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Revenue Neutral Rate

Revenue Neutral Rate (RNR)
Revenue Neutral Rate(RNR) is the foundation stone of GST and can be even considered to be the heart of GST rate, its levy and distribution between State Governments and Central Government.
RNR also decides  the following :
  1. minimum GST rate,
  2. average GST rate
  3. highest GST Rate
  4. zero Supply Rate
  5. exemptions
  6. eligibility for reduction of GST rates etc.
 RNR can be understood as a rate where both the Central Government and State Governments are at no loss from the perspective of current collection of various taxes. 
The most difficult task with the Expert Committee on GST led by CEA i.e i.e Dr. Arvind Subramanian  was to finalise RNR. Since, there were 3 approaches available for the committee to arrive at a perfect RNR.
The three approaches which were considered before deciding upon the RNR between 17-18% are as below :
Macro Approach - it yielded 11.6% RNR
Indirect Tax(ITT) Turnover Approach - it yielded 17.7% RNR
Direct Tax Turnover (DTT) Approach - it yielded 12% RNR
It is pertinent to understand that 15 States and 1 union territory data were considered to understand the implication of ITT approach, since they collectively accounted for about 78.5 per cent of all States’ VAT base.
They were Karnataka, Maharashtra, Andhra Pradesh, Gujarat, Tamil Nadu, Bihar, Odisha, Chhattisgarh, Delhi, Uttar Pradesh, Jharkhand, Rajasthan, Madhya Pradesh, West Bengal, Haryana and Puducherry.
The ITT approach had not fully incorporated the contribution of sugar products and textiles into a base structure since they are sold directly to the consumer.
But, it is being anticipated that textiles will be under the ambit of levy of GST otherwise, the chain will be broken.
Finally, the ITT approach was considered amongst all three approaches. This led the committee to arrive at RNR between 17-18% vide report dated 4rth December 2015.
However, looking to certain changes in macro economics alias base rate and dropping of 1% additional entry tax, the RNR will be again decided by GST Council.

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