Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST)
GST
Dated:- 19-12-2016
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\nDocument 1Report on the Revenue Neutral Rate and
\nStructure of Rates for the Goods and Services Tax
\n(GST)
\nDecember 4, 2015
\nContent
\nForeword
\nI
\nIntroduction
\nII
\nBenefits of Proposed GST
\nGovernance
\nMake in India by Making one India
\nThe growth effect via the boost to investment
\nIII Current Structure of Indirect Tax : Highlights
\nCentre
\nStates
\nCentre and States
\nIV Estimating India's Revenue Neutral Rate (RNR) under the GST
\nMacro Approach
\nIndirect Tax Turnover Approach
\nDirect Tax Turnover Approach
\nV
\nRecommendations
\nThe Magnitude of the RNR
\nCritical assessment of the methodology of the three approaches
\nRecommendations and validation
\nA risk analysis
\nAllocation of RNR between Centre and states
\nThe structure of rates
\nExemptions
\nLower, standard and “demerit” rates
\nAssigning products to rates
\nExemptions threshold
\nRates or Rate Bands and <\/p>\n
= = = = = = = =<\/p>\n
Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n re 1: Collection-efficiency in Major VAT\/GST Economies = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n levels of compliance and broadening of tax base under = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n (Arvind Subramanian) = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ment is revealed by a comparison with the other large federal = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n er-state sales. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ocumentation from the dealer behind him in the value-added\/tax chain. Provided, the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ents. In a sense, the supplier, because of the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ra Pradesh compared with goods that can be imported directly to say = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n s (locating closer to = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n s these costs that can be expected to decline with the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n lso be gains stemming from simplification of the documentation requirements under the GST. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ves = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ng without becoming protectionist and without = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ectors because = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n he federal level only. The extent of tax cascading in India is much greater = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n d = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n weighted = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n States, with implications for any = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n asthan, Madhya Pradesh, West Bengal, Harayana and Puducherry = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n sumption of intermediate and capital inputs; e is the exempt output ratio = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n f the States. This = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n akh registered entities (including = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n first place). = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n stimates for the RNR. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n x base proportions of 2 per cent, 56.15 per cent, and 41.85 per cent at the 1 = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ized sector\u2014a key input that drives the final result\u2014are reasonable. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n calculation of the base uses the statutory rate of excise of 12.36% rather than the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n es base. The DTT approach estimates an addition to the base of = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n orate nothing for the impact of the possible growth-enhancing effect of the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ulation corresponds closest to the policy envisaged under the Constitutional Amendment Bill. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n and only somewhat above = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n the magnitude of exemptions from 300 items to 90 items in line with the recommendations of the Empowered = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ndia = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n f 1 percentage point which in the GST setting would = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n will signal the government's confidence in the GST as a medium = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n t source of revenue\u2014 = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n tions list be common across the Centre and the States. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n f = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n 9 per cent (table-8). = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n cation of having to deal with multiple rates) and clearly identifiable so that there are = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n e it against the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n bonds and gold monetization) to wean consumers away from gold, on the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n e poorer households are more likely to buy = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n bill provides for States to have a band of 2 per cent above the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ve to be = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n a low rate, and only 15% at a normal rate = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n al” rate = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n spend for the top 60%. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n nd clothing are taxed at a low rate. We find that the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n urce: CBEC, State Governments, some Estimates = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n 3% = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n exempted, and with the PDS in operation, the price impact on these items of consumption = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n AT and other taxes to the unified GST. This compensation will be provided for 5 years. In the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n report has chosen = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n high inflation. The average of the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ave it in, and to allow the Centre and States at some future date to decide collectively to = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n y been \u201cpriced = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n Table 10 below. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n dingly, the Committee recommends that this sin\/demerit rate be fixed at about 40 = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n d direct benefit transfers, respectively; cesses should be reduced and = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n this report indicates that there = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n t of the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ystem, via a constitutional amendment requiring broad political consensus, = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n in Tables 1 and 2. There is a very strong association between the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n imation 1 = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ort duty = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n n important intermediate input. In the = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ing the design = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n for India as a whole under various base scenarios, starting = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n sts that the GST RNR rate ranges between 10 to 15, depending = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ase might not add to the taxable base under GST. The first category = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n tax for central excise was 12.36 per cent in 13-14. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n 377877436 3412732 = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ver in 13-14 prices = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n mation in both cases- PROWESS and MCA based estimates. Second, = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n 3 = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n e National Accounts = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ndard rate, the corresponding average statutory tax rate would be 9.05 per cent = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n added. Since in actual practice, input tax credit will be allowed only on the basis of = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n e 'net value of supply of domestically produced goods and = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ducation and health services, and = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ees \/ Fee for technical services = = = = = = = =<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nFigure 2: Standard rate of VAT in High and Emerging Market Economies
\nFigure 3: Comparing “Desirable\u201d Taxation with Actual Taxation of Selected
\nCommodities
\nFigure 4: Food, rent and clothing have high weight in CPI
\nFigure 5: A large part of CPI is exempt from Excise\/VAT
\nFigure 6: Only 15% of CPI is taxed at a “normal” rate
\nFigure 7: Low average tax rate on most large categories
\nFigure 8: Average tax rates by category for top 60%
\nFigure 9: Average tax rates by category for bottom 40%
\nFigure 10: CPI would have high sensitivity to single RNR
\nFigure 11: Scenario 1: some categories to see inflation
\nFigure 12: Dual rate sensitivity (Normal on 11% of CPI)
\nFigure 13: Scenario 2: Less than 3% inflation for items seeing price rise
\nFigure 14: Scenario 3: Only health to see high inflation
\nPage No.
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\nBoxes
\nBox 1: Estimating the association between rates and compliance
\nBox 2: Will There be Large Compen<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nGST.
\n(c) Analyse the sector-wise and State-wise impact of GST on the economy.
\n(d) The Committee may invite experts and stakeholders for consultations as it deems fit.
\nThe composition of the Committee is the following:
\nDr. Arvind Subramanian, Chief Economic Adviser, Ministry of Finance (Chairman)
\nDr. W R Reddy, Principal Secretary, Taxes, Government of Kerala
\nDr. P D Vaghela, Commissioner, Commercial Taxes, Government of Gujarat
\nShri K Rajaraman, Principal Secretary and Commissioner, Commercial Taxes,
\nGovernment of Tamil Nadu (since transferred from the post)
\nShri Ritvik Pandey, Commissioner, Commercial Taxes, Government of Karnataka
\nShri Udai Singh Kumawat, Joint Secretary, Department of Revenue
\nShri Alok Shukla, Joint Secretary, Tax Research Unit, Central Board of Excise and
\nCustoms
\nShri Upender Gupta, Commissioner, GST, Department of Revenue
\nMs. Aarti Saxena, Deputy Secretary, State Taxes, Department of Revenue
\nThe Committee met <\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nChief Economic Adviser
\n&
\nChairman of the Committee
\nI. INTRODUCTION
\n1.1
\nAs the world economy slows, and increasing financial volatility and turbulence become
\nthe “newest normal,” only a few economies have the resilience to be a refuge of stability and the
\npotential to be an outpost of opportunity. India is one of those few. As oil and commodity prices
\ncontinue to be soft, and in the wake of actions taken by the government and the Reserve Bank of
\nIndia, macro-economic stability seems reasonably assured for India. This bedrock of stability
\ncoupled with reforms to unleash the entrepreneurial energies of India can create the policy
\ncredibility and business environment that India is indeed seizing the historic opportunity afforded
\nby domestic and international developments to propel the economy to a high growth trajectory.
\nKey amongst these reforms is the goods and services tax (GST), which has, in some ways, been
\n\u201cpriced\u201d into expectations of the government'<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nsystems European Union, Canada, Brazil, Indonesia, China and Australiathat have a VAT
\n(the United States does not have a VAT).
\n1.4 As Table 1 highlights, most of them face serious challenges. They are either overly
\ncentralized, depriving the sub-federal levels of fiscal autonomy (Australia, Germany, and
\nAustria); or where there is a dual structure, they are either administered independently creating
\n1
\ntoo many differences in tax bases and rates that weaken compliance and make inter-state
\ntransactions difficult to tax (Brazil, Russia and Argentina); or administered with a modicum of
\ncoordination which minimizes these disadvantages (Canada and India today) but does not do
\naway with them.
\nTable 1: Comparison of Federal VAT Systems
\nNature of VAT
\nIndependent VATs at Centre
\nand States
\nVAT levied and administered
\nat Centre
\nDual VAT
\nCountry Examples
\nBrazil, Russia, Argentina
\nAustralia, Germany, Austria,
\nSwitzerland, etc.
\nCanada and <\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nAt the same time, the exceptions\u2014in the form of permissible additional excise taxes on sin
\ngoods (petroleum and tobacco for the Centre, petroleum and alcohol for the States)\u2014will
\nprovide the requisite fiscal autonomy to the States. Indeed, even if they are brought within the
\nscope of the GST, the states will retain autonomy in being able to levy top-up taxes on these
\n“sin\/demerit” goods.
\n2
\n1.6
\nProvided it can be reasonably well-designed, the Indian GST will be the 21st century
\nstandard for VAT in federal systems.
\n1.7 It is, therefore, imperative to ensure that the design and implementation of this policy is
\ndone right. And, one important, perhaps critical, dimension of this is the level and structure of
\ntax rates on which this Committee has been asked to make recommendations.
\nII.BENEFITS OF PROPOSED GST
\n2.1 Many benefits are claimed for the GST: that it will increase growth\u00c2\u00b9; that it will increase
\ninvestment by making it easier to take advantage of inpu<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nchain is not broken through wide ranging exemptions, especially on intermediate goods, this self-
\npolicing feature can work very powerfully in the GST.
\n1 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
\nelimination of the cascading of taxes on exports. What is unclear is the quantitative importance of the elimination of the
\nembedded taxes on exports under the GST relative to the current regime of zero-rating of exports. In other words, how
\nincomplete is the current zero-rating of exports and how much will the GST improve upon it are questions that need further
\ninvestigation.
\n2 Whether cascading is a serious problem and why is discussed by Keen (2013).
\n3
\n2.4
\nAccording to Pomeranz (2013), \u201cThe Value Added Tax (VAT) is a stark example of a tax
\nbelieved to facilitate enforcement through a built-in incentive structure that gener<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\npaper trail left by the VAT, knows that his evasion will be more likely to be detected once his
\nclient is audited.
\n2.6
\nSecond, the GST will in effect have a dual monitoring structureone by the States and
\none by the Centre. Hence, there will be a greater probability that evasion will be detected. Even
\nif one set of tax authorities overlooks and\/or fails to detect evasion, there is the possibility that
\nthe other overseeing authority may not.
\nMake in India by Making one India
\n2.7
\nThe current tax structure unmakes India, by fragmenting Indian markets along state lines.
\nThis has the collateral consequence of also undermining Make in India, by favouring imports and
\ndisfavouring domestic production. The GST would rectify it not by increasing protection but by
\neliminating the negative protection favouring imports and disfavouring domestic manufacturing.
\n2.8 These distortions are caused by three features of the current system: the central sales tax<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nChennai from South and East Asian sources.
\n2.11 How quantitatively significant is the impact of the CST? We have some suggestive
\nevidence based on data provided by six States: Maharashtra, Andhra Pradesh, Karnataka,
\nGujarat, Tamil Nadu and Kerala. In these States, stock transfers, on average, account for as
\nmuch of inter-state trade as the trade subject to the CST (in the case of Gujarat and Andhra
\nPradesh, stock transfers are more than twice as much) (Table 2). In other words, the distortion
\naffects fifty per cent of the total trade that flows between States.
\nTable 2: Impact of the Central Sales Tax (In Rs. Crore)
\nMaharashtra
\nTaxable turnover
\n316598
\nTamil
\nNadu
\n214771
\nKerala Karnataka Andhra Gujarat Total
\nPradesh
\n293151
\n186045
\n60669 304479 1375713
\nNon-taxable turnover
\n241319
\n142321
\n44683
\n98300
\n160910 651620 1339154
\n(stock transfer +
\nconsignment sales)
\nRatio of non-taxable to
\n76%
\n66%
\n15%
\n53%
\n265%
\n214%
\n97%
\ntaxable turnov<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nsuppliers\/customers instead of lowest-cost location in terms of wages, rent, etc.). Further, only
\nabout 40 per cent of the total travel time is spent driving, check points and other official
\nstoppages take up almost one-quarter of total travel time. Eliminating check point delays could
\nkeep trucks moving almost 6 hours more per day, equivalent to additional 164 kms per day
\npulling India above global average and to the level of Brazil. So, logistics costs (broadly defined,
\nand including firms' estimates of lost sales) are higher than the wage bill or the cost of power,
\nand 3-4 times the international benchmarks. 4
\n2.15
\nAnother study shows that inter-state trade costs exceed intra-state trade costs by a factor
\nof 7-16, thus pointing to clear existence of border barriers to inter-state movement of goods.
\nFurther, inter-state trade costs in India exceed inter-state costs in the US by a factor of 6,
\nsuggesting that India's border effects are large by international comp<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nintroduction of the GST, providing a boost to inter-state trade and hence productivity growth
\nwithin India.7
\nCVD and SAD Exemptions
\n2.18 It is insufficiently appreciated that India's border tax arrangements undermine Indian
\nmanufacturing and the \u201cMake in India\u201d initiative. Eliminating exemptions in the countervailing
\nduties (CVD) and special additional duties (SAD) levied on imports will address this problem.
\nHow so?
\n2.19 It is a well-accepted proposition in tax theory that achieving neutrality of incentives
\nbetween domestic production and imports requires that all domestic indirect taxes also be levied
\non imports. So, if a country levies a sales tax, VAT, or excise or GST on domestic
\nsales\/production, it should also be levied on imports. In India, this is achieved through the
\nCVD\/SAD which is levied on imports to offset the impact of the excise duty levied on
\ndomestically manufactured goods.
\n2.20
\nHowever, CVD\/SAD exemp<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\n7
\nwithout the CVD\/SAD imposed on it; and, because it is zero-rated in the source country, is not
\nburdened by any embedded input taxes on it. The corresponding domestic good does not face the
\nexcise duty, but since it has been exempted, the input tax credit cannot be claimed. The domestic
\ngood is thus less competitive vis-\u00c3\u00a0-vis the foreign good because it bears input taxes which the
\nforeign good does not. In the example, the penalty on domestic producers is over 6 per cent. In
\neffect, a policy designed to promote domestic manufacturing through excise exemption creates a
\nperverse incentive for the exempt industry and its eventual decline.
\n2.21 The CVD\/SAD, which is levied to offset the excise duty imposed on domestic producers,
\nis not applied on a whole range of imports. These exemptions can be quantified. The effective
\nrate of excise on domestically-produced non-oil goods is about 9 per cent. T<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nthat the CVD creates. Domestic producers may have chosen not to enter because the playing
\nfield is not level.
\n8 The CVD exemption strips the tax from its effective way of taxing the informal sector \u2013 where imported inputs are used directly
\nor indirectly by the sector.
\n8
\nTable 3: Effect of Countervailing Duty (CVD) Exemptions: An Illustration
\nScenario 1:
\nNo excise exemption for
\ndomestically produced good, no
\nCVD exemption for imported
\ngood
\nScenario 2:
\nNo excise exemption for
\ndomestically produced good,
\nCVD exemption for imported
\ngood
\nDomestic good Imported good Domestic good Imported good
\nScenario 3:
\nExcise exemption for
\ndomestically produced good,
\nCVD exemption for imported
\ngood
\nDomestic good Imported good
\nCost of raw materials
\n100
\n100
\n100
\n100
\n100
\n100
\nInput tax 1\/
\n12.36
\n\u00ce\u009d\u00ce\u2018
\n12.36
\nNA
\n12.36
\n\u00ce\u009d\u00ce\u2018
\nTotal cost of raw materials 2\/
\n100
\n100
\n100
\n100
\n112.36
\n100
\nValue added
\n100
\n100
\n100
\n100
\n100
\n100
\nCVD (@12.36 per cent) 3\/
\n\u00ce\u009d\u00ce\u2018
\n24.72
\n\u00ce\u009d\u00ce\u2018
\n0
\n\u00ce\u009d\u00ce\u2018
\n0
\nExcise duty (@<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nviolating any of its international trade obligations under the World Trade Organization (WTO) or
\nunder India's free trade agreements (FTAs).
\n2.25 In the meantime, the effect of the GST can be partially simulated even now by
\neliminating the exemptions applied to CVD\/SAD. The default situation should be an
\nexemptions-free regime. If particular sectors seek relief from the CVD\/SAD, they should be
\nrequired to make their case at the appropriate forums.
\n2.26 In a sense, India finds itself in a de facto state of negative protection on the one hand, and
\ncalls for higher tariffs on the other. It is win-win to resist these calls that would burnish India's
\nopenness credentials and instead eliminate the unnecessary and costly penalty on domestic
\nproducers.
\n2.27 All these three sets of costs\u2014the CST, the CVD exemptions, and other inter-state taxes-
\nshould be viewed as undermining Make in India because in all cases, they favour foreign
\nproduction <\/p>\n
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\nthese sectors are all outside the scope of excise duties which are applicable to manufacturing
\nonly. Similarly, no credit is allowed for the State VAT on capital goods acquired by the service
\nsector (e.g., telecommunications, transportation, finance, insurance, and IT services).
\n2.30
\nEstimates vary on how much of current investment in a given year suffers from non-
\ncreditable excise duties and\/or VAT. For example, indirect tax collection data for 2014-15
\nindicate that the total amount of capital goods purchases for which CENVAT credit was claimed
\nwas Rs. 1.6 lakh crore, divided between goods (Rs. 1 lakh crore) and services (Rs. 0.6 lakh
\ncrore). National income accounts data suggests that investment in plant and equipment for the
\nsame year by the non-government, non-household sector was about Rs. 7.4 lakh crore.
\nApparently, the blocked input taxes could amount to as much as 75 per cent of total investment.
\nWhat could account for the difference and could the GST fill this <\/p>\n
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\nbecause of more stringent rules in India for claiming tax credits.
\n2.34 In sum, investment is discouraged under the current system through the application of
\nexcise duties and VAT to capital goods, for which no set off or input tax credit is provided. This
\nincreases the cost of capital goods and reduces investment, which in turn leads to lower
\nemployment and output.
\nIII. CURRENT STRUCTURE OF INDIRECT TAXES: HIGHLIGHTS
\n3.1 This section describes briefly the structure of current rates of domestic indirect taxes at
\nthe Centre and the States. The key takeaways are that the current tax structure is highly complex,
\nhighly leaky (riddled with exemptions in goods that we estimate to be about 2.7 per cent of GDP
\nfor the Centre and States together) characterized by significant differences between the Centre
\nand the States, and by a rate structure that does not confirm to what the evidence suggests might
\nbe good policy. T<\/p>\n
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\n3.4
\nIn relation to services too, the Centre has a complicated rate structure. Although there is
\none statutory rate, in practice, there are 10 other rates because of so-called \u201cabatement” which
\namounts to fixing a rate different from the standard rate and not allowing further input tax
\ncredits. Abatement is necessitated in some part because of uncertainty in the base, and
\nspecifically being unable to distinguish \u201cgoods\u201d from \u201cservices.\u201d The exemptions threshold is
\nRs. 10 lakh.
\n3.5 At the Centre, there is incomplete provision of input tax crediting for goods, and
\nincomplete cross-crediting between goods and services.
\nStates
\n3.6
\nIn relation to goods, the States have structures characterized by:
\n\u00e2\u017e\u00a4 a base that is complete in extending all the way to the retail stage
\nan exemptions threshold that varies across States between 5 and 10 lakh with a
\nprovision for \u201ccompounding\u201d that also varies across States in design
\n\u00e2\u017e\u00a4 a multiplicity of rates,<\/p>\n
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\nExempted
\nDescription of Commodities xx\/
\nLower rate Higher rate
\nThreshold 3\/
\nGoods 5\/
\nTobacco,
\nExemptions
\nNumber 4\/ value
\nTextiles, mobile petroleum
\nphones;
\nfertilizers;
\nCentre (Excise) manufacturing
\n8
\n12.0
\n6.0
\n59.2
\n39.6
\n84.9
\n11.1
\n8.4
\n11.7
\nFood
\nStates (VAT)
\nup to retail
\n3+
\n12.5-14.5 4-5.5
\n28.5
\n67
\n32.8
\n54.8
\n7.5
\n9.6
\nFood, goods
\nof local
\nimportance
\nsome
\nintermediates
\nIntermediates;
\ncapital goods;
\ngold & precious
\nmetals
\nproducts,
\nautomobiles,
\naerated
\nwater
\n1.8
\nlakh
\n1.5 crores
\n300
\ncrore (a)
\nAlcohol,
\npetroleum,
\ntobacco
\n1.5
\n5-10 lakhs
\n90
\nlakh
\ncrore(b)
\nServices
\nCentre
\nStates 7\/
\nnegative list
\n11
\nNone
\n12.4
\n4.1
\n65.2
\n34.8
\n86.2
\n13.8
\n9.4
\nNone
\nconstruction,
\n11.2
\nEducation,
\nhealth,
\npublic
\nservices
\nwork contract,
\nrestaurant,
\ntransport, life
\ninsurance
\n10 lakhs
\n1\/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.
\n2\/ At the centre, there are 2 lower rates which are akin to a turnover tax; th<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nfuture standard rate is that the States have a much larger portion of the base (more than 65 per
\ncent) 10 taxed at the lower rate while the comparable number for the Centre is about 40 per cent.
\nOne reason is that States typically place intermediate goods in the lower rate category. The
\nhigher standard rate is therefore almost compelled by the fact of placing so much of the base at
\nthe lower rate.
\n3.8
\nOne corollary is that the weighted average statutory rate for goods is 8.4 per cent and 7.5
\nper cent for the Centre and States, respectively.
\nIV.ESTIMATING INDIA'S REVENUE NEUTRAL RATE (RNR) UNDER THE GST
\n4.1
\nThe Committee had the benefit of 3 technical approaches to estimating the RNR which
\nare described in detail in Annexes 1-3. These will constitute the basis for the Committee's
\nrecommendations on the RNR.11 These are briefly summarised in this section.
\n4.2
\nBefore describing the recommendations, it is important to make a point relating to
\nterminology.<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\naccounting for 78.5 per cent of the VAT base.
\n11 There have been other attempts at estimating the RNR, including by the Thirteenth Finance Commission and
\nNIPFP, We restrict the scope of our technical inputs to the three studies described in this section as they are the
\nmost recent by way of data and methodology; they are also the three that were discussed within the Committee.
\n15
\nmajority of the base will be taxed at the standard rate, although this is not true for the States
\nunder the current regime.
\n4.3
\nThe essence of calculating the RNR is highlighted in the simple equation:
\nt=R\/B
\nwhere t is the RNR, R is equal to revenues (both Centre and state) generated from existing sales
\nand excise taxes, which will be replaced by the GST. The revenues to be replaced are estimated
\nto be Rs. 3.28 lakh crore for the Centre, and Rs. 3.69 lakh crore for the States, including the
\nrevenues that will have to be compensated for the eliminatio<\/p>\n
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\n(i.e. the tax base associated with inputs used in the production of exempt final consumption); and
\nthe summation is over 140 goods and services and 66 sectors, based on the 2011-12 national
\naccounts. The following assumptions were made: (1) full compliance; (2) full pass-through of the
\n16
\nGST into prices; (3) no behavioral response; (4) the GST has a single positive rate, and a zero
\nrate on exports.
\n4.5
\nUnder a standard scenario exempting health, education, financial intermediation and
\npublic administration, the GST's potential base is 59 per cent of GDP. Exempting basic food
\nitems in addition (essentially unprocessed foods) reduced the potential base to 55 per cent of
\nGDP. However, exempting petroleum or electricity increases the potential base to 67 per cent of
\nGDP\u2014given that such items are largely consumed as inputs rather than final consumption, their
\nexemption increases the base due to cascading. Assu<\/p>\n
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\nbase is estimated by converting data on actual collections and statutory rates into a goods base.
\nIn other words, the effective rate becomes the basis for the estimation of the goods base. In the
\nabsence of data for all the States, the key assumption is that States collect revenues at the three
\nrates (1 per cent, 6 per cent, and 14 per cent) in such a proportion so as to yield a total taxable
\nbase of Rs. 30.8 lakh crore.
\n17
\n4.9 In the second stage, the services base is estimated based on turnover data of 3.25 lakh
\nfirms from the newly available MCA database (this base is estimated at Rs. 40.8 lakh crore).
\n4.10 In a third stage, adjustments are made to this base to remove IT-related services, because
\na large part of them are exported, and to remove most of real estate and financial services from
\nthe base because of the manner in which these items will be treated under the GST. This adjusted
\nbase is then subject to an input-output analysis to deduct from the base taxab<\/p>\n
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\ncompanies, partnerships, and proprietorships but not charitable organizations). The data are
\nclassified into 10 sectors and 75 sub-sectors. These data allow the potential base for the GST to
\nbe calculated. Unlike the indirect tax turnover approach but like the macro approach, this
\napproach yields a combined base for goods and services, rather than separate bases for goods and
\nservices.
\n4.13 The profit and loss accounts provide data on value of supply of goods and services
\n(which is equivalent to turnover) to which can be added imports of goods and services. This
\n12 “Revenue implications of GST and estimation of revenue neutral rate: Estimates for 2011-12\u201d submitted to the Empowered
\nCommittee of State Finance Ministers in February 2014.
\n18
\nyields the tax base of at about Rs. 222 lakh crore in turnover terms. Deducting the exempt sectors
\nfrom this base (petroleum, land component of real estate, the interest component of the financial
\nsector, elect<\/p>\n
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\n4.16 Putting all these together gives a potential tax base of Rs. 58.2 lakh crore, yielding a
\ncombined RNR of 11.98 per cent.
\n4.17 Table 5 highlights the estimated GST base and corresponding RNR of the three
\napproaches to estimating RNR.
\nTable 5: Summary of approaches to estimating RNR
\nApproach
\nGST Base
\n(in lakh crore)
\nRNR
\n(per cent)
\nMacro
\n59.9
\n11.6
\nITT
\n39.4
\n17.7
\nDTT
\n58.2
\n12.0
\nITT= Indirect Tax Turnover
\nDTT=Direct Tax Turnover
\nSource: Based on three approaches to estimating RNR
\n13 The export sector is exempt with full refund (i.e. zero-rated).
\n19
\nV. RECOMMENDATIONS
\n5.1
\nConsistent with the Committee's terms of reference, we make recommendations on a
\nnumber of issues: the RNR; the distribution of RNR between the Centre and States; the structure
\nof rates; and the potential price impact of the GST. In addition, we make recommendations on
\nother relevant issues: the bands for the GST; compensation, the treatment of precious metals, and
\nthe tax treatment of certain commodities <\/p>\n
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\n5.4 Our recommendation for the RNR will not be unduly guided by short-term
\nconsiderations, for example, relating to compensation. The RNR should be one that achieves the
\nobjectives of the government over a horizon that is not short term. If compensation is necessary,
\nit should be found\/funded from government resources elsewhere and the GST should not have to
\nbear the long-term burden of having to meet short-term exigencies.
\n5.5 The estimates presented for the national RNR, range from about 11.6 per cent under the
\nMacro approach to 17.7 per cent under the ITT approach. Where does the truth lie?
\n20
\n20
\nCritical assessment of the methodology of the three approaches
\n5.6 Each approach has advantages and shortcomings that are described below. The
\nEmpowered Committee of the GST has had the benefit of familiarity only with the ITT approach
\nof the NIPFP and we will dwell to some extent on this analysis. The Committee would
\nunderscore that the focus on the ITT approach does <\/p>\n
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\nper cent, 5 per cent, and 14-15 per cent, respectively.
\nThe estimation of the services base by the ITT approach does not make any allowance for
\npurchases from the unorganized sector. Such purchases will lead to an increase in the
\nbase via cascadingbecause the final value will reflect the embedded taxes which
\ncannot be set off as input tax credit.
\nThe estimation of the services base also ignores one potentially important issue.
\nCurrently, States tax most intermediate goods at the lower rate. If these goods were
\nshifted to the normal rateas States have indicated they might be willing to do\u2014there
\nwould be an effective expansion of the tax base. It may be noted that taxes on
\nintermediates in a GST system are like withholding collecting early on in the value
\nadded chain but refunding them later on. So, in principle, this shift of intermediate goods
\nshould not yield any additional taxes. But to the extent th<\/p>\n
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\n5.9 The macroeconomic approach of the IMF suffers from being too aggregate in nature and
\nthe implied tax base of Rs. 59.9 lakh crore seems to be on the high side. One particular source of
\nworry is that the tax base seems to increase substantially account of the exclusion of electricity
\nand petroleum. This seems unlikely given that in both cases, there is some considerable sales to
\nthe final consumer.
\n5.10
\nBut these two approaches have two important merits. They help provide a cross-check for
\nthe ITT approach; perhaps more significantly, they highlight the need to validate the estimates
\ngenerated by all three approaches. We turn to this validation in the next section.
\n14 The ITT approach also does not include in the base that component of imports of goods and services that is sold directly to
\nconsumers outside the dealer network. The Committee has not been able to quantify this omission.
\n15 There has been<\/p>\n
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\neffective rate of 9%.
\n22
\n5.11 All three approaches implicitly assume that there will be no benefits to the base and\/or
\nrevenues from improving compliance and or improved growth consequent upon implementing
\nthe GST. But the macro approach does not assume current levels of compliance\u2014as the other
\ntwo approaches do\u2014but a theoretical one which may or may not correspond to current reality.
\nRecommendations and validation
\n5.12 Our recommendation is based first on making adjustments to the ITT approach:17 Rs.
\n3.12 lakh crore for the data-based revision to the States' VAT base; Rs. 30,000 crore for the
\nomission of sugar; Rs. 45,000 crore for the cascading effect; and Rs. 95,000 crore for the choice
\nof the statutory rather than effective excise rate in quantifying the base. Then, we add an
\nadjustment for compliance efficiency gains (Rs. 2 lakh crore).
\n5.13
\nWhat is the basis for these adjustments?
\n5.<\/p>\n
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\n17 It is worth emphasizing that the ITT approach has itself undergone revision from a previous version. Some of the
\nimportant revisions in the latest version were adding real estate in to GST base and removing additional base on
\naccount of unorganized sector, sugar and textile.
\n23
\nabout 16%. We, conservatively, estimate that the under-statement of the base would be half that
\nassumed by the ITT approach which amounts to 45,000 crore.
\n5.18
\nFor the compliance effect we draw upon cross-country experience. In Box 1, econometric
\nanalysis of that experience yields an estimate that a 1 percentage point reduction in the standard
\nrate would increase the collection efficiency by 1 percent. The GST would lead to about a 4.1
\npercentage point reduction in the standard rate (in weighted terms) which would translate into a
\n4.1 percentage point increase in the C-efficiency or 9.3% increase in collection efficiency (based
\non the current C-ef<\/p>\n
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\nGST
\n5.20 Under GST, the compliance gains would be the following:
\n\u2022
\nAt the Centre, the rate structure will be significantly simplified from more than 10 rates
\n(for both goods and services) and numerous exemptions to 2-3 rates and fewer
\nexemptions;
\n24
\n5.21
\n\u2022
\n\u2022
\nAt the Centre and the States, significant improvements in compliance will result because
\nof the IT systems under which matching of supplier and purchase invoices will be
\nelectronic and instantaneous, reducing the scope for fraud and evasion; this will also
\nimprove compliance for direct taxes;
\nGeneral compliance will improve because of dual monitoring by the Centre and the
\nStates; and
\nThe comprehensive definition of taxation of goods and services should result in a smaller
\namount of the base falling through the cracks between \u201cgoods\u201d and \u201cservices\u201d as happens
\ncurrently. The elimination of abatements on services will<\/p>\n
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\n25
\n5.23
\nOur recommendation for the RNR is, therefore, a range for the RNR of 15-15.5%, with a
\nstrong preference for the lower end of that range.
\n5.24 Next we validate this recommendation. Since there is the possibility of error in all the
\napproaches, including our recommendation, we must independently validate them against other
\nbenchmarks. One important benchmark for validation relates to the efficiency of the tax system.
\nA commonly-used measure of performance of a VAT system is to compute a C-efficiency ratio.
\nThis is measured as:
\nC-eff=R\/(S*C)
\nwhere R stands for revenues collected, S is the standard rate and C is total final consumption (net
\nof value-added taxes). The denominator is a measure of the potential revenues that can be
\npotentially collected and the numerator actual collections. C-efficiency is simply a measure of
\ncomparing actual against potential. The C-efficiency implied by the <\/p>\n
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\nthat for low-income countries.
\n5.26 Put differently, if the RNR, and the associated standard rate, of the ITT approach were
\nreasonably estimated, it would imply that India has either come up with an effective policy base
\nunder the GST that is unusually narrow and\/or Indian indirect tax administration is unusually
\npoor relative to comparator countries. This inference would be puzzling, if not problematic, not
\nleast for implying that India's tax efficiency is closer to that of Mali than of Brazil, Chile,
\nIndonesia or Thailand. This cross-country comparison is important evidence that the RNR
\nestimated by the ITT approach is too high.
\n5.27 In contrast, the RNR estimates for the other two approaches would place India at levels
\ncomparable to other countries. 19 Our recommendations yield estimates for the RNR that are at or
\nbelow the average of other EMEs. In that sense, they are conservative estimates for the RNR
\nbecause they too imply similar levels of efficiency of <\/p>\n
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\nCommittee. Currently about Rs. 1.8 lakh crore are lost in central excise exemptions of which a substantial proportion can be
\nrecovered; expansion of tax base from manufacturing to retail level; bringing precious metals, gold, etc. into the tax base and
\ntaxed at the lower rate; reduction in the exemptions threshold from Rs. 1.5 crore in the case of goods to Rs. 25 lakh; this will
\noffset the raising of the exemptions threshold for services from the current level of Rs. 10 lakh. Offsetting some of these effects
\nwill be the fact that cascading could decline because of better administrative efficiency.
\n27
\n14.4 per cent and the highest standard rate is 19 per cent; and even for the high-spending and
\ntherefore high-taxing advanced economies it is 16.8 per cent. An RNR of anything beyond 15 –
\n15.5 per cent will likely result in a standard rate of about 19-21 per cent which would make India<\/p>\n
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\nA risk analysis
\n5.30 Since we cannot be certain of the RNR-it is after all our best assessment or best guess-
\na risk assessment framework poses the question: should we err on the side of an RNR that is a
\nlittle low or a little high?
\n28
\n5.31 One risk of setting an RNR that is low is the re-emergence of a trust deficit between the
\nCentre and the States as happened in relation to compensation for lost CST revenues after the
\nglobal financial crisis. If revenues fall short, and the fiscal position of the Centre and States is
\naffected, the Centre will face a double whammy, with weak revenues for itself and an additional
\nburden of having to compensate the States. And, if as a result, compensation is delayed or
\ndiluted, a trust deficit could re-emerge.
\n5.32 The second risk of setting a low RNR is that it could interact with slower growth and\/or
\nweaker buoyancy going forward to magnify the revenue shortfall.
\n5.33 On the other hand, some of these risks can be overcome. In the event of a rev<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\ntranslate into an efficiency gain of about 15 percent.
\n5.35
\nFurther, the improvement in compliance will not be restricted to indirect tax collections.
\nThe paper trail of the GST will also help direct tax administration and improve compliance in
\ncollections of corporate income taxes.
\n5.36 Third, the price consequences of a GST will be small, especially under a dual rate
\nstructure with essential food items exempted. As the analysis in Section V reveals, an RNR in the
\n15-15.5 per cent range with a lower rate of 12 per cent and a standard rate of 18 per cent would
\nhave no aggregate inflation impact. But a higher RNR with a lower rate of 12 per cent and a
\n29
\nstandard rate of 22 per cent would increase inflation by between 0.3-0.7 percent. Care will have
\nto be taken to ensure that the GST does not become the target of popular disaffection on the
\ngrounds that it fed higher inflation. In that respect a lower RNR is safer than a higher one,
\nes<\/p>\n
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\nterm tax reform. This would re-inforce the signal that the government has already sent\u20ac\u2022in a
\nsense under-writing the GST-by committing to compensation for five years (despite the fact
\nthat when the state VATs were implemented, compensation was not required beyond the second
\nyear.)
\nAllocation of RNR between Centre and States
\n5.39
\nThe Committee's recommendations on rates are all national rates, comprising the sum
\nof central and state GST rates. How these combined rates are allocated between the center and
\nstates will be determined by the GST Council. This allocation must reflect the revenue
\nrequirements of the Centre and states so that revenues are protected. For example, a standard rate
\nof 17% would lead to rates at the Centre and states of say 8 percent and 9 percent, respectively
\nbecause that is roughly the ratio of GST revenues that would have to be generated by the centre
\nand states assuming that the 2013-14 data o<\/p>\n
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\nthese exemptions must be plugged. Using exemptions as selective industrial policy has led to
\ngenerous un-selective policy, and proliferating exemptions. The road to exemptions hell is paved
\nwith the good initial intention of restricting exemptions to a few industries.
\n5.42 It is also worth emphasizing that exemptions need not, and often do not, result in low or
\nzero tax burdens. If a product is exempted, the effective tax burden will depend on all the
\nembedded taxes on inputs going into that product. If the move to the GST results in lower rates
\nof taxation, it is possible that eliminating exemptions might actually reduce the effective tax
\nburden. This is especially likely in relation to small scale industries (SSIs) which are likely to
\ncome within the scope of the GST because of reductions in the exemptions thresholds. The
\ncombination of input tax credits that they can reap combined with lower standard rates might
\nresult in SSIs facing lower tax burdens. An<\/p>\n
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\nLower, standard and “demerit” rates
\n5.45
\nIdeally, the GST should aspire to a single rate, which would then also be the standard
\nrate. Since 2000, about 90 per cent of countries that have adopted a VAT have chosen to have a
\nsingle rate. The tax administration benefits of having a single rate are substantial. However, in
\nthe years ahead, it may not be feasible to adopt a single rate GST system for social reasons. A 2-
\nrate structure (or a modified 2-rate structure) may therefore be adopted. What should be the
\nlower rate and the standard rate, and the demerit rate which would apply to a small group of
\nluxury items?
\n5.46
\nConsider the following simple formula for determining the structure of rates:
\nR = \u00ce\u00b1LG + BSG + y +\u00ce\u00bc
\nWhere R is the RNR, LG is the lower rate on goods, SG is the standard rate on goods, SS the
\nstandard rate on services; and DG the demerit rate on goods; \u00ce\u00b1, \u00e1\u00ba\u017e, y, and \u00c2\u00b5 are the respective
\nshares of these f<\/p>\n
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\n4-5 per cent with a large part of the base taxed at these rates (about 60-70 per cent) results in the
\nnecessity of high standard rates of 14-15 per cent. High standard rates make compliance
\nconsiderably more difficult.
\n5.50 The second reason for having lower rates that are close to the RNR relates to political
\neconomy. The temptation to push commodities to the lower rate increases the lower is the low
\nrate. The benefit for any industry group of seeking to reduce the tax on its output is directly
\nproportional to the tax advantage: moving a product from 14 per cent to 6 per cent is worth more
\nthan moving a product from 14 to 12 per cent. And in fact the pattern in the States reflects this
\npolitical economy at work.
\n5.51 So, if the RNR is close to 15 per cent, the effort should be to keep the low rate at about
\n12 (6+6 each for the Centre and States) per cent.
\n5.52 As discussed earlier, a lot will depend on the magnitude of exemptions and decisions
\nabout what goods are taxed at the lower<\/p>\n
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\nTable 7: RNR and Standard Rate structure for center and states (per cent)
\nRNR
\nLower
\nRate
\nStandard
\nRate (a)
\nHigher
\nRate
\nGoods
\nCenter
\n7
\n6.0
\n8.0
\nStates
\n8
\n6.0
\n9.0
\n220
\n20
\n20
\nServices
\nCenter
\n7
\nStates
\n8
\n8.0
\n9.0
\nSource: Committee's calculation.
\na: This corresponds to committee's preferred scenario with rate on precious metal at 6per cent.
\nTable 8: Gold rate and it impact on Standard Rate
\nRate on
\n“Low”
\nRNR
\nprecious
\nmetals
\nrate
\n(goods)
\n“Standard”
\nrate
\n(goods and
\n“High\/Demerit”
\nrate or Non-GST
\nexcise (goods)
\nservices)
\n6
\n16.9
\nPreferred
\n15
\n4
\n12
\n17.3
\n40
\n40
\n2
\n17.7
\n6
\n18.0
\nAlternative 15.5
\n4
\n12
\n18.4
\n40
\n2
\n18.9
\nSource: Committee's calculation.
\n5.54
\nIt is now growing international practice to levy sin\/demerit rates\u2014in the form of excises
\noutside the scope of the GSTon goods and services that create negative externalities for the
\neconomy (for example, carbon taxes, taxes on cars that create environmental pollution, taxes to
\n34
\naddress health concerns etc.). As currently envisag<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nno issues related to classification that could complicate tax compliance.
\nAssigning products to rates
\n5.56 Typically, the assignment of goods to different tax categories will be motivated by
\nconsiderations of equity. Goods that account for a large share of expenditures of poorer
\nhouseholds\u2014for example, food will typically be merit goods and will either be exempt or
\nplaced in a lower rate category. A related feature will be that this share will decline for richer
\nhouseholds.
\n5.57 But even if a good is a merit good, warranting an exemption or lower rate, policy makers
\nwill want to ask how effective that decision will be based on how well targeted the implicit
\nsubsidy will be, where the implicit subsidy is the difference between taxing a good at the
\nstandard tax rate and the lower or zero rate: if the poor also account for a large fraction of total
\nexpenditure on the merit good, then the subsid<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nactual structure of rates, a few broad policy conclusions emerge captured in Figure 3 (Box 3 has
\na detailed analysis).
\n\u2022
\nA number of commodities are treated fairly under the current system. Thus, merit goods
\nsuch as food items, especially cereals, pulses, edible oils, vegetables, and fuel are
\nappropriately taxed at zero or low rates (in Figure 3, these commodities have high
\nbenefit-cost ratios and attract low taxes).
\n22 Ideally, of course, if governments had well-designed transfer programs, they would achieve the desired objective of helping
\npoorer households by providing cash transfers and sparing the tax system from having to attain equity objectives. In practice,
\nthis is not always possible and in India DBTs are still a work-in-progress. See Keen (2015).
\n23 The analysis can be re-worked for other target groups, say the bottom 3 or 5 deciles.
\n36
\nBeneifit-Cost Rtaio
\nFigure 3: Comparing \u201cDesirable” Taxation with Actual Taxation of Selected Commodities
\nFood\n<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\none hand, and also give highly concessional tax rates to buy gold, on the other. For all
\nthese reasons, these commodities should in principle be taxed at the standard rate:
\ninstead they are taxed at about 1-1.6 percent (center plus States). This anomalous
\ntreatment must be rectified at least by raising current tax levels to 4 or 6 percent (see Box
\n3).
\nEducation, health (excluding medicines), and electricity are also not appropriately
\ntreated. They are all commodities that prima facie seem to be merit goods, warranting
\nzero or low tax burdens. However, in India, they are mostly consumed by the rich, and
\n37
\n\u2022
\nmany are largely privately provided. In the case of education, the current tax structure
\nturns out also to be regressive, with the bottom 4 deciles effectively paying greater taxes
\nthan the top 6 deciles They deserve to be taxed more like standard goods. Yet, most
\neducation and health services will be exemp<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nfrom smaller outlets (such as kirana shops). Third, on the other hand, a high threshold not only
\nrisks foregoing revenues but also undermines the value-added chain that is so critical for the
\ngovernance benefits of having a GST. The current proposal is to have a common threshold of Rs.
\n25 lakh for goods and services combined but raising this threshold say upto Rs. 40 lakh may be
\nconsidered.
\n38
\n38
\nCenter
\nGoods
\n1.5 crore;
\nexports and
\nexempted
\ngoods
\nexcluded from
\nthreshold
\nTable 9: Exemption Thresholds: Current and Proposed
\nCurrent
\nServices
\n10 lakh
\nCompounding
\nnot permissible
\nProposed under GST
\nGoods plus Services
\n25 lakh combined
\nwith no exemptions
\nand aggregated at the
\nlevel of legal entity
\nCompounding
\nto be decided; but
\npossibility of
\ncompounding from
\nexemptions
\nthreshold (25 lakh)
\nup to 1 crore
\nStates
\n5-10 lakh
\nnot
\napplicable
\npermissible in
\nsome States for
\nsome items and
\nat varying rates
\nsame as above
\nsame as above
\nSource: Department of Reven<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nstandard GST rate so that they have some fiscal flexibility to adapt to state-level conditions.
\nThere are two reasons why this flexibility may need to be reassessed. First, the argument for
\nfiscal flexibility\/autonomy becomes less compelling: under the proposed GST, the States still
\nretain considerable flexibility because alcohol and petroleum-the biggest sources of revenues
\nfor the States about 29 per cent of overall States' indirect tax revenue and about 41.8 per cent of
\n39
\nthe total revenue of States to be subsumed under GST\u2014as well as power, real estate, health and
\neducation remain outside the scope of the GST. Even if petroleum, alcohol and tobacco are
\nsubsumed in the GST, States will retain the right to levy top-up excises on them.
\n5.66
\nIn other words, the design of the GST is such that states will continue to have
\nconsiderable autonomy under the proposed GST either in its current form (which has a number
\nof <\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nbased on 8 per cent, which would immediately disadvantage production in the state charging the
\nhigher rate, undermining Make in India programme.
\nPotential price impact of GST24
\n5.69 In principle, the GST should have no aggregate impact on inflation and the price level
\nbecause the new rate will be a revenue neutral one. Revenue neutrality may, however, not be
\nenough to guarantee that there will be no price impact across all categories of goods and
\nservices. This is because the weights of commodities in the consumption basket (on which the
\nCPI is based) are different from their contribution to indirect tax collections. The impact on
\nparticular goods and services will depend on the current structure of taxation (including
\n24 The analysis in this section should not be considered definitive because it is based on a number of assumptions. The caveats are
\nnoted in greater detail in footnote 27 in Box 3.
\n40
\nexemptions) and the future structure of the GST both at the Center and the sta<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\n(Figure 6). The 4% taxed at a high rate are mostly the items excluded from GST, like petrol,
\ndiesel and alcohol.
\n25
\nWe use the Excise schedule from CBEC. Sales tax rates were provided by four states: Tamil Nadu, Karnataka, Kerala and
\nGujarat. Items exempt from VAT in three of the four states are assumed to be exempt for this analysis.
\n41
\nFigure 4: Food, rent and clothing have high
\nweight in CPI
\nOthers
\n9%
\nEducation
\n4%
\nFigure 5: A large part of CPI is exempt from
\nExcise\/VAT
\n80%
\n70%
\nTransport,
\nComm.
\n9%
\n60%
\n50%
\n6.7%
\nFood,
\nBeverages
\n40%
\n75.4%
\nHealth
\n6%
\n46%
\n30%
\n47.3%
\n47.1%
\n20%
\nFuel, Light
\n7%
\n10%
\n0%
\nHousing
\n10%
\nExempt from Excise Exempt from Sales
\nTax
\nExempt from GST*
\nClothing
\n7%
\nTobacco,
\nAlcohol
\n2%
\n* Items exempted from both excise and sales tax, to which are added
\nalcohol, tobacco, petroleum products
\nSource: CMIE
\nSource: CBEC, State Governments, Estimates
\n5.73 The taxation of some essential commodities in the CPI is shown in Figure 7. Most of the
\nc<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nFigure 7: Low average tax rate on most large
\ncategories
\nLow
\n32%
\nLow 0 12.4%
\nNormal 12.4-29.4%
\nSource: CBEC, State Governments, Estimates
\n20%
\n18%
\n16%
\n13.9%
\n14%
\n12%
\n10%
\n8%
\nZero
\n49%
\n6% 4.8%
\n4%
\n2%
\nHigh=29.4% +
\n0%
\n9.5%
\n8.8%
\n10.8%
\n8.8%
\n6.1%
\n2.6%
\n1.7%
\n1.1%
\n1.6%
\n2.3%
\nproducts
\nVegetables
\nCereals and products
\nFuel & light
\nElectricity
\nClothing & footwear
\nMilk and produ
\nFruits
\nOils and fats
\nPulses and products
\nSource: CBEC, State Governments, Estimates
\nHealth
\nMedicine
\nEgg, fish and meat
\nDistribution of taxes by income groups
\n5.74 These commodity-specific taxes can in turn be disaggregated by broad income groups
\nusing consumption data from the 2011-12 NSS. Figures 8 and 9 present these for the top 60
\n(T60) per cent of the population and bottom 40 per cent (B40) of the population, respectively.
\n5.75 Taxes on food are about 4 per cent for both groups. This is because even though many
\nfood items are exempt in most states, there are embedded taxes in food items such as fuel. This is
\nan importa<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\n5.78 For clothing the average tax rates are relatively similar-about 9 %between the two
\ngroups, and across states. In fuel and light, overall taxes are progressive but because electricity
\ncomprises a higher share of consumption of the top 60%, the exemption given to electricity
\nbenefits the top 60% more than the bottom 40%.
\nFigure 8: Average tax rates by category for top
\n60%
\nFigure 9: Average tax rates by category for
\nbottom 40%
\n15.0
\n10.0
\n5.0
\n0.0
\n-5.0
\n-10.0
\nTop 60
\nFootwear
\nMedicines only
\nHealth (incl. medicine)
\nClothing, Bedding, etc.
\nAverage Tax Rate
\n\u00e2\u2013\u00a0Subsidy
\nElectricity
\nEducation
\nFuel & Light ex. Electricity
\nNet Tax Rate
\nFood
\nPercent
\n15.0
\n10.0
\n5.0
\n0.0
\n-5.0
\n-10.0
\n-15.0
\nBottom 40
\nFootwear
\nMedicines only
\nHealth (incl. medicine)
\nClothing,
\nBedding, etc.
\nAverage Tax Rate
\n\u00e2\u2013\u00a0Subsidy
\nElectricity
\nEducation
\nFuel & Light ex. Electricity
\nFood
\n\u00e2\u2014\u2020 Net Tax Rate
\nSource: NSSO, CBEC, State Governments, World Bank Estimates
\nSource: NSSO, CBEC, State Governments, <\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nnormal tax rate would then apply to about 11.2% of CPI.
\n5.81 The category-wise effective tax rates for major categories in these scenarios are shown in
\nAnnex-5 (Figures 1-2), and the inflation impacts in Figures 10-14.
\n5.82 While assessing inflation, for each scenario we look at two outcomes: one if there is no
\ninput-tax credit\u00c2\u00b2, and the second with input-tax credit. In each of the three scenarios, we assume
\nthat a change in the tax rate would drive the supplier to change pricing. In some cases, even if the
\nheadline tax rate does not change (particularly for the exempt categories) if the taxes on inputs
\ngo up, the producer may be motivated to raise prices. For example, if taxes on fertilizers go up,
\nthe rice or cotton producer may take price increases. The reality may fall between the two
\nalternatives: even if GST credits start flowing in relatively fast, some producers may still price
\non the headline rate.
\n5.83 We have also not <\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nCategory codes: HE = Healthcare (excluding Medicines); HEM: Healthcare (Medicines); FL = Fuel & Light; CL = Clothing; FB = Food & Beverages; TR
\nTransport & Communication; ED = Education; HO = Housing; OT = Others (personal products, etc); PT = Paan & Tobacco
\n5.84
\nSingle-rate GST: The higher the single rate, the greater the price impact. For example, a
\n14% rate would drive CPI higher by 1.0% if the producers don't factor in the input-tax credit and
\n0.7% if they do. An 18% single rate would increase prices by 2.5% with or without input tax
\ncredits. (Figure 10 shows the sensitivity to various rates). The items that may see the largest
\nincrease in prices are clothing and medicines (Figure 11). The (small) increase in food and
\nbeverages is largely because a number of even primary food items are currently taxed in some
\nstates (though not in all). As we have assumed the current tax rate to be an average of state tax
\nrates, the average tax rate jum<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\n3%
\n1.0%
\n2%
\n0.7%
\n0.6%
\n0.3%
\n0.0%
\n1%
\n0%
\n-1%
\n-2%
\n-0.1%
\n-0.5%
\n-0.5%
\n-0.6%
\n-1.0%
\n14.0%
\n18.0%
\n-3%
\n-4%
\n22.0%
\n26.0%
\n30.0%
\nHE HEM FL FLE FB PT ED HO TR CL OT
\n\u00e2\u2013\u00a0Dual Rate \u00e2\u2013\u00a0Dual Rate with Input Credits
\n\u00e2\u2013\u00a0Dual Rate \u00e2\u2013\u00a0Dual Rate with Input Credits
\nSource: CBEC, State Governments, some Estimates
\nSource: CBEC, State Governments, some Estimates
\n5.86 Dual-rate GST with a lower rate of 12% and standard rate of 22%: This rate structure
\nwould correspond broadly to an RNR of about 17-18%. The inflation impact in this scenario lies
\nin between the first and second scenarios: a 22% standard rate would drive a CPI increase of
\n0.3% if all producers reacted to headline tax changes and by 0.7% if they adjusted for input
\ntaxes: the increase is a reflection of hidden taxation, i.e. the headline taxes may be low, but an
\nincrease in input taxes would raise inflation. Health (excluding medicines) would see the highest
\nincreases (Figure 14).
\nFigure 14: Scenario 3: Only health to see high inflation<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nfor the poor can be minimal.
\n5.91 These aggregate calculations would depend on a number of details in the design of the
\neventual GST, including:
\na) Final synchronized exemption lists;
\nb) The choice of categories to which low-rates are applied;
\nc) Exemption threshold for enterprises: a low threshold would mean that more
\nproducers\/sellers pay GST, and thus re-price their goods\/services, whereas a high
\nthreshold would bring that down (some categories like food could be particularly
\nsensitive to this choice). In many categories the bulk of the goods\/service are accessed
\nthrough suppliers\/outlets that don't pay tax (e.g. if all barbers\/beauticians paid service tax,
\ncollections would be Rs 5000-plus crore, but the collections are about Rs. 100 crore);
\nd) How many suppliers react just to the headline rate and have the pricing power to either
\ntake price increases or hold on to prices even when they are net <\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nearlier experience of implementing the state VATs the Centre provided compensation for three
\nyears but at a declining rate: 100 per cent of the shortfall in 2005-06, 75 per cent and 50 per cent
\nin the following two years respectively.
\n5.94
\nIn the aggregate, of course, the States should not suffer any loss in revenues because that
\nis intrinsic to the calculation of a revenue neutral rate. That is, if the RNR for the States is set
\nappropriately, States as a whole should have the same revenue as before. But there are two
\nsituations why shortfalls may arise. First, the aggregate RNR might be set too low. In this case,
\nof course, the GST Council may have to decide to raise rates going forward but interim shortfalls
\nwill have to be compensated.
\n5.95 A more likely scenario is for shortfalls to be experienced by individual States even if
\nStates as a whole experience revenue neutrality. Now, by definit<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nnot to provide state-wise RNR calculations.
\n5.97 But we undertake an illustrative exercise in Box 2 to show that anxieties of some of the
\nmajor States may be unwarranted and that the compensation requirements may well turn out to
\nbe minimal. We project the likely future tax base of goods consumption using NSS data and
\nlikely future tax base of services by estimating urban incomes. We find that the share of the
\nfuture tax base for States is very similar to their share in current GST revenues. For those States
\nthat receive a large share of current revenue because they have a large manufacturing base, their
\nanxieties can be reassured on the grounds that such States are also likely to have a large base in
\nservices going forward.
\n5.98
\nNotwithstanding the above, there need to be clear rules on compensation to avoid glitches
\nand controversy in the implementation of GST and to reassure the States so that they too can
\nembark on GST implementation with enthusiasm and confidenc<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nhighest three revenue growth figures for the last three years (for the States as a whole) was over
\n16.8 per cent; and the corresponding average of highest three nominal GDP growth figures was
\n13.4 per cent.
\n5.102 Looking ahead, this picture could change dramatically both because real GDP growth has
\nslowed but more important because inflation has declined dramatically and is expected to remain
\nlow. For example, in FY2016, nominal GDP growth is expected to be about 9.5 per cent and the
\nforecast for the period ahead is in the range of 11 per cent and rising slowly on expectations of a
\npick-up in real GDP growth. Now, if historical buoyancy prevails, this will lead to substantially
\nlower collections which would be normal and which should not be attributed to the GST and
\nhence would not necessarily need to be compensated.
\n5.103 Hence, the formula for GST compensation going forward would have to take account of
\ntwo factors: on the one hand, erring on the s<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\n51
\nbring alcohol within the GST net-like foreseen for petroleum products. To leave it out is to rule
\nout even the possibility of choice for all time which cannot be good policy.
\n5.106 Another misconception pervades discussions of bringing alcohol in the GST. Bringing
\nalcohol into the scope of the GST need not take away the right of States to tax alcohol. As is
\nenvisaged for tobacco, it is perfectly possible\u2014and indeed desirable\u2014for some basic tax to be
\nlevied on alcohol within the GST, and allow States to levy top-up sin taxes on alcohol for other
\nrevenue or social reasons. In other words, bringing alcohol within the scope of GST would not
\ncurtail States' fiscal autonomy in this area.
\n5.107 The same applies to real estate which is also a major arena of rent-seeking. Bringing
\nelectricity into the GST could also improve the competitiveness of Indian manufacturing. And,
\nas argued in d<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nin.\u201d
\n6.3
\nGetting the design of the GST right is therefore critical. Specifically, the GST should aim
\nat tax rates that protect revenue, simplify administration, encourage compliance, avoid adding to
\ninflationary pressures, and keep India in the range of countries with reasonable levels of indirect
\ntaxes.
\n52
\n6.4
\nThere is first a need to clarify terminology. The term revenue neutral rate (RNR) will
\nrefer to that single rate, which preserves revenue at desired (current) levels. In practice, there will
\nbe a structure of rates, but for the sake of analytical clarity and precision it is appropriate to think
\nof the RNR as a single rate. It is a given single rate that gets converted into a whole rate
\nstructure, depending on policy choices about exemptions, what commodities to charge at a lower
\nrate (if at all), and what to charge at a very high rate. The RNR should be distinguished from the
\n\u201cstandard\u201d rate defined as that rate in a GST regime which is app<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nTable 10: Summary of Recommended Rate Options (in per cent)
\nRNR
\nRate on “Low”
\n“High\/Demerit”
\nrate or Non-GST
\nexcise (goods)
\nprecious
\nmetals
\nrate
\n(goods)
\n“Standard”
\nrate
\n(goods and
\nservices)
\n6
\n16.9
\nPreferred
\n15
\n4
\n12
\n17.3
\n40
\n2
\n17.7
\n6
\n18.0
\nAlternative 15.5
\n4
\n12
\n18.4
\n40
\n40
\n2
\n18.9
\nSource: Committee's calculations.
\nNote All rates are the sum of rates at center and states
\n53
\n\u2022
\n\u2022
\nOn the RNR, the Committee's view is that the range should between 15 percent and 15.5
\npercent (Centre and states combined) but with a preference for the lower end of that
\nrange based on the analysis in this report. The Committee has noted the risks both of
\nsetting rates that are marginally high and low. On balance, however, it is easier to address
\nthe consequences of erring on the side of marginally low rates.
\nOn structure, in line with growing international practice and with a view to facilitating
\ncompliance and administration, India should strive toward a one-rate structure as the
\nmedium-<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\npercent (Centre plus states) and apply to luxury cars, aerated beverages, paan masala, and
\ntobacco and tobacco products (for the states).
\nThis historic opportunity of cleaning up the tax system is necessary in itself but also to
\nsupport GST rates that facilitate rather than burden compliance. Choices that the GST
\nCouncil makes regarding exemptions\/low taxation (for example, on gold and precious
\nmetals, and area-based exemptions) will be critical. The more the exemptions that are
\nretained the higher will be the standard rate. There is no getting away from a simple and
\npowerful reality: the broader the scope of exemptions, the less effective the GST will be.
\nFor example, if precious metals continues to enjoy highly concessional rates, the rest of
\nthe economy will have to pay in the form of higher rates on other goods, including
\nessential ones. As the table shows, very low rates on precious metals would lead <\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nsparingly used. Another problem with exemptions is that, by breaking up the value-
\nadded chain, they lead in practice to a multiplicity of rates that is unpredictable, obscured,
\nand distortionary. A rationalization of exemptions under the GST will complement a
\nsimilar effort already announced for corporate taxes, making for a much cleaner overall
\ntax system.
\nThe rationalization of exemptions is especially salient for the center, where exemptions
\nhave proliferated. Indeed, revenue neutrality for the center can only be achieved if the
\nbase for the center is similar to that of the states (which have fewer exemptions\u201490
\nproducts versus 300 for the center). If policy objectives have to be met, instruments other
\nthan tax exemptions such as direct transfers could be deployed.
\n\u2022 The Committee's recommendations on rates summarized in the table above are all
\nnational rates, comprising the sum of central and state<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nshould not be large shifts in the tax base in moving to the GST, implying that overall
\ncompensation may not be large. Nevertheless, fair, transparent, and credible
\ncompensation will create the conditions for effective implementation by the states and for
\nengendering trust between the Centre and states;
\nThe GST also represents a historic opportunity to Make in India by Making One India.
\nEliminating all taxes on inter-state trade (including the 1 percent additional duty) and
\nreplacing them by one GST will be critical to achieving this objective;
\nAnalysis in the report suggests that the proposed structure of tax rates will have minimal
\ninflationary consequences. But careful monitoring and review will be necessary to ensure
\nthat implementing the GST does not create the conditions for anti-competitive behavior;
\nComplexity and lags in GST implementation require that any evaluation of the GST-
\nand any consequential decisions\u2014should not be undertaken ov<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nexperience of the GST, to consider bringing fully into the scope of the GST commodities
\nthat are proposed to be kept outside, either constitutionally or otherwise. Bringing alcohol
\nand real estate within the scope of the GST would further the government's objectives of
\n56
\nimproving governance and reducing black money generation without compromising on
\nstates' fiscal autonomy. Bringing electricity and petroleum within the scope of the GST
\ncould make Indian manufacturing more competitive; and eliminating the exemptions on
\nhealth and education would make tax policy more consistent with social policy
\nobjectives.
\n6.6 There is a legitimate concern that policy should not be changed easily to suit short term
\nends. But there are enough checks and balances in the parliamentary system and enough
\npressures of democratic accountability to ensure that. Moreover, since tax design is profoundly
\npolitical and contingent, it would be unwise to encumber the Constitution with the minutiae of
\npoli<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\naffecting potentially 2-2.5 million tax entities, and marshalling the latest technology to use and
\nimprove tax implementation capability, is perhaps unprecedented in modern global tax history.
\nThe time is ripe to collectively seize this historic opportunity.
\n57
\nBox 1. Estimating the association between rates and compliance
\nMany considerations will go into the determination of the revenue neutral rate, but one of them
\nwill also be the impact of rates on compliance. Theory suggests that increases in rates will lead
\nto reduced tax compliance. But is there any evidence from the experience of VAT itself?
\nBased on data provided by the IMF, the Committee undertook a simple econometric analysis
\nto test whether tax rates and compliance were correlated. Data was provided for 86 countries,
\ndeveloped and developing. Compliance was measured in two ways: collection efficiency (CE)
\nand revenue productivity (RP). CE is measured<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nstandard tax rate and all measures of compliance even after controlling for per capita GDP and
\ngroup dummies (Figure 1). For example, for collection efficiency the coefficient (A) is about
\n(-) 1.22. This suggests that a 1 percentage point increase in the standard rate worsens
\n58
\ncompliance by 1.22 percentage points.
\nFigure 1: Regression of collection efficiency on standard rate, after controlling for per
\ncapita GDP and group dummies for income groups
\n40
\nCAN
\nTHA
\nPRY
\nel col_eff|X)
\n0
\n20
\n20
\n-40
\n-20
\n-15
\nBEN
\nLUX
\nCHN
\nBRB
\nBLR
\nGEO
\nDMA
\nBWA
\nCYP
\nEST
\nSER
\nMMDA HRV
\nJPN
\nCHE
\nKOR
\nNIC
\nKGZ
\nSEN
\nBGR
\nIDN
\nHND
\nURY
\nISR
\nCHL TGO
\nUS
\nbl.B
\nKHM
\nOM
\nGTM
\n\u2022 KAZ
\nGHA
\n\u2022 AUS
\nESP SUR
\nLKA
\nMEX
\nDOM
\nPHL
\n-VCT
\nETH
\n\u00e2\u2014\u008fCIV
\nKEN AUT BRA
\nNLD MIL
\nCOL DZR DEU CZE
\nRWA
\nRUSSV PRT POL
\nURC IRLVA
\nITA
\nBEL
\n-10
\ncoef -1.237229, (robust) se .32774309, t=-3.77
\nSource: Committee's calculation
\nDNK
\nGR
\n-ISL
\n-5
\n0
\n5
\n10
\nef std rate | X)
\nThis has an important implication for t<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\n7.16***
\n(2)
\nEstimation 2
\n7.20**
\n(1.40)
\n(2.89)
\n-1.24***
\n-1.22***
\n(0.33)
\n(0.35)
\n2.15
\n(13.04)
\n-0.64
\n(24.85)
\nYes
\nNo
\n84
\n84
\n0.293
\n0.276
\n* p Bottom
\nSource: NSS, committee's calculation
\nRecognizing this, the government has recently tried to wean consumers away from gold via the
\ngold monetization and gold bond schemes. It would be perverse and contradictory to use taxes to
\nincentivize the holding of gold, and undo what the government is trying to do via these gold
\nschemes. At the very least, tax policy should be neutral on consuming precious metals.
\nThus, on grounds of equity and effectiveness of targeting, on grounds of consistency of policy,
\ngold should be taxed at the standard rate (bullion can be exempted from the GST). Instead, it is
\ntaxed at 1 percent, dramatically highlighting the incongruity of policy.
\nThe final point to make, of course, is that the more rational gold taxation can be, the lower will
\nbe the standard rate which will be critical in creating a buoyant and complian<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nincreased from
\n2% to 4% w.e.f.
\n17.03.2012
\n1000
\n900
\n800
\n700
\n600
\n500
\n400
\n2011-12
\nNumber for 2015-16 is annualized
\nSource: CBEC
\nPower, health, and education
\n2012-13
\n72
\nImport duty
\nincreased from
\n4% to 6% w.e.f.
\n21.01.2013
\nImport duty
\nincreased
\nfrom 6% to
\n8% w.e.f.
\n05.06.2013
\nImport duty
\nincreased from
\n8% to 10% w.e.f.
\n13.08.2013
\n2013-14
\n2014-15
\n2015-16
\nSome key sectors have been excluded or exempt from the scope of GST. These include power,
\nhealth and education probably on the grounds that these are public goods, publicly provided, and
\nof importance to relatively poorer sections of the population. But what evidence do we have on
\nthe underlying assumptions justifying such a policy?
\nFigure 2 suggests that these sectors are perhaps under-taxed currently (They lie well below and
\nto the left of the line of the best fit). The design of tax policy, thus, needs to more carefully take
\naccount of evidence. For all three sectors, the benefits of exemptions (even without taking
\naccount of an<\/p>\n
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\nmedium run, of course, direct benefit transfers or better public provision of essential services
\nwould relieve tax policy of the burden of having to meet social objectives. But even in the short
\nrun, greater attention needs to be devoted to finding better instruments of social policy, and
\nleaving tax policy to meet broad macro-economic objectives.
\n73
\nAnnex 1: Macro-Approach to Estimating RNR
\nThe contemplated GST is a consumption tax of the VAT type. It would tax value added at each
\nstage of the production-distribution chains of goods and services, with a credit\/refund for taxes
\non inputs. The provision of a credit\/refund to intermediate and capital inputs is the single most
\nimportant design element of the GST; and, given the assumption of revenue neutrality, it is what
\nmostly distinguishes it from the current system of federal\/States sales and excise taxes, and what
\nmakes it a fundamental reform of the indirect tax system in India.
\nThe revenue imp<\/p>\n
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\nphase.
\nThe macroeconomic approach to estimating the RNR has a number of advantages relative to a
\nmethodology based on firm-level data, from tax returns or other sources. First, the existing
\nsystem of sales and excise taxes, which combines federal and state level taxes, produce
\ninsufficient information for estimating value added at the firm level for the whole economy,
\nmainly because it is riddled with exemptions and exceptions, and administrative data are of poor
\nquality. National accounts data provide a more accurate picture of sectoral value-added and final
\nconsumption.
\nSecond, firm-level data do not always separate intermediate and capital inputs, which may
\nreceive different tax treatment under the GST \u2013 the methodology by A. Modi, which relies on tax
\n–
\n74
\nreturns of the corporate income tax, is interesting in that it uses depreciation schedules for
\nincome tax purposes as proxies for long-term capital consumption. Third, firm-level data rarely,
\nif ever, contain<\/p>\n
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\nfirst with a very broad base. The macro approach outlined above was applied using the following
\nformula:
\nPB=\u00ce\u00a3(Y+M-X)-(1-e)\u00ce\u00a3(N+I)
\nPB is the potential GST base; Y is domestic output, (M-X) is net imports (imports minus
\nexports); (N+I) is consumption of intermediate and capital inputs; e is the exempt output ratio
\n(i.e. the tax base associated with inputs used in the production of exempt final consumption); and
\nthe summation is over 140 goods and services and 66 sectors, based on 2011-12 national
\naccounts. The following assumptions were made: (1) full compliance; (2) full pass-through of the
\nGST into prices; (3) no behavioral response; (4) the GST has a single positive rate, and a zero
\nrate on exports.
\nUnder a standard scenario exempting health, education, financial intermediation and public
\nadministration, the GST potential base is 59 of GDP. Exempting basic food items in addition
\n(essentially unprocessed foods) reduced th<\/p>\n
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\non key policy choices regarding exemptions, and a compliance rate of about 80 of potential GST
\nrevenues.
\n76
\nAnnex 2: Indirect Tax Turnover-based approach to estimating RNR
\nThe taxes to subsumed into GST and the corresponding revenues earned are summarised in
\nTables 1 and 2 below. The reported revenue for the Centre includes the entire revenue from
\nTobacco products. However, since a part of the revenue on tobacco products is to be realized
\nthrough non-rebatable excises, for the purposes of the present exercise, it is assumed that one
\nfourth of the revenue from tobacco products would be realized from GST.
\nTable 1: Summary of Revenue to be compensated for all States combined
\nTax Heads
\nCST (including ITC adjustment)
\nVAT & Sales Tax (excluding Non-VAT)
\nNon VAT (collected on services\/works contract)
\nEntertainment Tax
\nLottery, Betting & Gambling
\nLuxury Tax
\nEntry Tax not in lieu of octroi
\nEntry Tax in lieu of octroi
\nToll tax not in l<\/p>\n
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\nwe have VAT, entry tax not in lieu of octroi, entertainment tax. Rest of the levies are classified
\nin the second category. This is because, taxes such as entry tax in lieu of octroi would be levied
\n77
\nover and above VAT or GST and hence would not provide additional base to the tax. Similar
\nwould be the case of purchase tax for instance. VAT revenue is further bifurcated into revenue
\nfrom commodities which will be brought into tax under GST and those that would remain
\noutside the base, i.e, liquor, diesel, petrol and ATF. We have used weighted average tax rates for
\nthe estimation of taxable turnover from the data on tax collected under entry tax not in lieu of
\noctroi and VAT excluding those which would not form part of the GST, viz., liquor, diesel,
\npetrol and ATF. Further, since state VAT is applied on a base inclusive of excise duty, the base
\nis deflated by 1.1236 to derive the base net of taxes. 34 To this is added a<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\n78
\nTurning to the services component, to derive the total turnover of services that would be subject
\nto GST, we have used to data sources: the activity code wise information on sales from the MCA
\ndatabase and the turnover derived from the service tax collection. The MCA data needed some
\ncleaning and updation which is summarised below.
\nIn this database, the activity codes assigned to companies was as per 2004 NIC code. On
\nexamining the data it was found that some companies did not have a valid activity code as per
\nthe NIC classification. Further, since the data for 2013-14 appeared incomplete since fewer
\ncompanies where reflected for 2013-14 when compared to 2012-13, the data available for 2013-
\n14 has been augmented by using information from 2011-12 and 2012-13. Before attempting
\nthese corrections, it would be useful to examine the data that is available for each of these
\nyears. (Table 3) The total number of firms reporting data in 2<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\n4. Firms in service but not
\nincluded due to coverage
\n1043559
\nTotal
\n55293975
\n1161634
\n42053102
\n0
\n4142732
\nSource: computed from data provided by Ministry of Corporate Affairs
\n35 Companies associated with electricity, gas and steam and construction for instance are excluded from the analysis
\n36 Data for one company appeared spurious it increased from Rs 89 crore in 2012-13 to Rs 115 lakh crore in 2013-14
\nand then dropped to Rs 180 crore in 2013-14. For purposes of comparison this value was corrected.
\n79
\nUsing the concordance tables, companies first are classified as per the NIC code for 2008.
\nFurther, since it was noted that a number of companies which filed returns in 2012-13 did not file
\nreturns in 2013-14, an attempt is made to undertake some corrections to get a more
\ncomprehensive base for 2013-14. These are discussed below.
\nStep 1: For all companies reporting information in 2012-13 but not for 2013-14 and had a valid
\nactivity code, the data from 2012-13 has been ext<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\n405707
\n7.Total turnover from MCA after all corrections (2013-14)
\n4083607
\nThis information relates to companies alone. Since the tax would be payable by non-corporate
\nservice providers as well, we have used information from service tax collection to correct any
\nshortfall from the MCA related estimates. Further, for all the services, two kinds of adjustments
\nhave been made, viz., deduction for taxable inputs used for service provision and deduction of
\nservices provided when used as inputs into taxable activities. For these corrections, the input-
\noutput table for 2006-07 has been used to derive service specific input-output ratios (see table 5).
\n80
\nIn addition to the above, there are three sector specific corrections made in the data
\n1. For computer related services, it has been argued that a sizeable part of the turnover
\nis associated with exports- this component will not add to the taxable base for GST.
\nBased on an IBEF study, the domestic supply of computer service<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nas per the input output table, more than 80 per cent of total financial services are
\nused as inputs. But since a significant part of financial services are in the form of
\nembedded services, the possibility of taking input tax credit can be limited. So
\nusing the ratio of FISIM to total financial services, the extent of financial services
\nused as inputs is reduced from 80 per cent to 50 per cent.
\nIn addition to the above, since services provided by railways are not captured within either of
\nthese methods, the base is augmented to the extent of passenger services and transport of exempt
\nservices.3 37
\nwhile railways would collect
\n37
\nTransport of taxable services is not included since this would be a wash transaction
\nthe taxpayer who pays this tax would claim credit against subsequent transactions.
\nrevenue,
\n81
\nTable 5: Input Coefficients and the Adjusted Base: MCA Database
\nNet
\nTaxable
\nShare of
\nsales
\nused as
\nadditional
\nbase
\navail<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\n0.4170
\n43668
\nOthers \/ Undifferentiated services
\n0.0765 0.3567
\n118838
\nTotal
\n745390
\nTotal after all corrections\u00c2\u00b38
\n853235
\nThe total base for GST from the above methods therefore can be summarised as;
\nThe RNR corresponding to the proposed design, with CST compensated at 2 per cent is
\nsummarised in the table below. The results presented contain four scenarios. The GST bill
\nproposes that in the short term, the States would be enabled to levy a 1 per cent tax on inter-state
\n38 Two corrections are incorporated here – correction for revenue from railways and for base corresponding to
\nrestaurants which is already included in the base for goods computed from the state side.
\n82
\nsale of goods. Scenario 1 presents a case where there is no such levy while scenario 2 presents
\nthe case where such a levy does exist. Further, in each of these cases, the results report an RNR
\nfor whether there is a single rate GST or a two rate GST. In single rate case, the entire base is
\ntaxed at the same rate. In t<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nStatistics, output of manufacturing in organised sector in transport equipment is Rs 652251 crore.
\nAssuming that value added subsequent to manufacturing, including trader margins and transport
\ncosts is 10 per cent of this value, the value of sales of transport vehicles is Rs 717476 crore. 39
\nAssuming that this part of the base is taxed at 15 per cent each by both Centre and States, the
\n39 The figures for exports and imports for transport vehicles suggest that there is a net export in this segment. If this
\nbe the case then the downward correction in the RNR would be smaller.
\n83
\nRNR got the rest of the base would be 6.81 per cent for the Centre, 8.09 per cent for the States
\nadding up to 14.91 per cent overall as compared to 17.69 per cent reported above.
\nTo understand what these numbers indicate, it would be useful to look at the composition of the
\nrevenues from the States. The composition indicates that 19 per cent of the revenue to be
\ncompensated is not adding to th<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nincorporating the fact that VAT is levied on a base inclusive of excise. In other words, the RNR
\ngets placed below the average tax rate. On the other hand, if one sought to find resources for all
\nthe taxes incorporated in category II, then the RNR increases to 9.37 for the States and 17.69
\noverall.
\nTable 9: Impact on RNR of design of GST
\nState rate
\nOverall rate
\nRNR excluding II
\n7.55
\n15.88
\nEffective tax rate for States
\n9.05
\nRNR for finding revenue for II as well
\n9.37
\n17.69
\n84
\nAnnex 3: Direct Tax Turnover Approach to Estimating RNR
\nAt the producer level, the GST base is equivalent to the value added which is the value that a
\nproducer adds to his raw materials or purchases before selling the new or improved product or
\nservice. That is, the inputs (the raw materials, transport, rent, advertising, and so on) are bought,
\npeople are paid wages to work on these inputs and, when the final good or service is sold, s<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\ninvoice, we use the subtractive indirect method for calculating the GST base and the
\nconsequential, revenue neutral rate (RNR). The present exercise is an attempt to calculate the
\nsingle RNR using this method. Mathematically,-
\nTotal Revenues (R)
\n=
\nt* (output) \u2013 t* (inputs)
\n–
\n=
\nt* (output – inputs)
\n=
\nt*
\n(Base)
\nor, Single RNR, 't' = R\/Base
\n40 This method is so called because value added itself is not calculated but only the tax liability on the components of
\nvalue added is calculated.
\n85
\n4.
\nFor the purpose of estimating the RNR, we use the extensive producer level data in the
\nform of profit and loss accounts available with the Income Tax Department. These accounts
\nrelate to 94, 31, 508 business entities for the financial year ending on 31st March, 2013
\n(financial year 2013-14) 41. These entities comprise of all companies, partnership firms and
\nproprietorships but do not include charitable organ<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nservices to arrive at the \u2018net value of domestically available goods and services\u2019.
\nSince exports are zero rated in a GST regime, the value of exports is reduced from the
\n'net value of domestically available goods and services' to arrive at the \u2018net value of
\ngoods and services available for domestic consumption' or the \u2018aggregate output
\ntax base'.
\nSimilarly, the expense items on the debit side of the Profit and Loss Account, in respect
\nof which input tax credit would be potentially available, are identified and appropriately
\nadjusted for indirect taxes to arrive at the 'value of purchase of intermediate goods
\nand services'.
\nUnder the GST Model, full and immediate input credit is proposed to be allowed for
\nGST paid on purchase of capital goods in the year of purchase. Therefore, the \u2018value of
\n41 These accounts have been electronically filed with the Income Tax Department along with their return of i<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nagricultural produce. Reflecting this, appropriate downward adjustments have been
\nmade to both the output and input tax base.
\nThe threshold limit is proposed to be increased to Rs 40 lakh for both goods and
\nservices. Therefore, appropriate downward adjustment to the GST base is made to also
\nreflect this.
\nThe 'aggregate output tax base' is reduced by the \u2018aggregate input tax base' to arrive
\nat the 'GST Base'.
\n87
\nSl. No.
\nTable 1: Summary of Data
\nDescription
\nTaxable
\nUnit
\nAll Sectors
\nSectors
\nA
\nSample Size
\nin nos
\n9431508
\n9087529
\nB
\nNet value of supply of domestically produced goods and services
\n1
\nSale of Goods
\nRs. In crs
\n18055276
\n15180098
\n2
\nSale of Services
\nRs. In crs
\n2818183
\n2764294
\n3
\nOther operating revenues
\nRs. In crs
\n896139
\n889567
\n4
\n5
\nFinancial services (in case of finance company) excluding interest
\nCommission
\nRs. In crs
\n49998
\n49991
\nRs. In crs
\n63526
\n63480
\nOther income
\n6
\n(excluding rent, interest, dividend, profit on sale of fixed assets, profit on<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nRs. In crs
\n102244
\n93883
\n15
\nHotel, boarding and Lodging
\nRs. In crs
\n12055
\n11943
\n16 Traveling expenses other than on foreign traveling
\nRs. In crs
\n69477
\n66842
\n8222222
\n18
\n19
\n20
\nGuest House expenses
\n21
\n17 Foreign traveling expenses
\nConveyance expenses
\nTelephone expenses
\nRs. In crs
\n12656
\n12387
\nRs. In crs
\n24968
\n23963
\nRs. In crs
\n27831
\n27003
\nRs. In crs
\n499
\n449
\n24
\nClub expenses
\nFestival celebration expenses
\n23 Gift
\nAudit fee
\n25 Total (D1 to D24)
\nRs. In crs
\n137
\n128
\nRs. In crs
\n1200
\n1166
\nRs. In crs
\n414
\n374
\nRs. In crs
\n7290
\n7042
\nRs. In crs
\n1231869
\n1139866
\nE
\nMiscellaneous Services
\n1 Other expenses
\nRs. In crs
\nF
\nTotal value of inputs on which input tax credit could be available
\nRs. In crs
\n2211903
\n18322797
\n1723601
\n15833024
\n88
\n6. The “net value of supply of domestically produced goods and services” is the
\naggregate of the value of (i) sale of goods; (ii) sale of services; (iii) other operating expenses; (iv)
\nfinancial services (excluding interest) provided by financial comp<\/p>\n