Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST)
GST
Dated:- 10-12-2015
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, b
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e GST is. But the ambition of the Indian GST experiment 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 reating 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
Country Examples
Disadvantages
Independent VATs at Centre and States
Brazil, Russia, Argentina
Differences in base and rates weake
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ance while also rendering manageable the collection of taxes on inter-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.
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 inve
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dit, each dealer has an incentive to request documentation 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.
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 generates a third party reported paper trail on transactions between firms, which makes it harder to hide the transaction from the government (e.g. Tait, 1972; Burgess and Stern, 1993; Agha and Haughton, 1996; Kopczuk and Slemrod, 2006). This belief has contributed to one of the most significant developments in tax policy of recent decades (Keen and Lockwood, 2010): a striking increase in VAT adoption from 47 countries in 1990 to over 140 today (Bird and Gendron, 2007).”
2.5 The best evidence of the impact of the paper trail on evasion comes f
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ent 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 (CST) on inter-state sales of goods; other numerous inter-state taxes that will be replaced by the (one) GST; and the extensive nature of countervailing duty (CVD) exemptions.
CST3
2.9 The 2 per cent CST on inter-state sales of goods leads to inefficiencies in supply chain of goods. Goods produced locally within the jurisdiction of consumption attract lower tax than those produced outside. This tax encourages geographic fragmentation of production. The tax can be avoided partially through branch/stock transfers by manufacturers
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In other words, the distortion affects fifty per cent of the total trade that flows between States.
Eliminating other inter-state taxes
2.12 Currently, there are a number of inter-state taxes that are levied by the States in addition to the CST. These include: entry tax not in lieu of octroi and entry tax in lieu of octroi.
2.13 Under the GST, all these taxes would be folded into the GST with enormous benefits. What are the benefits?
2.14 There is ample evidence to suggest that logistical costs within India are high. One study suggests that, for example, in one day, trucks in India drive just one-third of the distance of trucks in the US (280 kms vs 800 kms). This raises direct costs (wages to drivers, passed on to firms), indirect costs (firms keeping larger inventory), and location choices (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 a
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ictions raises welfare by 5 per cent.5
2.16 All of these barriers to inter-state trade become even more important in India because the share of roads in freight traffic is high (about 72 per cent) and much higher than in comparable countries and rising over time because of under-investment in the Railways (Economic Survey, 2015, pp.92-94). The implication is that it is especially important for India to reduce costs to inter-state trade because of the excessive reliance on roads for movement of goods. 2.17 Now, all of these costs are not due to taxes. But, the World Bank estimates that about 20-30 per cent are (World Bank).6 It is 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 co
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In scenario 2, there is no excise exemption but there is a CVD/SAD exemption which results in a large penalty on domestic producers (of 12.36 per cent under certain assumptions about costs). But the important and subtle point relates to scenario 3 when the excise and CVD/SAD are both exempted. This may seem apparently neutral between domestic production and imports but it is not. The imported good enters the market 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-à-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
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lp collection efficiency because they are levied at customs. 8
2.23 The second rationale advanced for exempting many imported goods from CVD is that there is no competing domestic production. This argument is faulty because the absence of competing domestic production may itself be the result of not having the neutrality of incentives that the CVD creates. Domestic producers may have chosen not to enter because the playing field is not level.
2.24 Indian tax policy is therefore effectively penalising domestic manufacturing. How can this anomaly be remedied? Simply by enacting an exemptions-free GST. In one stroke the penalties on domestic manufacturing would be eliminated because the GST (central and state) would automatically be levied on imports to ensure neutrality of incentives. In effect, India would be promoting domestic manufacturing without becoming protectionist and without violating any of its international trade obligations under the World Trade Organization (WTO) or under
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effect, the GST will be eliminating negative protectionism.
2.28 This increase in inter-state trade will then have another powerful consequence. A common market will help attain convergence within India because production can be based on comparative advantage. In other words, implementing the GST will help the lagging regions catch up with the more advanced regions by making the former more profitable production destinations.
The growth effect via the boost to investment
2.29 Under the current tax system, while the Union excise duties and State VAT applies to all capital goods, input tax credits are generally limited to manufacturing plant and equipment. For example, no input tax credits are allowed for the Union excise duties on capital equipment acquired for use in transportation, infrastructure, distribution, or construction sectors because these sectors are all outside the scope of excise duties which are applicable to manufacturing only. Similarly, no credit is allowed for the
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vely 12-14 per cent cheaper (because they are taxed at the standard rate of 12.5 per cent currently by the Centre), increasing the demand for capital goods, raising investment and hence growth.
2.32 Assuming an elasticity of investment demand with respect to price to be -0.5, GST, by allowing full input tax credit for capital goods, could higher investment in capital goods by 6 per cent, resulting in 2 per cent higher investment (as machinery and equipment account for around one-third of total investment), which in turn could lead to incremental GDP of 0.5 per cent, assuming an incremental capital output ratio of 4.
2.33 Prior to the introduction of GST in 1991, Canada also had an excise duty regime similar to that in India. Studies for Canada estimated this beneficial impact of GST to be 0.5 per cent as a result of the GST at the 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, i
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olicy objectives (see paragraphs 5.56 to 5.60 and Box 3).
3.2 The details, also summarized in the Table 4, are the following:
Centre
3.3 In relation to goods, the Centre has a very complicated tax structure (Table-4), more complex than that of most of the States, characterized by:
* a multiplicity of rates, including central excise (the most important), cesses, countervailing and special additional duties;
* a multiplicity of central excise rates-8 ad valorem and several specific rates;
* extensive exemptions, amounting to about 300 items compared to say 90 for most of the States. These exemptions amount to about 1.8 lakh crore, amounting to about 1.5 per cent of GDP;
* an incomplete base that stops at the manufacturing stage; and
* an exemptions threshold of 1.5 crore with exports and exempted goods not counting towards the threshold
3.4 In relation to services too, the Centre has a complicated rate structure. Although there is one statutory
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, with both rates and exemptions varying across States. On exemptions, there is both a set that is broadly common to all States and some state-specific ones like agriculture equipment, aquatic feed, cereals and pulses are mostly common across the States whereas Agate (Akik) stones and articles are state specific.
* a standard VAT rate for goods that in most of the States is typically about 12.5-15 per cent (compared with the standard rate of 12 per cent at the Centre)
Centre and States
3.7 Another key difference between the Centre and the 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 corolla
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n policy choices about exemptions, what commodities to charge at a lower rate (if at all), and what to charge at a very high rate. That single rate will be the focal point for the RNR. The RNR should be distinguished from the “standard” rate defined as that rate in a GST regime (which has more than one rate), which is applied to all goods and services whose taxation is not explicitly specified. Typically, the 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 elimination of the Central Sales Tax (
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s 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 the 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.
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
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st, it estimates the goods base at the level of 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.
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-
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ata which are available for about 94.3 lakh 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 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, electricity, gem and jewellery, education, health, and agricultural produce) narrows the output tax base down to about Rs. 194 lakh crore.
4.14 Next,
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.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
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 such as alcohol, electricity, education, and health.
The Magnitude of the RNR
5.2 Three different approaches have been presented to determine the RNR. Each has it merits and drawbacks because
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tives 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?
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 not signify that it is superior to the other two; indeed, focusing on one approach can be limiting and misleading.
5.7 Five key features drive the results of the ITT approach:
i. The assumptions of
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nce 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.
iii. 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 rate-as 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 that the unorganized sector buys intermediates from the organized sector, this shifting will result in greater taxes because
the withheld taxes on intermediates will not be refunded later in the chain because the
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eems 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.
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
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of zero to these effects because of uncertainty about arriving at a quantitative estimate. But that is clearly biased downwards as the authors of the approach would themselves acknowledge. We have chosen to address this bias by making some conservative estimates about the magnitude of these effects.
5.17 For the cascading effect, the ITT approach had earlier estimated an addition to the base of 10% of the incremental services base. The DTT approach estimates an addition to the base of 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)
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ing effect; and
* We incorporate under half the change of the compliance-enhancing effect suggested by our econometric analysis;
* We incorporate 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;
* 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 cr
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15.5
0.53
ITT= Indirect Tax Turnover DTT=Direct Tax Turnover
Source: Different approaches and committee's calculation
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 comparin
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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 the Indian tax system. 20
5.28 Another consideration can be invoked to support the RNR of 15-15.5 per cent. Suppose this RNR requires to be operationalized in a two rate GST structure with a lower rate of say 12 per cent and a standard rate of 17-19 per cent, depending on how goods are allocated between the lower and standard rate.
5.
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nets can better offset this regressivity but India at a lower level of development is less able to do so and hence needs to be especially mindful of rates that are out of line with international ones.
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?
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
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as our evidence in Box 1 shows. The econometric analysis suggests that a 1 percentage point reduction in the standard rate will lead to an improvement in administrative efficiency (and compliance) of 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 standard rate of 22 per cent would increase inflation by between 0.3-0.7 percent. Care wi
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mpliance will improve, so that the GST will become a buoyant source of revenue. This could happen even in the short run as discussed earlier. A marginally lower rate, if it turns out to be that way, 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 sent-in 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 a
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se of exemptions.
5.41 The Committee cannot state this in any stronger terms: if the GST is to be a success-with an uninterrupted value chain that facilitates compliance and a buoyant 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 reduc
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ust be common across the Centre and States, otherwise tax administration becomes fiendishly complicated. Hence the importance of the recommendation that the exemptions 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 + βSG + γSS + μDG
Where R is the RNR, LG is the
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ic. In fact, this is the pattern in the States. Lower rates of 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
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t 6 per cent, the standard rate can come down to as much as 16.9 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
20
States
8
6.0
9.0
20
Services
Center
7
–
8.0
–
States
8
–
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
RNR
Rate on precious metals
“Low” rate (goods)
“Standard” rate (goods and services)
“High/Demerit” rate or Non-GST excise (goods)
Preferred
15
6
12
16.9
40
4
17.3
2
17.7
Alternative
15.5
6
12
18.0
40
4
18.4
2
18.9
Source: Committee's 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
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nd tobacco products over and above this high rate. These goods are final consumer goods and should be of high value (so that small retail outlets are not burdened with the complication 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 be
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oup and instead “leaks” to the non-target group, in this case, the top 6 deciles.
5.60 When we do a benefit-cost analysis of different commodities and compare 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).
* But there are a number of anomalies. The most glaring is gold, silver and precious metals. They are a strong demerit good: the very rich consume most of it (see Table 2 in Box 3 which shows that the top 2 deciles account for roughly 80 percent of total consumption) and the poor spend a small fraction of their total expenditure on it; moreover, they have become a source of macro-economic instabil
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op 6 deciles They deserve to be taxed more like standard goods. Yet, most education and health services will be exempted under the GST. Electricity is planned to be excluded from the GST. These exemptions and exclusions-which are bad from a tax policy and administration perspective because they will break down the value added chainmerit reconsideration.
* Conversely, a number of demerit goods such as alcohol and tobacco are appropriately taxed at high rates. But the case for alcohol's inclusion in the GST relates to governance and reducing corruption. A similar argument applies to including real estate in its entirety in the GST.
Exemptions threshold
5.61 The current situation and proposed thresholds are described in Table 8. (Compounding refers to the exemption of firms from the VAT chain; instead they are charged a small turnover tax without allowing for any input tax credits). Setting an exemptions threshold has to balance three considerations.
5.62 First, minimizing the burden
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10 lakh
not applicable
permissible in some States for some items and at varying rates
same as above
same as above
Source: Department of Revenue
5.63 Corporate income tax data suggests that between for turnover in the Rs. 25-40 lakh crore range, there are 3.26 lakh registered entities (0.22 corporate and 3.04 non-corporates), accounting for just over Rs. 1.04 lakh crore in total turnover. The benefit cost ratio of minimizing the compliance burden relative to the revenue foregone may need to be considered. Also, the option should be given to firms to be part of the GST chain even if they are below the exemption threshold.
5.64 That said, the concern that reducing the threshold will raise the tax burden faced by small scale industries (SSIs) may need to be reviewed. Under plausible scenarios, the effective burden on SSI plants can actually decline, if the standard rate (currently around 25-26% in goods for the center and States combined) comes down, as envisaged by the Committee (s
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ST is such that states will continue to have considerable autonomy under the proposed GST either in its current form (which has a number of exemptions and exclusions) or in a future GST regime that reduces these exemptions and exclusions because there will be scope for states to levy top-up excises. That is the sense in which, the Committee argued earlier that the Indian GST has the potential to marry the best of centralized and decentralized features of VATs in large federal systems.
5.67 Second, if States exercise this flexibility, there would be varying rates for a given product, which would create distortions across States and reduce efficiency and increase compliance costs, especially for companies planning multi-state activities. These distortions and costs must be seen against the fact that they will not lead any meaningful additional fiscal autonomy to the states.
5.68 Rate bands would also create another complication for administering the CVD: under World Trade Organization
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flation, we need to begin with understanding the current structure of taxes.
Current taxes on the consumption basket
5.70 The average effective tax rate on consumption as measured by the Consumer Price Index (CPI) is 10.4%. Excluding items outside GST coverage, the rate drops to 7%, as the excluded items (e.g. alcohol, petrol and diesel) have very high tax rates. This relatively low rate reflects a number of key features.
5.71 First, categories like food and beverages, rent and clothing have large weights in CPI basket (Figure 4). These are categories that are either exempted or taxed at low rates. For example, 75% of CPI is exempt from excise, and 47% of CPI is exempt from sales tax (Figure 5)25. Excluding taxed items that are outside GST (e.g. alcohol, petrol and diesel), 54% of the CPI would be GST exempt.
5.72 Second, most items, where not exempted are taxed at a lower rate. Thus, in addition to exempted commodities, a further 32% is taxed at a low rate, and only 15% at a norma
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t, even these numbers do not truly reflect the net tax burden because of the subsidies provided by the public distribution system (PDS) as described below.
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 important point to emphasize: exemptions do not lead to zero taxation because embedded taxes via inputs cascade into the final product.
5.76 Because of the PDS, however, these taxes are offset by food subsidies so that the net tax rate is negative for the B40 and close to zero for the T60. The magnitude of the impact of the PDS, howev
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ottom 40%.
The price impact of the GST Regime
5.79 We analyse scenarios for both a single rate (of 14%) and two scenarios involving a dual rate GST (12% and 18%; and 12% and 22%, respectively). In the dual rate scenarios, we apply a high tax rate of 35% to about 1% of CPI (that relate to luxury goods).
5.80 In the single rate scenario, we assume that whatever attracts any duty right now would be taxed. In the dual rate scenarios, we assume that most food items are exempt except where processing is involved (e.g. cooked meals, biscuits, sugar, tea, papad, bhujia). We assume that processed food is taxed at the low rate of 12% (this is 9.6% of the 45.9% of CPI that is food & beverages). We also assume that textiles and 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.
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sonal products, may not cut prices even if they see a reduction in their tax rates.
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 jumps from low single digits to the RNR, a substantial increase.
5.85 Dual-rate GST with a lower rate of 12 per cent and a standard rate of 18 per cent: This rate structure would correspond broadly to an RNR of about 1
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, but an increase in input taxes would raise inflation. Health (excluding medicines) would see the highest increases (Figure 14).
Concluding observations
5.89 The experience in a number of economies like Australia, New Zealand and Canada, was that GST implementation drove a step increase in prices: this boosted inflation for a year, and once these prices came into the base, inflation declined, indicating low persistence of this inflation.
5.90 For India, one broad conclusion is that under a dual rate GST, the aggregate impact on inflation will depend on the RNR and the standard rate. An RNR in the 15-15.5 % range with a lower rate of 12% and a standard rate of 18 percent would have negligible inflation impact. A higher RNR with a lower rate of 12% and a standard rate of 22 percent would have 0.3-0.7% impact on aggregate inflation. However, under both these scenarios, if food and fuel and light were exempted, and with the PDS in operation, the price impact on these items of consumpti
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on food and fuel and light, the impact on the bottom 40% can be offset by state governments making changes to the PDS.
f) New GST features: currently excise and VAT cannot be offset, and cascade; in addition, VAT credits cannot be carried across states. Both these characteristics would change in the GST regime, and affect the eventual inflation.
5.92 However, to ensure that producers do not take advantage of the GST, the government might consider setting up mechanisms to monitor the price impact, especially of sensitive items, as was done by Australia. The Competition Commission of India should be especially vigilant in identifying anti-competitive producer behavior that hurts consumers via excessive price increases.
Compensation
5.93 Under the proposed agreement on the GST, the Centre has agreed to compensate the States for any shortfall in their indirect tax collections in the transition from the current state VAT and other taxes to the unified GST. This compensation will be pr
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in revenues from producing States to consuming States, from manufacturing to services, and within manufacturing from intermediate and capital goods toward final goods. This distributional shift is unavoidable because it is in some ways intrinsic to the move to the GST. Most States will stand to gain and it is likely that poorer States will be beneficiaries because they consume more, on average, than they produce; and their economies are more services-than manufacturing-based.
5.96 But pinning down exactly which particular States will gain is not easy because disaggregated state-wise data that would allow reliable computation of the current and future tax base for the States is simply not possible. Moreover, the taxable base of States will also depend on rules on supply of goods and services and changing behavior of firms in response to these rules (for example, headquarters and where supplied). For these reasons, this report has chosen not to provide state-wise RNR calculations.
5.9
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between the actual level of collection (RA) in any particular year and the collection level to be protected (RP) in that year. The challenge will be in identifying the latter.
5.100 Under the system used to provide compensation for the transition to the state VAT, the formula used for compensation was the following: the three best annual growth rates of revenue collected in the previous six years was taken, was averaged, and then used for the calculation of RP, namely the future revenue to be protected. This method had the virtue of simplicity because state governments knew in advance the actual revenue they could expect to receive in the coming year and could hence plan accordingly.
5.101 Going forward, there might be one issue in applying the same methodology to GST compensation. In some of the last five years, revenues witnessed unusually high levels of growth because of the combination of high real GDP growth and high inflation. The average of the highest three revenue growth fig
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ty to the States on revenue availability and help them better plan their expenditures; on the other hand, the formula should take account of the dramatically changed outlook for nominal GDP and hence revenue growth for both the Centre and the States.
Other issues
5.104 The Committee has not been asked explicitly to analyze all issues relating to GST, some of which have been reflected in the Constitutional Amendment Bill. But the Committee would be remiss if it did not state its views on some important issues, for example, the exclusion of alcohol from the scope of taxable items in the Constitutional Bill. Political compulsions may require the exclusion of alcohol in the current conjuncture. But this is at odds with the aim of improving governance and reducing rent-seeking which is pervasive in relation to alcohol.
5.105 Leaving that aside, there is still little reason to exclude alcohol constitutionally. Far better to leave it in, and to allow the Centre and States at some future da
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e GST would be more consistent with social policy objectives than the status quo.
VI. CONCLUSIONS
6.1 This is a historic opportunity for India to implement a game-changing tax reform. Domestically, it will help improve governance, strengthen tax institutions, facilitate “Make in India by Making One India,” and impart buoyancy to the tax base. It will also set the global standard for a value-added tax (VAT) in large federal systems in the years to come.
6.2 The GST has been an initiative that has commanded broad consensus across the political spectrum. It has also been a model of cooperative federalism in practice with the Centre and states coming together as partners in embracing growth and employment-enhancing reforms. It is a reform that is long awaited and its implementation will validate expectations of important government actions and effective political will that have, to some extent, already been “priced in.”
6.3 Getting the design of the GST right is therefore critical. Spe
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i.e., majority of goods and services) will be taxed at the standard rate, although this is not always true, and indeed it is not true for the states under the current regime.
6.5 Against this background, we would draw a few important conclusions.
* Because identifying the exact RNR depends on a number of assumptions and imponderables; because, therefore, this task is as much soft judgement as hard science; and finally also because the prerogative of deciding the precise numbers will be that of the future GST Council, this Committee has chosen to recommend a range for the RNR rather than a specific rate. For the same reason, the Committee has decided to recommend not one but a few conditional rate structures that depend on policy choices made on exemptions, and the taxation of certain commodities such as precious metals. The summary of recommended options is provided in Table 10 below.
Table 10: Summary of Recommended Rate Options (in per cent)
RNR
Rate on precious metals
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te structure. In order to ensure that the standard rate is kept close to the RNR, the maximum possible tax base should be taxed at the standard rate. The Committee would recommend that lower rates be kept around 12 per cent (Centre plus states) with standard rates varying between 17 and 18 per cent.
* 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. As currently envisaged, such demerit rates-other than for alcohol and petroleum (for the states) and tobacco and petroleum (for the Centre)-will have to be provided for within the structure of the GST. The foregone flexibility for the center and the states is balanced by the greater scrutiny that will be required because such taxes have to be done within the GST context and hence subject to discussions in the GST Council. Accordingly, the Committee recommends that this sin/demerit rate be fixed at
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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 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. The Committee considers that there are sound r
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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 over short horizons (say months) but over longer periods say 1-2 years. For example, if six months into implementation, revenues are seen to be falling a little short, there should not be a hasty decision to raise rates until such time as it becomes clear that the shortfall is not due to implementation issues. Facilitating easy implementation and taxpayer compliance at an early stage-via low rates and without adding to inflationary
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in 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 policy that limits the freedom of the political process in the future: the process must retain the choice on what to include in/exclude from the GST (for example, alcohol) and what rates to levy. The credibility of the macroeconomic system as a whole is undermined by constitutionalising a tax rate or a tax exemption. Setting a tax rate or an exemptions policy in stone for all time, regardless of the circumstances that will ari
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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 as:
C-eff = R/(S*C)
where R stands for revenue collected, S is the standard rate and C is total final consumption net of VAT collections. The denominator is a measure of the potential revenues that ought to be collected and the numerator actual collections. C-efficiency is simply a measure of comparing actual against potential. Revenue productivity (RP) simply replaces final consumption with GDP in the denominator.
Simple re
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n for the RNR in India. It suggests that a lower RNR will not lead to as much of a loss in revenue as a simple calculation suggests. For example, if the standard rate were reduced by say 4.1 percentage points in weighted terms that should increase C-efficiency by 4.1 percentage points (using the conservative regression estimate of 1 rather than 1.22) which amounts to about 9.3 per cent given the current C-efficiency ratio of 0.44. Better compliance could therefore fetch potential additional revenues of nearly Rs. 4.3 lakh crore.
Table 1: Regression Results of Collection Efficiency
(1)
(2)
Estimation 1
Estimation 2
Log per capita GDP
7.16***
(1.40)
7.20**
(2.89)
Standard Rate
-1.24***
(0.33)
-1.22***
(0.35)
Constant
2.15
(13.04)
-0.64
(24.85)
Income Group FE
No
Yes
Observations
84
84
Adjusted R2
0.293
0.276
Standard errors in parentheses
* p < 0.10, ** p < 0.05, *** p < 0.01
Collection efficiency (Revenue/(Standard
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. Hence, this report has refrained from estimating state-specific RNRs.
But we can shed some light on this question by looking at proxies for the likely future tax base of States. This future tax base will be based on consumption rather than production. So, we need to find proxies for the States' share in consumption of taxable goods and taxable services. We turn to the NSS-which measures consumptionto calculate taxable goods consumption. We define each state's share in taxable consumption of goods as SG i where G the superscript refers to goods and i the subscript refers to the State.
Since it is difficult to distinguish taxable from non-taxable services in the NSS, we turn to urban incomes as a proxy for taxable services. After all, urban incomes will be a key determinant of spending on business-to-consumer (B2C) services such as financial services, restaurants, advertising, real estate, professions services etc all of which are taxable.
We compiled data on urban populations of th
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degree line is also fitted to the chart which shows points on the line where the current and future tax base are likely to be the same. All points above the line denote States that will potentially need to be compensated. The chart has two interesting and potentially significant implications for compensations:
* First, most of the points are below or close to the 45 degree line, and where they are above the line, they are not very far above it. This suggests that on aggregate there will not be a huge re-shuffling of taxable revenues
* Second, the largest manufacturing States and the ones that currently get a lion's share of revenues either lie below the line, suggesting that far from needing compensation they will actually be benefitting from the move to the GST; or in the one case, where it is above, it is actually very close to the line, implying a small compensation requirement.
We do a sensitivity analysis by changing the goods and services base to 50-50 and the results are s
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ivated by considerations of equity. Goods that account for a large share of expenditures of poorer households-for example, foodwill either be exempt or placed in a lower rate category. But these decisions have to be underpinned by analysis and evidence. This section undertakes such an analysis and then compares the outcome of this analysis with current policy. In other words, the question is whether current tax policy is consistent with social objectives in relation to a number of key commodity groups:
* Food and beverages (and sub-groups)
* Clothing
* Fuel and light (excluding power)
* Medicines
* Gold and precious metals
* Power
* Education
* Non-medical health
* Alcohol
* Tobacco
These groups have been chosen because they are of special interest in the context of the GST: either they are exempted (food, gold (Centre), power, non-medicine health, and education); or they are taxed at a lower rate (clothing, gold (States), medicines); or they are charged at very hi
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will come with the cost that most of the benefits of the subsidy will accrue to the relatively better off. 29
So, one can think of a commodity-wise benefit-cost analysis for determining the rate structure. The benefit could be thought of as the subsidy rate for the target group, say the bottom four deciles of the population.30 The subsidy essentially measures how much the expenditure of the target group would be increased by exempting a good rather than taxing it at the standard rate.
The cost could be measured in relation to the principle of effective targeting. The cost is simply that proportion of the total subsidy for any particular good that does not reach the target group and instead “leaks” to the non-target group, in this case, the top 6 deciles.
We depict this benefit cost analysis graphically in Figure-1 for different group of commodities. We want to focus on the groups (and related sub-groups) that are going to be the focus of important policy choices in the GST mentioned
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mewhere in between that are perhaps worthy of being included at the lower tax rate. These include milk, poultry products and perhaps clothing.31
The data that underlie this graph are presented in Table 1 for the commodities of policy interest. In each table, the share of each commodity in total expenditure of the target group (bottom 40 percent, B40) and the non-target group (the top 60 percent, T60) is presented. This is a measure of equity.
The table 1 also presents the share of the total expenditure on a commodity group that is accounted for by the target and non-target groups. This provides a measure of effectiveness because the greater the expenditure accounted for by the non-target group the more the subsidy will not reach the target group.
We can then compare how these commodities should be treated in terms of equity and effectiveness and how they are in terms of the current effective tax rate on these same commodities (Figure 2).
When measuring the tax on an exempted good,
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efit cost ratio of exempting a good is shown on the Y axis and the effective tax rate on the X axis. In principle, the higher the benefit cost ratio, the lower should be the tax. The line of best fit is downward sloping, indicating that tax policy is broadly sensible.
Food, fuel, and clothing
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. Conversely, a number of demerit goods such as alcohol and tobacco are
appropriately taxed at high rates.
In the case of food and fuels, the PDS system helps make the system fair. For example, taking account of the PDS, the effective tax rate on the bottom 4 deciles is -7.4% for food as a whole, – 32% for cereals, and – 5.7% for fuel and light excluding power. The PDS has therefore served as reasonably effective social policy.
Clothing is also an anomaly but not as striking as the
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3.5 per cent of its expenditures on gold, silver, and precious metals. In contrast the poorest decile spends about 0.03 per cent.
Table 2 highlights how ineffective or unfair is the implicit gold subsidy. It shows the expenditure of these commodities of each decile as a share of total gold expenditures. The top decile accounts for over 63 per cent of total gold expenditure. And this is a serious under-estimate because we know that NSS is very ineffective at capturing the expenditure of the very rich. Cumulatively, the top 2-3 deciles account for an overwhelming share of total gold consumption and therefore appropriate nearly all the subsidy given to gold.
A second reason for favouring gold and precious metals could be to promote savings. At a time when there were few savings instruments, it may have made sense to incentivize the purchase of gold via a lower rate in order to promote savings. But today, this objective has been overtaken by two developments: on the one hand, the emphasi
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ational gold taxation can be, the lower will be the standard rate which will be critical in creating a buoyant and compliance friendly GST. As shown in Table 8, the standard rate could come down to as much as 16.8 per cent if gold is taxed at 12 (6+6) per cent.
There might be concerns that increasing taxes on gold will lead to increased smuggling and evasion. This is a legitimate concern. But there is some evidence on how serious the impact of increased taxes might be. Import duties have been increased several times in the recent past on gold. These too are tax increases. In Figure 4 below, we plot the imports of official gold since 2011-12 and highlight the timing of import duty increases. The chart clearly shows that there is no seriously deleterious impact on gold imports in response to tariff increases. To some extent, there will be declines in consumption and imports if taxes increase but these are modest and manageable. The notion that there will be rampant evasion and smuggling
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arge share of these services (probably privately provided) that nearly all the benefits of the implicit subsidy go to the relatively well off. 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. These commodities deserve to be taxed more like standard goods. Yet, today, they face low taxes and they are planned to be excluded from the GST.
Thus, tax policy in the name of the poor turns out to be poor or ineffective social policy. And the cost is a tax base that is narrow, exemptions-ridden, and in the case of power, the cost also includes breaking up the value added chain because it is an 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 be
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iven the revenue neutrality assumption, R is equal to revenues (both federal and state) generated from existing sales and excise taxes, which India wants to replace with the GST. Assuming that R is known, policy decisions on the GST base become the Centre of policy discussions and design, and are intimately linked to the estimation of the RNR.
National accounts data on final consumption, or supply and use tables can be used to estimate the equation above. They should yield similar results, but the latter provides more insight into how the GST is likely to affect various sectors of the economy, and is particularly relevant, if not necessary, when exemptions or lower rates are part of the options considered during 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 ta
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onomic approach is that national accounts data do not reflect misreporting of the tax base and the tax liability, while tax returns do (implicitly). Another disadvantage is that sectoral analysis using national accounts data is usually limited, relative to firm-level data-where, for example, mixed supplies such as taxed/exempt by the same firm can be analyzed more effectively.
As noted above, estimating the RNR requires clarity on policies regarding the revenues to be subsumed by the GST and the GST base; but these are still the subject of some debate, and are likely to remain until late in the policy process. A useful analysis then consists in examining the potential revenue impact of the GST 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 expor
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GST RNR rate, assuming maximum revenue to be replaced of 6 of GDP, ranges between 9 and 11.
Among the assumptions listed above, compliance is perhaps the most important factor to consider. Although the design of the GST is likely to improve compliance-even assuming no changes in administration, the federal/state coordination of the GST will improve information for cross-verification, especially regarding inter-state transactions-experience suggests that some losses to poor compliance and enforcement should be expected. Losses in the order of 10 to 20 of potential revenues are common in OECD countries; assuming 20 increases the range of the RNR from 9-11 to 11-14.
In summary, this analysis suggests 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.
Annex 2: Indirect Tax Turnover-based approach to estimating RNR
The taxes to subsumed into GST and the corresponding revenues e
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e Compensated (2 per cent)
368829
To derive the tax base for GST, we have broken down the exercise into two parts – one, to derive the base corresponding to goods, we have used the revenue collections from individual States, the tax rates applicable in these States and some assumptions based on discussions with States regarding the composition of turnover taxable by the 1 per cent rate, the lower rate and the standard rate. The assumptions adopted are 2 per cent of total base taxable at 1 per cent, 56.15 per cent taxable at the lower rate and the rest taxable at the standard rate. For each state, taxes have been classified into two groups – taxes, the base of which can be added to the taxable base in GST and taxes, whose base 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
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nment: 2013-14 (Rs crore)
S. No.
Type of duty
Shared with States
Not shared with States
Total
Tobacco Correction
Basic
NCCD
Education cess*
Others
1
CE duty
a)
Non Pol
(excluding Tobacco products)
53672
1913
2441
2675
60701
b)
Tobacco products
14855
1319
528
1153
17855
44637.5
Total CE duty
{Non Pol} [a)+b)]
68527
3232
2969
3828
78556
2
CVD (Non-Pol)
77965
479
3663
883
82990
3
SAD (Non-Pol)
24837
0
0
0
24837
4
Service Tax
150417
0
4319
0
154736
5
TOTAL
321746
3711
10951
4711
341119
6
Total revenue to be compensated
327728
6i
Non Tobacco revenues to be compensated
323264
6ii
Tobacco products revenue at 10 per cent
4463.75
Note: * includes secondary and higher education cess.
Source: Provided by
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those reporting for 2013-14. However, if one compares the number of firms with valid activity code and working in the supply of services, the differences are not that large – 3.56 lakh in 2012-13 as against 3.25 lakh in 2013-14. A comparison of turnovers suggests that while the overall turnovers in 2011-12 and 2012-13 are higher than those in 2013-14, the turnover of firms reporting to be service providers with a valid code is comparable to the turnover available for 2013-14.
Table 3: A comparison of MCA data
2011-12
2012-13
2013-14
Number of Firms
1. Firms with no valid code
34720
34059
21996
2. Firms not engaged in services
169042
175154
0
3. Firms in services
331124
356752
325013
4. Firms in service but not
included due to coverage35
71813
76128
0
Total
606699
642093
347009
Turnover (Rs crore)
1. Firms with no valid code
1058035
22941162
730001
2. Firms not engaged in services
50129647
14171531
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activity code. These companies account for 89.88 per cent of the total turnover of uncoded companies.
Table 4 below summarises the numbers after each of these steps and Table 7 provides estimates of the size of the additional base subsequent to all corrections using MCA database.
Table 4: Computing Total Turnover for the year 2013-14
(Rupees in crore)
Steps
Steps Turnover
1.Data provided for 2013-14
3412732
2.Including companies for which data from 2012-13 was
extrapolated for companies with valid activity code
3974753
3.Turnover without activity code in 2012-13
1511747
4.Turnover classified through assigning activity codes in 2012-13
1358755
5.Taxable turnover from step 4 (in 12-13 prices)
377204
6.Taxable turnover 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 c
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state sector would be limited to the extent to which it is taxed today through taxation of works contracts and pre-completion sales of properties. To incorporate this view, the turnover from service tax collections is given primacy.
3. For financial services, there are two difficulties. First, the coverage of financial services tends to be incomplete being largely limited to fee based services. The present regime of taxation of financial services within Service Tax too is of this form. There is no clear indication to suggest that a radically new approach would be adopted in the proposed GST regime. Therefore, the base corresponding to the present service tax regime is considered a more appropriate base to incorporate into GST RNR estimation 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, t
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0.2265
0.4523
24462
521
Storage and Warehousing
0.0739
0.9894
1397
522
Other transport service activities
0.0624
0.6605
4910
55
Hotel and Restaurant
0.1833
0.1887
36394
61
Post & Telecommunication
0.1020
0.7716
49069
62 & 63
Computer related activities
0.0425
0.1256
116242
64, 65 & 66
Banking and other financial services
0.0361
0.6151
110927
42, 68, 77
Real Estate
0.5523
0.4202
126995
72 & 85
Research & Development and Education
0.0075
0.0112
50295
70, 73, 74,
78, 79, 80 &
82
Business services
0.0788
0.9947
7550
84
Public administration
0.0000
0.0000
3781
86
Health
0.2256
0.0231
2177
93, 94
O.com, social & personal services
0.1123
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 su
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s Base (MCA)
853235
15.87
Services GVA (2011-12 series)
5376045
Total GST Base (MCA)
3936610
37.57
GVA Total
10477140
Table 7: Revenue Neutral Rates: Alternative Scenarios
2 per cent
Single rate
Standard rate
Scenario 1
Centre
8.33
10.42
State (Average)
9.37
12.34
Total
17.69
22.76
Scenario 2
Centre
8.33
10.42
State (Average)
8.88
11.44
Total
17.21
21.86
To consider an alternative case within scenario 1, if one proposes a 30 per cent tax on all transport vehicles (15 per cent for the Centre and 15 per cent for the States), and retain only the 1 per cent tax on gold and bullion, what will the RNR look like. From the 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
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ment tax
2138
II. Revenue not adding to the base, of which
71517
a. CST
38338
b. Lottery, betting and gambling
608
c. Luxury tax
1946
d. Entry tax in lieu of octroi
20772
e. toll taxes
552
f. cesses and surcharges
4742
g. Advertisement tax
1
h. purchase tax
4559
Considering the single rate case in scenario 1 above, the RNR excluding revenues from II above would be 7.55 per cent with the overall RNR being 15.88 per cent. Assuming that the rate structure for taxation in the state is 1 per cent, 5 per cent and 12.5 per cent, on bullion, lower rate and standard 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.
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itive – direct (accounts) method;
2) t (wages) + t (profits): the additive – indirect method40,
3) t (output – input) : the subtractive – direct (accounts) method; and
4) t (output) – t (input) : the subtractive – indirect (the invoice or credit) method.
3. While there are four possible ways of levying a VAT, in practice, the method used (number 4) never actually calculates the value added; instead, the tax rate is applied to a component of value added (output and inputs) and the resultant tax liabilities are subtracted to get the final net tax payable. This is sometimes called the “indirect” way to assess the tax on value 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*(input
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g steps:
a. The receipt items on the credit side of the Profit and Loss Account, which would be liable to output tax, are identified and appropriately adjusted for indirect taxes to arrive at the 'value of supply of domestically produced goods and services (net of indirect taxes)' (hereinafter referred to as 'net value of supply of domestically produced goods and services');
b. Since imports are liable to GST at the point of importation, the 'value of imports' is aggregated with the 'net value of supply of domestically produced goods and services' to arrive at the 'net value of domestically available goods and services'.
c. 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'.
d. Similarly, the expense items on the debit side of the Profit and Loss Account, in respect o
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the financial sector, electricity, gem and jewellery, education and health services, and agricultural produce. Reflecting this, appropriate downward adjustments have been made to both the output and input tax base.
h. 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.
i. The 'aggregate output tax base' is reduced by the 'aggregate input tax base' to arrive at the 'GST Base'.
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 companies; (v) Commission; and (vi) other income. The item 'other income' as reported in the accounts excludes rent, interest, dividend, profit on sale of fixed assets, profit on sale of securities liable to STT, profit on sale of other in
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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 purchases from the primary sector, secondary sector and tertiary sector. The aggregate of purchases by all entities from these three sectors is estimated to be Rs. 183, 22,797 crore during the financial year 2013- 14. After adjusting for the exempt sectors,
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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 unregistered dealers, by taxable sectors, is estimated to be Rs. 11, 86,501 cores during the financial year 2013-14.
11. Similarly, value of specific services and miscellaneous services purchased by taxable sectors, from unregistered dealers, are estimated to
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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 amounts to a wash transaction having no impact on the GST base.
15. Under the GST, a threshold exemption is proposed to be provided for registration of dealers. Since no decision has yet been taken on the level of the threshold exemption, we assume th
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59
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
48910
158340
378129
1182874
427039
1341213
Between Rs. 5 crore and Rs. 10 crore
31696
226691
155235
1081062
186931
1307752
Between Rs. 10 crore and Rs. 100 crore
60571
1891079
124932
2800947
185503
4692026
Above Rs. 100 crore
14130
12579433
4186
1146675
18316
13726108
Total
661210
14965794
8770698
7561190
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, based on the information contained in the National Accounts
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633
6 Aggregate Output Tax Base (3-4-5)
Rs. In crs
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
79759
G GST Base (B6-C7-D-E+F)
Rs. In crs
5815262
H Revenues t
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32.8
32.8
We assume that the value addition is 32.8
8
Base value of Output (Row 3 + Row 7 )
100
92.8
In the existing regime, the output is exempt and no input credit is allowed. UED on inputs become a cost for the taxpayer and therefore included as part of value addition.
9
UED on Output
0
7.42
The output is exempt and therefore there is no UED on output
10
Output VAT (Row 8 * Row 2a)
13.5
7.42
11
Aggregate Value addition
(excluding embedded taxes, if any)
(Row 3 + Row 7)
92.8
92.8
12
Price to the consumer
(Row 8 + Row 9 + Row 10)
113.5
107.65
13
Combined Tax Incidence (Row 9 + Row 10 plus Row 4 if Row 9 is zero)
20.7
14.85
14
Rate of tax incidence
(Row 13 divided by Row 11)
22.31%
16.00%
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 o
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“Fiscal Policy for Equitable Growth,” India Development Report, 2015.
* Pomeranz, Dina, “No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax,” Harvard University and NBER, 2013.
* GTCDR South Asia, “Republic of India Manufacturing Plan Implementation Supply Chain Delays and Uncertainty in India: The hidden constraint on manufacturing growth”, 2014.
* Rao, Kavita, “Revenue Implications of GST and Estimation of Revenue Neutral Rate: Estimates for 2011-12”, National Institute of Public Finance and Policy, New Delhi, 2014.
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 wi
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indirectly by the sector.
9 Compounding refers to the exemption of firms from the VAT chain; instead they are charged a small turnover tax without allowing for any input tax credits
10 Based on data for Karnataka, Maharashtra, Andhra Pradesh, Gujarat, Tamil Nadu, Bihar, Odisha, Chhattisgarh, Delhi, Uttar Pradesh, Jharkhand, Rajasthan, 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.
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.
13 The export sector is exempt with full refund
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bout Rs. 8800 crore in 2014-15), which has since shrunk to about Rs. 600-800 crores. It appears that the States did not take up the power ceded by the Centre, resulting in virtually no State-level taxation of textiles.
16 Another issuea technical one-is that the calculation of the base uses the statutory rate of excise of 12.36% rather than the effective rate of 9%.
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.
18 This base calculation corresponds closest to the policy envisaged under the Constitutional Amendment Bill.
19 It is worth noting that the exclusion of intermediates such as petroleum and power from the GST base tend to make India's Cefficiency better than it actually is. Excluding these inputs essentially lower the standard rate by more than i
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r, have the advantage of increasing the tax base via the “withholding effect” discussed earlier.
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.
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.
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.
26 We use the CSO's Input-Output Table (IOT) for 200
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l go up as a result of the implicit subsidy. The RNR will go up to a greater extent the more the leakage that occurs to non-target households.
32 So, for example, if the embedded taxes on a commodity is e (expressed in per cent), and t is the standard rate, then the effective subsidy rate of exempting a good is (t-e)/E, where E is the total expenditure of the target group. In contrast, if that good is taxed at the lower rate l, then the subsidy rate is (this ratio should be (t-(l-e))/E instead) because input tax credits will be available on the embedded taxes.
33 The calculations in Figure 2 are somewhat tentative and subject to a number of caveats. There remains some uncertainty about the assignment of tax rates to commodities in the data in the National Sample Survey, CPI and the Input-Output table. This would have to be reviewed and refined in future work. Second, a key benefit of the GST will be the ability for producers to claim input tax credits regardless of where their inputs
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s
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.
37 Transport of taxable services is not included since this would be a wash transaction – while railways would collect revenue, the taxpayer who pays this tax would claim credit against subsequent transactions
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.
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.
40This method is so called because value added itself is not calculated but only the tax liability on the components of value added is calculated.
41 These accounts have been
= = = = = = = =
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ood, 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
ÎΑ
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 (@12.36 per cent)
24.72
ÎΑ
24.72
ÎΑ
0
ÎΑ
Total cost
224.72
224.72
224.72
200
212.36
200
Protection for domestic good
0.0%
-12.36%
-6.16%
1/ Excise tax rate = 12.36 per cent. Input tax does not apply for imported good because it is zero rated in the exporting country
2/ In scenarios 1 and 2, total cost of raw materials
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1.5 crores
300
lakh
crore (a)
Alcohol,
1.5
lakh
5-10 lakhs
90
crore(b)
States (VAT)
Services
Centre
States 7/
00
negative list
None
12.4
4.1
65.2
34.8
86.2
13.8
9.4
None
construction,
Education,
health,
public
11.2
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, the states levy a lower rate of 1 percent on gold; the center levies higher rates on luxury xars and aerated drinks
3/ Does not apply to exports and exempted goods for goods at the centre
4/ Approximate; precise amounts vary by state. Exemption lists are not identical across states.
5/ Other excises on goods include cesses, countervailing duties and special additional duties (at the Centre) and octroi (in the States).
6/ Incomplete
= = = = = = = =
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= = = = = = = =
f VAT in High and Emerging Market Economies
25
Average: 16.8
Average: 14.11
10
5
20
20
15
KOR
PHIL
MEX
CHIN
RUS
CHILE
BRA
MACRO
High income countries
EMES
Source-IMF, Credit Suisse and Committee's own calculation
DTT
COM (P)
India
COM (A)
L.LI
Document 6
Figure 3: Comparing “Desirable” Taxation with Actual Taxation of Selected Commodities
Beneifit-Cost Rtaio
Cereals
Food
50.0
Food(excluding PDS subsidy)
40.0
30.0
• Top six deciles
Bottom four deciles
20.0
Cereals(excluding PDS
subsidy)
Fuel and light excluding
electricity
Fuel and light (excluding PDS
subsidy)
10.0 Clothing
Under-Taxed?.
Medicine
Education
Beverages
Tobacco
Electricity
Intoxicants and paan
Health except medicine
0.0
Gold
40.0
-30.0
-20.0
-10.0
0.0 -16.0 20.0
30.0
40.0
50.0
60.0
Effective tax rate
Source: NSS,CBEC, World Bank and Committee's calculation
Document 7
Figure 4: Food, rent and clothing have high
weight in CPI
Others
9%
Education
4%
Fig
= = = = = = = =
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= = = = = = = =
als and products
Electricity
Clothing & footwear
Milk and products
Source: CBEC, State Governments, Estimates
Vegetables
Document 9
Percent
Figure 8: Average tax rates by category for top
60%
15.0
Top 60
10.0
5.0
0.0
-5.0
-10.0
Footwear
Medicines only
Health (incl. medicine)
Clothing, Bedding, etc.
Electricity
Average Tax Rate
Subsidy
Education
Fuel & Light ex. Electricity
â—† Net Tax Rate
Food
Percent
Figure 9: Average tax rates by category for
bottom 40%
15.0
Bottom 40
10.0
5.0
0.0
-5.0
-10.0
-15.0
Footwear
Medicines only
Health (incl. medicine)
Clothing, Bedding, etc.
Average Tax Rate
Subsidy
Electricity
Education
Fuel & Light ex. Electricity
Food
Source: NSSO, CBEC, State Governments, World Bank Estimates
Source: NSSO, CBEC, State Governments, World Bank Estimates
These are an aggregate of five states: Tamil Nadu, Kerala, Karnataka, Gujarat and Andhra Pradesh. Estimates do not take in CST, and do not
also factor in inter-state
= = = = = = = =
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ormal on
11% of CPI)
Figure 13: Scenario 2: Less than 3% inflation
for items seeing price rise
Dual Rate: Low rate 12%,
Normal Rate 18%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.1%
-0.5%
-0.5%
-0.6%
-1.0%
14.0%
18.0%
6%
Dual Rates: Low Rate = 12%
5%
1.9%
4%
1.3%
3%
1.0%
2%
0.7%
0.6%
1%
0.3%
0%
0.0%
-1%
-2%
-3%
-4%
22.0%
26.0%
30.0%
â– â– Dual Rate â– Dual Rate with Input Credits
Source: CBEC, State Governments, some Estimates
HE HEM FL FLE FB PT ED HO TR CL OT
â– Dual Rate â– Dual Rate with Input Credits
Source: CBEC, State Governments, some Estimates
Document 12
Figure 14: Scenario 3: Only health to see high inflation
5%
4%
Dual Rate: Low rate 12%,
Normal Rate 22%
3%
2%
1%
0%
* * * * * * * * * *
-1%
-2%
-3%
-4%
HE HEM FL FLE FB PT ED
HO TR
CL OT
â– Dual Rate Dual Rate with Input Credits
Source: CBEC, State Governments, some Estimates
Document 13
Figure 1: Regression of collection efficiency on standard rate,
= = = = = = = =
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= = = = = = = =
(robustness)
20
20
18
16
14
To be compensated
12
10
Share in taxes to be compensated
∞
6
4
Not to be compensated
2
0
0246810 12 14 16 18 20
Share in future GST base
Source: NSS, CSO and Committee own calculations
Document 16
Benefit: Subsidy as a share of total hosehold expenditure
Figure 1- Benefit Cost Calculus of Exempting Selected Commodities from GST
0.025
Exemptable commodities
CER
0.02
0.015
0.01
Commodities taxable at
F&LXE
low rate
EDOIL
0.005
0
0.6
0.65
TOBA
PAN
0.7
0.75
CLO
Commodites
taxable at
standard rate
MED NI
EDU
ELEC
INTOX
MEDI
GOLD
0.8
0.85
0.95
1
CER: Cereals
Cost: Fraction of total subsidy that “leaks” to non-target groups
F&LXE: Fuel & Light ex. Electricity
MED I: Health except Medicine
OHCS: Other household consumables
S&S: Salt and sugar
Source: NSS 68th round data
EDU: Education
ELEC: Electricity
TOBA: Tobacco
INTOX: Intoxicants
PAN: Pan
CLO: Clothing
MED NI: Medicine
TOI: Toilet articles
= = = = = = = =
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= = = = = = = =
2%
1.2%
2.9%
97.1%
Note:
1) The consumption categories are arranged in the decreasing order of benefit-cost ratio.
2) The category “food” includes cereals, cereal substitutes, pulses and products, egg, fish and meat;
vegetables, fruits, processed food, packaged food, salt and sugar
3) The category “Fuel and light excluding PDS subsidy excludes the consumption of Kerosene (PDS)
4) The category Cereals excluding PDS subsidy excludes consumption of Rice-PDS and Wheat/Atta-PDS
Source: NSS
Document 18
Beneifit-Cost Rtaio
Figure 2: Comparing “Desirable” Taxation with Actual Taxation of Selected Commodities
Cereals
Food
50.0
Food(excluding PDS subsidy)
40.0
30.0
Top six deciles
Bottom four deciles
20.0
Cereals (excluding PDS
subsidy)
Fuel and light excluding
electricity
Fuel and light (excluding PDS
subsidy)
10.0 Clothing
Under-Taxed?.
Medicine
Education
Beverages
Tobacco
Electrcity
Intoxicants and paan
Health except medicine
0.0 Gold
-40.0
-3
= = = = = = = =
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= = = = = = = =
ndia (in MT)
Import duty
increased from
4% to 6% w..₤
21.01.2013
Import duty
increased
from 6% to
8%w.af
05.06.2013
Import duty
increased from
8% to 10% w.e.f
13.08.2013
2013-14
2014-15
2015-16
Document 22
SL No.
Table 1: Summary of Data
Description
Taxable
Unit
All Sectors
Sectors
A
Sample Size
innos
9431508
9087529
B
Net value of supply of domestically produced goods and services
1
Sale of Goods
Rs. In cr
18055276
15180098
2
Sale of Services
Rs. Incr
2818183
2764294
3 Other operating revenues
Rs. In cr
896139
889567
4
Financial services (in case of finance company) excluding interest
5 Commission
Rs. In cr
49998
49991
Rs. In cr
63526
63480
Other income
6
(exchiding rent, interest, dividend, profit on sale of fixed assets, profit on
sale of securities liable to STT, profit on sale of other investments,
agricultural income and profit on account of currency fluctuation)
336661
332841
7 Total
Rs. Incr
Rs. In cr
22219783
= = = = = = = =
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= = = = = = = =
than on foreign traveling
Rs. In cr
69477
66842
17 Foreign traveling expenses
Rs. Incr
12656
12387
21
23
18 Conveyance expenses
19 Telephone expenses
20 Guest House expenses
Club expenses
22 Festival celebration expenses
Gift
24 Audit fee
25 Total (D1 to D24)
Rs. In cr
24968
23963
Rs. In cr
27831
27003
Rs. Incr
499
449
Rs. In cr
137
128
Rs. Incr
1200
1166
Rs. Incr
414
374
Rs. Incr
7290
7042
Rs. Incr
1231869
1139866
E
Miscellaneous Services
1 Other expenses
Rs. Incr
2211903
1723601
F
Total value of inputs on which input tax credit could be available
Rs. In cr
18322797
15833024
Document 23
16%
14.4%
13.1%
12%
8%
Figure 1: Effective tax rates in Scenario 1
20%
RNR 14%
Figure 2: Effective tax rates in Scenario 2
20%
Dual Rate with Normal Rate 18%
4%
5.0%
960
1.2%
Cereals and products
проÑÑ€
Fud & light
Electricity
Clothing & footwear
Milk and products
Vegetables
STH
2.5%
14.0% 14.0%
14.0%
16%
14.
= = = = = = = =
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= = = = = = = =