflect the revenue
requirements of the Centre and states so that revenues are protected. For example, a standard rate
of 17% would lead to rates at the Centre and states of say 8 percent and 9 percent, respectively
because that is roughly the ratio of GST revenues that would have to be generated by the centre
and states assuming that the 2013-14 data o
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t source of revenue—
these exemptions must be plugged. Using exemptions as selective industrial policy has led to
generous un-selective policy, and proliferating exemptions. The road to exemptions hell is paved
with the good initial intention of restricting exemptions to a few industries.
5.42 It is also worth emphasizing that exemptions need not, and often do not, result in low or
zero tax burdens. If a product is exempted, the effective tax burden will depend on all the
embedded taxes on inputs going into that product. If the move to the GST results in lower rates
of taxation, it is possible that eliminating exemptions might actually reduce the effective tax
burden. This is especially likely in relation to small scale industries (SSIs) which are likely to
come within the scope of the GST because of reductions in the exemptions thresholds. The
combination of input tax credits that they can reap combined with lower standard rates might
result in SSIs facing lower tax burdens. An
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tions list be common across the Centre and the States.
Lower, standard and “demerit” rates
5.45
Ideally, the GST should aspire to a single rate, which would then also be the standard
rate. Since 2000, about 90 per cent of countries that have adopted a VAT have chosen to have a
single rate. The tax administration benefits of having a single rate are substantial. However, in
the years ahead, it may not be feasible to adopt a single rate GST system for social reasons. A 2-
rate structure (or a modified 2-rate structure) may therefore be adopted. What should be the
lower rate and the standard rate, and the demerit rate which would apply to a small group of
luxury items?
5.46
Consider the following simple formula for determining the structure of rates:
R = αLG + BSG + y +μ
Where R is the RNR, LG is the lower rate on goods, SG is the standard rate on goods, SS the
standard rate on services; and DG the demerit rate on goods; α, ẞ, y, and µ are the respective
shares of these f
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f
4-5 per cent with a large part of the base taxed at these rates (about 60-70 per cent) results in the
necessity of high standard rates of 14-15 per cent. High standard rates make compliance
considerably more difficult.
5.50 The second reason for having lower rates that are close to the RNR relates to political
economy. The temptation to push commodities to the lower rate increases the lower is the low
rate. The benefit for any industry group of seeking to reduce the tax on its output is directly
proportional to the tax advantage: moving a product from 14 per cent to 6 per cent is worth more
than moving a product from 14 to 12 per cent. And in fact the pattern in the States reflects this
political economy at work.
5.51 So, if the RNR is close to 15 per cent, the effort should be to keep the low rate at about
12 (6+6 each for the Centre and States) per cent.
5.52 As discussed earlier, a lot will depend on the magnitude of exemptions and decisions
about what goods are taxed at the lower
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9 per cent (table-8).
Table 7: RNR and Standard Rate structure for center and states (per cent)
RNR
Lower
Rate
Standard
Rate (a)
Higher
Rate
Goods
Center
7
6.0
8.0
States
8
6.0
9.0
220
20
20
Services
Center
7
States
8
8.0
9.0
Source: Committee's calculation.
a: This corresponds to committee's preferred scenario with rate on precious metal at 6per cent.
Table 8: Gold rate and it impact on Standard Rate
Rate on
“Low”
RNR
precious
metals
rate
(goods)
“Standard”
rate
(goods and
“High/Demerit”
rate or Non-GST
excise (goods)
services)
6
16.9
Preferred
15
4
12
17.3
40
40
2
17.7
6
18.0
Alternative 15.5
4
12
18.4
40
2
18.9
Source: Committee's calculation.
5.54
It is now growing international practice to levy sin/demerit rates—in the form of excises
outside the scope of the GSTon goods and services that create negative externalities for the
economy (for example, carbon taxes, taxes on cars that create environmental pollution, taxes to
34
address health concerns etc.). As currently envisag
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cation of having to deal with multiple rates) and clearly identifiable so that there are
no issues related to classification that could complicate tax compliance.
Assigning products to rates
5.56 Typically, the assignment of goods to different tax categories will be motivated by
considerations of equity. Goods that account for a large share of expenditures of poorer
households—for example, food will typically be merit goods and will either be exempt or
placed in a lower rate category. A related feature will be that this share will decline for richer
households.
5.57 But even if a good is a merit good, warranting an exemption or lower rate, policy makers
will want to ask how effective that decision will be based on how well targeted the implicit
subsidy will be, where the implicit subsidy is the difference between taxing a good at the
standard tax rate and the lower or zero rate: if the poor also account for a large fraction of total
expenditure on the merit good, then the subsid
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e it against the
actual structure of rates, a few broad policy conclusions emerge captured in Figure 3 (Box 3 has
a detailed analysis).
•
A number of commodities are treated fairly under the current system. Thus, merit goods
such as food items, especially cereals, pulses, edible oils, vegetables, and fuel are
appropriately taxed at zero or low rates (in Figure 3, these commodities have high
benefit-cost ratios and attract low taxes).
22 Ideally, of course, if governments had well-designed transfer programs, they would achieve the desired objective of helping
poorer households by providing cash transfers and sparing the tax system from having to attain equity objectives. In practice,
this is not always possible and in India DBTs are still a work-in-progress. See Keen (2015).
23 The analysis can be re-worked for other target groups, say the bottom 3 or 5 deciles.
36
Beneifit-Cost Rtaio
Figure 3: Comparing “Desirable” Taxation with Actual Taxation of Selected Commodities
Food
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bonds and gold monetization) to wean consumers away from gold, on the
one hand, and also give highly concessional tax rates to buy gold, on the other. For all
these reasons, these commodities should in principle be taxed at the standard rate:
instead they are taxed at about 1-1.6 percent (center plus States). This anomalous
treatment must be rectified at least by raising current tax levels to 4 or 6 percent (see Box
3).
Education, health (excluding medicines), and electricity are also not appropriately
treated. They are all commodities that prima facie seem to be merit goods, warranting
zero or low tax burdens. However, in India, they are mostly consumed by the rich, and
37
•
many are largely privately provided. In the case of education, the current tax structure
turns out also to be regressive, with the bottom 4 deciles effectively paying greater taxes
than the top 6 deciles They deserve to be taxed more like standard goods. Yet, most
education and health services will be exemp
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e poorer households are more likely to buy
from smaller outlets (such as kirana shops). Third, on the other hand, a high threshold not only
risks foregoing revenues but also undermines the value-added chain that is so critical for the
governance benefits of having a GST. The current proposal is to have a common threshold of Rs.
25 lakh for goods and services combined but raising this threshold say upto Rs. 40 lakh may be
considered.
38
38
Center
Goods
1.5 crore;
exports and
exempted
goods
excluded from
threshold
Table 9: Exemption Thresholds: Current and Proposed
Current
Services
10 lakh
Compounding
not permissible
Proposed under GST
Goods plus Services
25 lakh combined
with no exemptions
and aggregated at the
level of legal entity
Compounding
to be decided; but
possibility of
compounding from
exemptions
threshold (25 lakh)
up to 1 crore
States
5-10 lakh
not
applicable
permissible in
some States for
some items and
at varying rates
same as above
same as above
Source: Department of Reven
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bill provides for States to have a band of 2 per cent above the
standard GST rate so that they have some fiscal flexibility to adapt to state-level conditions.
There are two reasons why this flexibility may need to be reassessed. First, the argument for
fiscal flexibility/autonomy becomes less compelling: under the proposed GST, the States still
retain considerable flexibility because alcohol and petroleum-the biggest sources of revenues
for the States about 29 per cent of overall States' indirect tax revenue and about 41.8 per cent of
39
the total revenue of States to be subsumed under GST—as well as power, real estate, health and
education remain outside the scope of the GST. Even if petroleum, alcohol and tobacco are
subsumed in the GST, States will retain the right to levy top-up excises on them.
5.66
In other words, the design of the GST is such that states will continue to have
considerable autonomy under the proposed GST either in its current form (which has a number
of
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ve to be
based on 8 per cent, which would immediately disadvantage production in the state charging the
higher rate, undermining Make in India programme.
Potential price impact of GST24
5.69 In principle, the GST should have no aggregate impact on inflation and the price level
because the new rate will be a revenue neutral one. Revenue neutrality may, however, not be
enough to guarantee that there will be no price impact across all categories of goods and
services. This is because the weights of commodities in the consumption basket (on which the
CPI is based) are different from their contribution to indirect tax collections. The impact on
particular goods and services will depend on the current structure of taxation (including
24 The analysis in this section should not be considered definitive because it is based on a number of assumptions. The caveats are
noted in greater detail in footnote 27 in Box 3.
40
exemptions) and the future structure of the GST both at the Center and the sta
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a low rate, and only 15% at a normal rate
(Figure 6). The 4% taxed at a high rate are mostly the items excluded from GST, like petrol,
diesel and alcohol.
25
We use the Excise schedule from CBEC. Sales tax rates were provided by four states: Tamil Nadu, Karnataka, Kerala and
Gujarat. Items exempt from VAT in three of the four states are assumed to be exempt for this analysis.
41
Figure 4: Food, rent and clothing have high
weight in CPI
Others
9%
Education
4%
Figure 5: A large part of CPI is exempt from
Excise/VAT
80%
70%
Transport,
Comm.
9%
60%
50%
6.7%
Food,
Beverages
40%
75.4%
Health
6%
46%
30%
47.3%
47.1%
20%
Fuel, Light
7%
10%
0%
Housing
10%
Exempt from Excise Exempt from Sales
Tax
Exempt from GST*
Clothing
7%
Tobacco,
Alcohol
2%
* Items exempted from both excise and sales tax, to which are added
alcohol, tobacco, petroleum products
Source: CMIE
Source: CBEC, State Governments, Estimates
5.73 The taxation of some essential commodities in the CPI is shown in Figure 7. Most of the
c
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al” rate
Figure 7: Low average tax rate on most large
categories
Low
32%
Low 0 12.4%
Normal 12.4-29.4%
Source: CBEC, State Governments, Estimates
20%
18%
16%
13.9%
14%
12%
10%
8%
Zero
49%
6% 4.8%
4%
2%
High=29.4% +
0%
9.5%
8.8%
10.8%
8.8%
6.1%
2.6%
1.7%
1.1%
1.6%
2.3%
products
Vegetables
Cereals and products
Fuel & light
Electricity
Clothing & footwear
Milk and produ
Fruits
Oils and fats
Pulses and products
Source: CBEC, State Governments, Estimates
Health
Medicine
Egg, fish and meat
Distribution of taxes by income groups
5.74 These commodity-specific taxes can in turn be disaggregated by broad income groups
using consumption data from the 2011-12 NSS. Figures 8 and 9 present these for the top 60
(T60) per cent of the population and bottom 40 per cent (B40) of the population, respectively.
5.75 Taxes on food are about 4 per cent for both groups. This is because even though many
food items are exempt in most states, there are embedded taxes in food items such as fuel. This is
an importa
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spend for the top 60%.
5.78 For clothing the average tax rates are relatively similar-about 9 %between the two
groups, and across states. In fuel and light, overall taxes are progressive but because electricity
comprises a higher share of consumption of the top 60%, the exemption given to electricity
benefits the top 60% more than the bottom 40%.
Figure 8: Average tax rates by category for top
60%
Figure 9: Average tax rates by category for
bottom 40%
15.0
10.0
5.0
0.0
-5.0
-10.0
Top 60
Footwear
Medicines only
Health (incl. medicine)
Clothing, Bedding, etc.
Average Tax Rate
â– Subsidy
Electricity
Education
Fuel & Light ex. Electricity
Net Tax Rate
Food
Percent
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
Bottom 40
Footwear
Medicines only
Health (incl. medicine)
Clothing,
Bedding, etc.
Average Tax Rate
â– Subsidy
Electricity
Education
Fuel & Light ex. Electricity
Food
â—† Net Tax Rate
Source: NSSO, CBEC, State Governments, World Bank Estimates
Source: NSSO, CBEC, State Governments,
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nd clothing are taxed at a low rate. We find that the
normal tax rate would then apply to about 11.2% of CPI.
5.81 The category-wise effective tax rates for major categories in these scenarios are shown in
Annex-5 (Figures 1-2), and the inflation impacts in Figures 10-14.
5.82 While assessing inflation, for each scenario we look at two outcomes: one if there is no
input-tax credit², and the second with input-tax credit. In each of the three scenarios, we assume
that a change in the tax rate would drive the supplier to change pricing. In some cases, even if the
headline tax rate does not change (particularly for the exempt categories) if the taxes on inputs
go up, the producer may be motivated to raise prices. For example, if taxes on fertilizers go up,
the rice or cotton producer may take price increases. The reality may fall between the two
alternatives: even if GST credits start flowing in relatively fast, some producers may still price
on the headline rate.
5.83 We have also not
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urce: CBEC, State Governments, some Estimates
Category codes: HE = Healthcare (excluding Medicines); HEM: Healthcare (Medicines); FL = Fuel & Light; CL = Clothing; FB = Food & Beverages; TR
Transport & Communication; ED = Education; HO = Housing; OT = Others (personal products, etc); PT = Paan & Tobacco
5.84
Single-rate GST: The higher the single rate, the greater the price impact. For example, a
14% rate would drive CPI higher by 1.0% if the producers don't factor in the input-tax credit and
0.7% if they do. An 18% single rate would increase prices by 2.5% with or without input tax
credits. (Figure 10 shows the sensitivity to various rates). The items that may see the largest
increase in prices are clothing and medicines (Figure 11). The (small) increase in food and
beverages is largely because a number of even primary food items are currently taxed in some
states (though not in all). As we have assumed the current tax rate to be an average of state tax
rates, the average tax rate jum
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3%
3%
1.0%
2%
0.7%
0.6%
0.3%
0.0%
1%
0%
-1%
-2%
-0.1%
-0.5%
-0.5%
-0.6%
-1.0%
14.0%
18.0%
-3%
-4%
22.0%
26.0%
30.0%
HE HEM FL FLE FB PT ED HO TR CL OT
â– Dual Rate â– Dual Rate with Input Credits
â– Dual Rate â– Dual Rate with Input Credits
Source: CBEC, State Governments, some Estimates
Source: CBEC, State Governments, some Estimates
5.86 Dual-rate GST with a lower rate of 12% and standard rate of 22%: This rate structure
would correspond broadly to an RNR of about 17-18%. The inflation impact in this scenario lies
in between the first and second scenarios: a 22% standard rate would drive a CPI increase of
0.3% if all producers reacted to headline tax changes and by 0.7% if they adjusted for input
taxes: the increase is a reflection of hidden taxation, i.e. the headline taxes may be low, but an
increase in input taxes would raise inflation. Health (excluding medicines) would see the highest
increases (Figure 14).
Figure 14: Scenario 3: Only health to see high inflation
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exempted, and with the PDS in operation, the price impact on these items of consumption
for the poor can be minimal.
5.91 These aggregate calculations would depend on a number of details in the design of the
eventual GST, including:
a) Final synchronized exemption lists;
b) The choice of categories to which low-rates are applied;
c) Exemption threshold for enterprises: a low threshold would mean that more
producers/sellers pay GST, and thus re-price their goods/services, whereas a high
threshold would bring that down (some categories like food could be particularly
sensitive to this choice). In many categories the bulk of the goods/service are accessed
through suppliers/outlets that don't pay tax (e.g. if all barbers/beauticians paid service tax,
collections would be Rs 5000-plus crore, but the collections are about Rs. 100 crore);
d) How many suppliers react just to the headline rate and have the pricing power to either
take price increases or hold on to prices even when they are net
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AT and other taxes to the unified GST. This compensation will be provided for 5 years. In the
earlier experience of implementing the state VATs the Centre provided compensation for three
years but at a declining rate: 100 per cent of the shortfall in 2005-06, 75 per cent and 50 per cent
in the following two years respectively.
5.94
In the aggregate, of course, the States should not suffer any loss in revenues because that
is intrinsic to the calculation of a revenue neutral rate. That is, if the RNR for the States is set
appropriately, States as a whole should have the same revenue as before. But there are two
situations why shortfalls may arise. First, the aggregate RNR might be set too low. In this case,
of course, the GST Council may have to decide to raise rates going forward but interim shortfalls
will have to be compensated.
5.95 A more likely scenario is for shortfalls to be experienced by individual States even if
States as a whole experience revenue neutrality. Now, by definit
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report has chosen
not to provide state-wise RNR calculations.
5.97 But we undertake an illustrative exercise in Box 2 to show that anxieties of some of the
major States may be unwarranted and that the compensation requirements may well turn out to
be minimal. We project the likely future tax base of goods consumption using NSS data and
likely future tax base of services by estimating urban incomes. We find that the share of the
future tax base for States is very similar to their share in current GST revenues. For those States
that receive a large share of current revenue because they have a large manufacturing base, their
anxieties can be reassured on the grounds that such States are also likely to have a large base in
services going forward.
5.98
Notwithstanding the above, there need to be clear rules on compensation to avoid glitches
and controversy in the implementation of GST and to reassure the States so that they too can
embark on GST implementation with enthusiasm and confidenc
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high inflation. The average of the
highest three revenue growth figures for the last three years (for the States as a whole) was over
16.8 per cent; and the corresponding average of highest three nominal GDP growth figures was
13.4 per cent.
5.102 Looking ahead, this picture could change dramatically both because real GDP growth has
slowed but more important because inflation has declined dramatically and is expected to remain
low. For example, in FY2016, nominal GDP growth is expected to be about 9.5 per cent and the
forecast for the period ahead is in the range of 11 per cent and rising slowly on expectations of a
pick-up in real GDP growth. Now, if historical buoyancy prevails, this will lead to substantially
lower collections which would be normal and which should not be attributed to the GST and
hence would not necessarily need to be compensated.
5.103 Hence, the formula for GST compensation going forward would have to take account of
two factors: on the one hand, erring on the s
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ave it in, and to allow the Centre and States at some future date to decide collectively to
51
bring alcohol within the GST net-like foreseen for petroleum products. To leave it out is to rule
out even the possibility of choice for all time which cannot be good policy.
5.106 Another misconception pervades discussions of bringing alcohol in the GST. Bringing
alcohol into the scope of the GST need not take away the right of States to tax alcohol. As is
envisaged for tobacco, it is perfectly possible—and indeed desirable—for some basic tax to be
levied on alcohol within the GST, and allow States to levy top-up sin taxes on alcohol for other
revenue or social reasons. In other words, bringing alcohol within the scope of GST would not
curtail States' fiscal autonomy in this area.
5.107 The same applies to real estate which is also a major arena of rent-seeking. Bringing
electricity into the GST could also improve the competitiveness of Indian manufacturing. And,
as argued in d
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y been “priced
in.”
6.3
Getting the design of the GST right is therefore critical. Specifically, the GST should aim
at tax rates that protect revenue, simplify administration, encourage compliance, avoid adding to
inflationary pressures, and keep India in the range of countries with reasonable levels of indirect
taxes.
52
6.4
There is first a need to clarify terminology. The term revenue neutral rate (RNR) will
refer to that single rate, which preserves revenue at desired (current) levels. In practice, there will
be a structure of rates, but for the sake of analytical clarity and precision it is appropriate to think
of the RNR as a single rate. It is a given single rate that gets converted into a whole rate
structure, depending on policy choices about exemptions, what commodities to charge at a lower
rate (if at all), and what to charge at a very high rate. The RNR should be distinguished from the
“standard” rate defined as that rate in a GST regime which is app
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Table 10 below.
Table 10: Summary of Recommended Rate Options (in per cent)
RNR
Rate on “Low”
“High/Demerit”
rate or Non-GST
excise (goods)
precious
metals
rate
(goods)
“Standard”
rate
(goods and
services)
6
16.9
Preferred
15
4
12
17.3
40
2
17.7
6
18.0
Alternative 15.5
4
12
18.4
40
40
2
18.9
Source: Committee's calculations.
Note All rates are the sum of rates at center and states
53
•
•
On the RNR, the Committee's view is that the range should between 15 percent and 15.5
percent (Centre and states combined) but with a preference for the lower end of that
range based on the analysis in this report. The Committee has noted the risks both of
setting rates that are marginally high and low. On balance, however, it is easier to address
the consequences of erring on the side of marginally low rates.
On structure, in line with growing international practice and with a view to facilitating
compliance and administration, India should strive toward a one-rate structure as the
medium-
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dingly, the Committee recommends that this sin/demerit rate be fixed at about 40
percent (Centre plus states) and apply to luxury cars, aerated beverages, paan masala, and
tobacco and tobacco products (for the states).
This historic opportunity of cleaning up the tax system is necessary in itself but also to
support GST rates that facilitate rather than burden compliance. Choices that the GST
Council makes regarding exemptions/low taxation (for example, on gold and precious
metals, and area-based exemptions) will be critical. The more the exemptions that are
retained the higher will be the standard rate. There is no getting away from a simple and
powerful reality: the broader the scope of exemptions, the less effective the GST will be.
For example, if precious metals continues to enjoy highly concessional rates, the rest of
the economy will have to pay in the form of higher rates on other goods, including
essential ones. As the table shows, very low rates on precious metals would lead
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d direct benefit transfers, respectively; cesses should be reduced and
sparingly used. Another problem with exemptions is that, by breaking up the value-
added chain, they lead in practice to a multiplicity of rates that is unpredictable, obscured,
and distortionary. A rationalization of exemptions under the GST will complement a
similar effort already announced for corporate taxes, making for a much cleaner overall
tax system.
The rationalization of exemptions is especially salient for the center, where exemptions
have proliferated. Indeed, revenue neutrality for the center can only be achieved if the
base for the center is similar to that of the states (which have fewer exemptions—90
products versus 300 for the center). If policy objectives have to be met, instruments other
than tax exemptions such as direct transfers could be deployed.
• The Committee's recommendations on rates summarized in the table above are all
national rates, comprising the sum of central and state
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this report indicates that there
should not be large shifts in the tax base in moving to the GST, implying that overall
compensation may not be large. Nevertheless, fair, transparent, and credible
compensation will create the conditions for effective implementation by the states and for
engendering trust between the Centre and states;
The GST also represents a historic opportunity to Make in India by Making One India.
Eliminating all taxes on inter-state trade (including the 1 percent additional duty) and
replacing them by one GST will be critical to achieving this objective;
Analysis in the report suggests that the proposed structure of tax rates will have minimal
inflationary consequences. But careful monitoring and review will be necessary to ensure
that implementing the GST does not create the conditions for anti-competitive behavior;
Complexity and lags in GST implementation require that any evaluation of the GST-
and any consequential decisions—should not be undertaken ov
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t of the
experience of the GST, to consider bringing fully into the scope of the GST commodities
that are proposed to be kept outside, either constitutionally or otherwise. Bringing alcohol
and real estate within the scope of the GST would further the government's objectives of
56
improving governance and reducing black money generation without compromising on
states' fiscal autonomy. Bringing electricity and petroleum within the scope of the GST
could make Indian manufacturing more competitive; and eliminating the exemptions on
health and education would make tax policy more consistent with social policy
objectives.
6.6 There is a legitimate concern that policy should not be changed easily to suit short term
ends. But there are enough checks and balances in the parliamentary system and enough
pressures of democratic accountability to ensure that. Moreover, since tax design is profoundly
political and contingent, it would be unwise to encumber the Constitution with the minutiae of
poli
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ystem, via a constitutional amendment requiring broad political consensus,
affecting potentially 2-2.5 million tax entities, and marshalling the latest technology to use and
improve tax implementation capability, is perhaps unprecedented in modern global tax history.
The time is ripe to collectively seize this historic opportunity.
57
Box 1. Estimating the association between rates and compliance
Many considerations will go into the determination of the revenue neutral rate, but one of them
will also be the impact of rates on compliance. Theory suggests that increases in rates will lead
to reduced tax compliance. But is there any evidence from the experience of VAT itself?
Based on data provided by the IMF, the Committee undertook a simple econometric analysis
to test whether tax rates and compliance were correlated. Data was provided for 86 countries,
developed and developing. Compliance was measured in two ways: collection efficiency (CE)
and revenue productivity (RP). CE is measured
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in Tables 1 and 2. There is a very strong association between the
standard tax rate and all measures of compliance even after controlling for per capita GDP and
group dummies (Figure 1). For example, for collection efficiency the coefficient (A) is about
(-) 1.22. This suggests that a 1 percentage point increase in the standard rate worsens
58
compliance by 1.22 percentage points.
Figure 1: Regression of collection efficiency on standard rate, after controlling for per
capita GDP and group dummies for income groups
40
CAN
THA
PRY
el col_eff|X)
0
20
20
-40
-20
-15
BEN
LUX
CHN
BRB
BLR
GEO
DMA
BWA
CYP
EST
SER
MMDA HRV
JPN
CHE
KOR
NIC
KGZ
SEN
BGR
IDN
HND
URY
ISR
CHL TGO
US
bl.B
KHM
OM
GTM
• KAZ
GHA
• AUS
ESP SUR
LKA
MEX
DOM
PHL
-VCT
ETH
â—CIV
KEN AUT BRA
NLD MIL
COL DZR DEU CZE
RWA
RUSSV PRT POL
URC IRLVA
ITA
BEL
-10
coef -1.237229, (robust) se .32774309, t=-3.77
Source: Committee's calculation
DNK
GR
-ISL
-5
0
5
10
ef std rate | X)
This has an important implication for t
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imation 1
7.16***
(2)
Estimation 2
7.20**
(1.40)
(2.89)
-1.24***
-1.22***
(0.33)
(0.35)
2.15
(13.04)
-0.64
(24.85)
Yes
No
84
84
0.293
0.276
* p Bottom
Source: NSS, committee's calculation
Recognizing this, the government has recently tried to wean consumers away from gold via the
gold monetization and gold bond schemes. It would be perverse and contradictory to use taxes to
incentivize the holding of gold, and undo what the government is trying to do via these gold
schemes. At the very least, tax policy should be neutral on consuming precious metals.
Thus, on grounds of equity and effectiveness of targeting, on grounds of consistency of policy,
gold should be taxed at the standard rate (bullion can be exempted from the GST). Instead, it is
taxed at 1 percent, dramatically highlighting the incongruity of policy.
The final point to make, of course, is that the more rational gold taxation can be, the lower will
be the standard rate which will be critical in creating a buoyant and complian
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ort duty
increased from
2% to 4% w.e.f.
17.03.2012
1000
900
800
700
600
500
400
2011-12
Number for 2015-16 is annualized
Source: CBEC
Power, health, and education
2012-13
72
Import duty
increased from
4% to 6% w.e.f.
21.01.2013
Import duty
increased
from 6% to
8% w.e.f.
05.06.2013
Import duty
increased from
8% to 10% w.e.f.
13.08.2013
2013-14
2014-15
2015-16
Some key sectors have been excluded or exempt from the scope of GST. These include power,
health and education probably on the grounds that these are public goods, publicly provided, and
of importance to relatively poorer sections of the population. But what evidence do we have on
the underlying assumptions justifying such a policy?
Figure 2 suggests that these sectors are perhaps under-taxed currently (They lie well below and
to the left of the line of the best fit). The design of tax policy, thus, needs to more carefully take
account of evidence. For all three sectors, the benefits of exemptions (even without taking
account of an
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n important intermediate input. In the
medium run, of course, direct benefit transfers or better public provision of essential services
would relieve tax policy of the burden of having to meet social objectives. But even in the short
run, greater attention needs to be devoted to finding better instruments of social policy, and
leaving tax policy to meet broad macro-economic objectives.
73
Annex 1: Macro-Approach to Estimating RNR
The contemplated GST is a consumption tax of the VAT type. It would tax value added at each
stage of the production-distribution chains of goods and services, with a credit/refund for taxes
on inputs. The provision of a credit/refund to intermediate and capital inputs is the single most
important design element of the GST; and, given the assumption of revenue neutrality, it is what
mostly distinguishes it from the current system of federal/States sales and excise taxes, and what
makes it a fundamental reform of the indirect tax system in India.
The revenue imp
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ing the design
phase.
The macroeconomic approach to estimating the RNR has a number of advantages relative to a
methodology based on firm-level data, from tax returns or other sources. First, the existing
system of sales and excise taxes, which combines federal and state level taxes, produce
insufficient information for estimating value added at the firm level for the whole economy,
mainly because it is riddled with exemptions and exceptions, and administrative data are of poor
quality. National accounts data provide a more accurate picture of sectoral value-added and final
consumption.
Second, firm-level data do not always separate intermediate and capital inputs, which may
receive different tax treatment under the GST – the methodology by A. Modi, which relies on tax
–
74
returns of the corporate income tax, is interesting in that it uses depreciation schedules for
income tax purposes as proxies for long-term capital consumption. Third, firm-level data rarely,
if ever, contain
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for India as a whole under various base scenarios, starting
first with a very broad base. The macro approach outlined above was applied using the following
formula:
PB=Σ(Y+M-X)-(1-e)Σ(N+I)
PB is the potential GST base; Y is domestic output, (M-X) is net imports (imports minus
exports); (N+I) is consumption of intermediate and capital inputs; e is the exempt output ratio
(i.e. the tax base associated with inputs used in the production of exempt final consumption); and
the summation is over 140 goods and services and 66 sectors, based on 2011-12 national
accounts. The following assumptions were made: (1) full compliance; (2) full pass-through of the
GST into prices; (3) no behavioral response; (4) the GST has a single positive rate, and a zero
rate on exports.
Under a standard scenario exempting health, education, financial intermediation and public
administration, the GST potential base is 59 of GDP. Exempting basic food items in addition
(essentially unprocessed foods) reduced th
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sts that the GST RNR rate ranges between 10 to 15, depending
on key policy choices regarding exemptions, and a compliance rate of about 80 of potential GST
revenues.
76
Annex 2: Indirect Tax Turnover-based approach to estimating RNR
The taxes to subsumed into GST and the corresponding revenues earned are summarised in
Tables 1 and 2 below. The reported revenue for the Centre includes the entire revenue from
Tobacco products. However, since a part of the revenue on tobacco products is to be realized
through non-rebatable excises, for the purposes of the present exercise, it is assumed that one
fourth of the revenue from tobacco products would be realized from GST.
Table 1: Summary of Revenue to be compensated for all States combined
Tax Heads
CST (including ITC adjustment)
VAT & Sales Tax (excluding Non-VAT)
Non VAT (collected on services/works contract)
Entertainment Tax
Lottery, Betting & Gambling
Luxury Tax
Entry Tax not in lieu of octroi
Entry Tax in lieu of octroi
Toll tax not in l
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ase might not add to the taxable base under GST. The first category
we have VAT, entry tax not in lieu of octroi, entertainment tax. Rest of the levies are classified
in the second category. This is because, taxes such as entry tax in lieu of octroi would be levied
77
over and above VAT or GST and hence would not provide additional base to the tax. Similar
would be the case of purchase tax for instance. VAT revenue is further bifurcated into revenue
from commodities which will be brought into tax under GST and those that would remain
outside the base, i.e, liquor, diesel, petrol and ATF. We have used weighted average tax rates for
the estimation of taxable turnover from the data on tax collected under entry tax not in lieu of
octroi and VAT excluding those which would not form part of the GST, viz., liquor, diesel,
petrol and ATF. Further, since state VAT is applied on a base inclusive of excise duty, the base
is deflated by 1.1236 to derive the base net of taxes. 34 To this is added a
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tax for central excise was 12.36 per cent in 13-14.
78
Turning to the services component, to derive the total turnover of services that would be subject
to GST, we have used to data sources: the activity code wise information on sales from the MCA
database and the turnover derived from the service tax collection. The MCA data needed some
cleaning and updation which is summarised below.
In this database, the activity codes assigned to companies was as per 2004 NIC code. On
examining the data it was found that some companies did not have a valid activity code as per
the NIC classification. Further, since the data for 2013-14 appeared incomplete since fewer
companies where reflected for 2013-14 when compared to 2012-13, the data available for 2013-
14 has been augmented by using information from 2011-12 and 2012-13. Before attempting
these corrections, it would be useful to examine the data that is available for each of these
years. (Table 3) The total number of firms reporting data in 2
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377877436 3412732
4. Firms in service but not
included due to coverage
1043559
Total
55293975
1161634
42053102
0
4142732
Source: computed from data provided by Ministry of Corporate Affairs
35 Companies associated with electricity, gas and steam and construction for instance are excluded from the analysis
36 Data for one company appeared spurious it increased from Rs 89 crore in 2012-13 to Rs 115 lakh crore in 2013-14
and then dropped to Rs 180 crore in 2013-14. For purposes of comparison this value was corrected.
79
Using the concordance tables, companies first are classified as per the NIC code for 2008.
Further, since it was noted that a number of companies which filed returns in 2012-13 did not file
returns in 2013-14, an attempt is made to undertake some corrections to get a more
comprehensive base for 2013-14. These are discussed below.
Step 1: For all companies reporting information in 2012-13 but not for 2013-14 and had a valid
activity code, the data from 2012-13 has been ext
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ver in 13-14 prices
405707
7.Total turnover from MCA after all corrections (2013-14)
4083607
This information relates to companies alone. Since the tax would be payable by non-corporate
service providers as well, we have used information from service tax collection to correct any
shortfall from the MCA related estimates. Further, for all the services, two kinds of adjustments
have been made, viz., deduction for taxable inputs used for service provision and deduction of
services provided when used as inputs into taxable activities. For these corrections, the input-
output table for 2006-07 has been used to derive service specific input-output ratios (see table 5).
80
In addition to the above, there are three sector specific corrections made in the data
1. For computer related services, it has been argued that a sizeable part of the turnover
is associated with exports- this component will not add to the taxable base for GST.
Based on an IBEF study, the domestic supply of computer service
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mation in both cases- PROWESS and MCA based estimates. Second,
as per the input output table, more than 80 per cent of total financial services are
used as inputs. But since a significant part of financial services are in the form of
embedded services, the possibility of taking input tax credit can be limited. So
using the ratio of FISIM to total financial services, the extent of financial services
used as inputs is reduced from 80 per cent to 50 per cent.
In addition to the above, since services provided by railways are not captured within either of
these methods, the base is augmented to the extent of passenger services and transport of exempt
services.3 37
while railways would collect
37
Transport of taxable services is not included since this would be a wash transaction
the taxpayer who pays this tax would claim credit against subsequent transactions.
revenue,
81
Table 5: Input Coefficients and the Adjusted Base: MCA Database
Net
Taxable
Share of
sales
used as
additional
base
avail
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3
0.4170
43668
Others / Undifferentiated services
0.0765 0.3567
118838
Total
745390
Total after all corrections³8
853235
The total base for GST from the above methods therefore can be summarised as;
The RNR corresponding to the proposed design, with CST compensated at 2 per cent is
summarised in the table below. The results presented contain four scenarios. The GST bill
proposes that in the short term, the States would be enabled to levy a 1 per cent tax on inter-state
38 Two corrections are incorporated here – correction for revenue from railways and for base corresponding to
restaurants which is already included in the base for goods computed from the state side.
82
sale of goods. Scenario 1 presents a case where there is no such levy while scenario 2 presents
the case where such a levy does exist. Further, in each of these cases, the results report an RNR
for whether there is a single rate GST or a two rate GST. In single rate case, the entire base is
taxed at the same rate. In t
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e National Accounts
Statistics, output of manufacturing in organised sector in transport equipment is Rs 652251 crore.
Assuming that value added subsequent to manufacturing, including trader margins and transport
costs is 10 per cent of this value, the value of sales of transport vehicles is Rs 717476 crore. 39
Assuming that this part of the base is taxed at 15 per cent each by both Centre and States, the
39 The figures for exports and imports for transport vehicles suggest that there is a net export in this segment. If this
be the case then the downward correction in the RNR would be smaller.
83
RNR got the rest of the base would be 6.81 per cent for the Centre, 8.09 per cent for the States
adding up to 14.91 per cent overall as compared to 17.69 per cent reported above.
To understand what these numbers indicate, it would be useful to look at the composition of the
revenues from the States. The composition indicates that 19 per cent of the revenue to be
compensated is not adding to th
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ndard rate, the corresponding average statutory tax rate would be 9.05 per cent
incorporating the fact that VAT is levied on a base inclusive of excise. In other words, the RNR
gets placed below the average tax rate. On the other hand, if one sought to find resources for all
the taxes incorporated in category II, then the RNR increases to 9.37 for the States and 17.69
overall.
Table 9: Impact on RNR of design of GST
State rate
Overall rate
RNR excluding II
7.55
15.88
Effective tax rate for States
9.05
RNR for finding revenue for II as well
9.37
17.69
84
Annex 3: Direct Tax Turnover Approach to Estimating RNR
At the producer level, the GST base is equivalent to the value added which is the value that a
producer adds to his raw materials or purchases before selling the new or improved product or
service. That is, the inputs (the raw materials, transport, rent, advertising, and so on) are bought,
people are paid wages to work on these inputs and, when the final good or service is sold, s
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added. Since in actual practice, input tax credit will be allowed only on the basis of
invoice, we use the subtractive indirect method for calculating the GST base and the
consequential, revenue neutral rate (RNR). The present exercise is an attempt to calculate the
single RNR using this method. Mathematically,-
Total Revenues (R)
=
t* (output) – t* (inputs)
–
=
t* (output – inputs)
=
t*
(Base)
or, Single RNR, 't' = R/Base
40 This method is so called because value added itself is not calculated but only the tax liability on the components of
value added is calculated.
85
4.
For the purpose of estimating the RNR, we use the extensive producer level data in the
form of profit and loss accounts available with the Income Tax Department. These accounts
relate to 94, 31, 508 business entities for the financial year ending on 31st March, 2013
(financial year 2013-14) 41. These entities comprise of all companies, partnership firms and
proprietorships but do not include charitable organ
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e 'net value of supply of domestically produced goods and
services to arrive at the ‘net value of domestically available goods and services’.
Since exports are zero rated in a GST regime, the value of exports is reduced from the
'net value of domestically available goods and services' to arrive at the ‘net value of
goods and services available for domestic consumption' or the ‘aggregate output
tax base'.
Similarly, the expense items on the debit side of the Profit and Loss Account, in respect
of which input tax credit would be potentially available, are identified and appropriately
adjusted for indirect taxes to arrive at the 'value of purchase of intermediate goods
and services'.
Under the GST Model, full and immediate input credit is proposed to be allowed for
GST paid on purchase of capital goods in the year of purchase. Therefore, the ‘value of
41 These accounts have been electronically filed with the Income Tax Department along with their return of i
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ducation and health services, and
agricultural produce. Reflecting this, appropriate downward adjustments have been
made to both the output and input tax base.
The threshold limit is proposed to be increased to Rs 40 lakh for both goods and
services. Therefore, appropriate downward adjustment to the GST base is made to also
reflect this.
The 'aggregate output tax base' is reduced by the ‘aggregate input tax base' to arrive
at the 'GST Base'.
87
Sl. No.
Table 1: Summary of Data
Description
Taxable
Unit
All Sectors
Sectors
A
Sample Size
in nos
9431508
9087529
B
Net value of supply of domestically produced goods and services
1
Sale of Goods
Rs. In crs
18055276
15180098
2
Sale of Services
Rs. In crs
2818183
2764294
3
Other operating revenues
Rs. In crs
896139
889567
4
5
Financial services (in case of finance company) excluding interest
Commission
Rs. In crs
49998
49991
Rs. In crs
63526
63480
Other income
6
(excluding rent, interest, dividend, profit on sale of fixed assets, profit on
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ees / Fee for technical services
Rs. In crs
102244
93883
15
Hotel, boarding and Lodging
Rs. In crs
12055
11943
16 Traveling expenses other than on foreign traveling
Rs. In crs
69477
66842
8222222
18
19
20
Guest House expenses
21
17 Foreign traveling expenses
Conveyance expenses
Telephone expenses
Rs. In crs
12656
12387
Rs. In crs
24968
23963
Rs. In crs
27831
27003
Rs. In crs
499
449
24
Club expenses
Festival celebration expenses
23 Gift
Audit fee
25 Total (D1 to D24)
Rs. In crs
137
128
Rs. In crs
1200
1166
Rs. In crs
414
374
Rs. In crs
7290
7042
Rs. In crs
1231869
1139866
E
Miscellaneous Services
1 Other expenses
Rs. In crs
F
Total value of inputs on which input tax credit could be available
Rs. In crs
2211903
18322797
1723601
15833024
88
6. The “net value of supply of domestically produced goods and services” is the
aggregate of the value of (i) sale of goods; (ii) sale of services; (iii) other operating expenses; (iv)
financial services (excluding interest) provided by financial comp
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represent
accretion to savings or have been effectively netted out in the calculation of the input base
eligible for input tax credit.
7. The “net value of supply of domestically produced goods and services” by all sectors
is estimated to be Rs. 222,19,873 crore in the financial year 2013-14. However, diamond
cutting, petroleum, rice and flour mill and power and energy sectors (hereafter collectively
referred to as “exempt sectors”) are proposed to be exempt from GST. After adjusting for the
“exempt sectors”, the “net value of supply of domestically produced goods and services” for
the taxable sectors is estimated to be Rs 192, 80,272 crore.
8.
Input tax base comprises of all goods and services used as intermediate inputs in the
production of goods and services and on which output tax has been paid. The 'value of
purchases of intermediate goods and services' by all sectors is the aggregate of the
expenditure on items listed in Table-1. These purchases can be classified as p
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ases by the
taxable sectors is estimated to be Rs. 11, 04,545 crore during the financial year 2013-14.
10. As regards purchases from secondary sector is concerned, they are generally made
from both registered and unregistered dealers. To the extent these are acquired from registered
dealers, full input tax credit would be available. However, where purchases of trading goods and
raw materials are made from unregistered dealers, no input tax credit would be available since no
output tax would have been paid by the registered dealer purchaser. Since there is no bifurcation
of purchases from registered and unregistered dealers in the Profit and Loss Accounts, the
amount of purchases from unregistered dealer needs to be estimated. Based on anecdotal
information, it is estimated that 10 per cent of the purchases of trading goods and raw materials
from the secondary sector is acquired from unregistered dealers on which no input credit would
be available. The value of such purchases from unreg
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roleum, land component of real
estate, alcohol and power and energy. The impact of these exemptions has been factored in the
calculation of GST. In the case of some of these exemptions, the producers are not required to
file their income tax returns and, therefore, do not form part of the sample. Accordingly, while
no adjustment is required to be made to the output tax base, a downward adjustment has been
made to the input tax base. In all other cases, downward adjustment has been made to both the
output tax and input tax base.
14.
In terms of the proposed GST Model, the tax base will include real estate to the extent
that the present scheme of taxation will continue. In the light of this, the value of rental services
has been excluded from both the output tax and the input tax base. However, in the case of land,
no information is separately available for the amount embedded in real estate services. Since the
value of land is included in both the output tax and input tax base, this amo
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0
0
0
0
0
0
Between 0 and Rs 10 lakh
356036
3186
6077867
81777
6433903
84964
Between Rs 10 lakh and Rs 25 lakh
35152
5898
647707
105854
682859
111751
Between Rs 25 lakh and Rs 40 lakh
21875
7010
304099
96652
325974
103662
Between Rs 40 lakh and Rs 1 crore
51385
34476
616905
412195
668290
446671
Between Rs 1 crore and Rs 2 crore
41455
59682
461638
653155
503093
712837
Between Rs 2 crore and Rs 5 crore
Between Rs 5 crore and Rs 10 crore
Between Rs 10 crore and Rs 100 crore
Above Rs 100 crore
48910
158340
378129
1182874
427039
1341213
Total
31696 226691
60571
1891079
14130 12579433
661210 14965794
155235 1081062
124932 2800947
4186 1146675
8770698 7561190
186931
1307752
185503
4692026
18316 13726108
9431908 22526984
16.
The comprehensive GST is intended to bring within its fold rail transport services also.
The rail transportation sector is entirely under the Ministry of Railways which is not required to
file a tax return. Therefore, the sample does not include rail services. Accordingly,
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ax Base (3-4-5)
Rs. In crs
2177633
18847105
C Input Tax Base
1
Value of purchase of Capital goods
Rs. In crs
606609
2
Value of purchase of intermediate goods and services
Rs. In crs
18322797
3
Gross value of intermediate goods and services (1+2)
Rs. In crs
18929406
4
Value of purchases by exempt sectors
Rs. In crs
2489773
5
Value of purchases of primary goods
Rs. In crs
1104545
6
Value of purchases from unregistered dealers
Rs. In crs
2312560
7
Aggregate Input Tax Base (3-4-5-6)
Rs. In crs
13022528
D Estimated value addition by dealers below threshold exemption of Rs 40 lakhs
Rs. In crs
63109
E Estimated value addition attributable to alcohol sector
Rs in crs
25965
F Estimated value addition by Rail Sector
G GST Base (B6-C7-D-E+F)
H Revenues to be compensated
79759
Rs. In crs
5815262
1
Centre
2
States
3
Combined (1+2)
Rs. In crs
Rs. In crs
327728
368829
Rs. In crs
696557
I Revenue Neutral Rate (RNR)
1
Centre
in percent
5.64
2
State
in percent
6.34
3
Combined
in percent
11.98
J GST Prod
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consumer
113.5
107.65
(Row 8+ Row 9+ Row 10)
13
Combined Tax Incidence
20.7
14.85
(Row 9+ Row 10 plus Row 4 if
Row 9 is zero)
14
Rate of tax incidence
22.31%
16.00%
(Row 13 divided by Row 11)
Note: Under GST, the tax incidence on small-scale industries would be lower in spite of withdrawal of exemption. Similarly the price of the
products manufactured by SSIs would be lower under the GST regime if the SSIs pass on the benefit of lower tax incidence to consumers.
Alternatively, their profitability would increase. Therefore, the new GST regime without SSI exemption will be more beneficial to SSIs.
94
Annex 5: Effective tax rates by commodities under 3 GST scenarios
Figure 1 (Scenario 1: a single rate GST of 14%)
Figure 2 (Scenario 2: a dual-rate GST, with a low rate of 12%, a standard rate of 18%, and a high
rate of 35%)
Figure 3 (Scenario 3: Scenario 2 with just the standard rate changed to 22%).
Figure 1: Effective tax rates in Scenario 1
20%
16%
14.4%
13.1%
12%
8%
5.0%
4%
0%
8.6%
RNR
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eferences
1. National Council for Applied Economic Research, “Moving to Goods and Services Tax in
India: Impact on India's Growth and International Trade,” 2009.
2. Keen, Michael, “Targeting and Indirect Tax Design,” Inequality and Fiscal Policy,
International Monetary Fund, 2015.
3. Keen, Michael, “Targeting, Cascading, and Indirect Tax Design,” International Monetary
Fund, WP/13/57, 2013.
4. Keen, Michael, “The Anatomy of the VAT,” International Monetary Fund, WP/13/111,
2013.
5. World Bank, “Fiscal Policy for Equitable Growth,” India Development Report, 2015.
6. Pomeranz, Dina, “No Taxation without Information: Deterrence and Self-Enforcement in the
Value Added Tax,” Harvard University and NBER, 2013.
7. GTCDR South Asia, “Republic of India Manufacturing Plan Implementation Supply Chain
Delays and Uncertainty in India: The hidden constraint on manufacturing growth”, 2014.
8. Rao, Kavita, “Revenue Implications of GST and Estimation of R
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