Goods & Services Tax (GST) in IndiaGST Bill In Rajya Sabha Versus Revenue Neutral Rate

July 28, 20160
GST and RNR
GST
Of late, it is been anticipated that GST implementation is very near than ever been felt in the past.
GST Bill in Rajya Sabha is in critical stage and next 7 days will be a testing phase for implementation of GST in April 2017.
There are various reasons which have prevented the passage of GST Bill in Rajya Sabha. Out of them, couple of factors were hidden political agendas whereas, the visible factors  can be understood from the following demands of Congress, the single largest party in Rajya Sabha.
What Congress Wanted 
Congress  had made three demands as below :
a. to abolish the proposed 1% additional entry tax to benefit the manufacturing states;
b. to set up an independent GST dispute settlement authority chaired by a judge and
c. to specify a ceiling limit of 18% GST rate in the Constitution.
What Government is Willing 
The Government has already agreed upon the two demands as below :
a. with already abolishing 1% additional entry tax in its cabinet meeting held on 27th July 2016
b. to create GST dispute settlement authority 
Whereas, Government is not willing to consider the third demand since the cap limit of 18% GST rate cannot be incorporated in the legislation.
What Is The Impact of Dropping 1% Entry Tax 
After a series of meetings spanning more than a decade, a consensus was arrived at to settle with  a Revenue Neutral Rate(RNR) between 17-18% in December 2015 by collective efforts of various organisations, experts, empowered committee of ministers and finally recommendation from GST Committee led by CEA i.e Dr. Arvind Subramanian .  
It was recommended with a provision of 1% entry tax but the Petroleum Sector was kept outside the ambit of RNR .
However, the current abolishment of 1% entry tax will further create an anamoly to zero upon a new RNR. 
What is RNR
The term revenue neutral rate (RNR) will refer to that single rate, which preserves revenue at desired (current) levels. In practice, there will be a structure of rates, but for the sake of analytical clarity and precision it is appropriate to think of the RNR as a single rate.
It is a given single rate that gets converted into a whole rate structure, depending on policy choices about exemptions, what commodities to charge at a lower rate (if at all), and what to charge at a very high rate.
The RNR should be distinguished from the “standard” rate defined as that rate in a GST regime which is applied to all goods and services whose taxation is not explicitly specified. Typically, the majority of the base (i.e., majority of goods and services) will be taxed at the standard rate, although this is not always true, and indeed it is not true for the states under the current regime.
In otherwords,the RNR is a revenue neutral rate where both the Central Government and State Governments are at no loss from the perspective of current collection of various taxes. 
Lower RNR Via Petroleum Products
The macro economics & dynamics of calculation of RNR are dependant upon various factors. Further, as per various study reports, the inclusion of petroleum products is a must to lower down the RNR.

At the same time it must be noted that Constitutionally petrol and other petroleum products will be within the GST system only. But, for time being it would be outside the  GST .

It is pertinent to note further that for the proper implementation of GST and micro economics related thereto , the inclusion and levy of GST is a must . Because,  a major chunk of collection of taxes by State Governments and Central Government as well as inflation is governed by such products even RNR is very much effectd by such products .

As per an estimation, likewise the implementation of GST in India can boost our national GDP by 2%, the inclusion of Sin/Demerit Goods i.e Petroleum Products can also lower the RNR upto 2%.

What are Sin/Demirt Goods & Its Dynamics
The exceptions under GST has been carved out in the form of permissible additional excise taxes on sin goods i.e petroleum and tobacco for the Centre, petroleum and alcohol for the States. This will provide the requisite fiscal autonomy to the States. Indeed, even if they are brought within the scope of the GST, the states will retain autonomy in being able to levy top-up taxes on these “sin/demerit” goods.

The Central Government has hinted for further lowering of GST rate in late June 2016 and with abolishing of 1% entry tax on 27th July 2016, we may see a regime where Petroleum products  attracting levy of GST can become a compulsion.

Why Petroleum Products Should Attract GST
The following five reasons mandates, the levy of GST on Petrol and other petroleum products  :
a. Uniform taxation and abolition of other indirect taxation
b. Lower Revenue Neutral Rate (RNR)
c. To check inflation which will be there after implementation of GST in India 
d. To complete the chain and extend real benefit of GST
e. To boost the  GDP by 2% 
Conclusion
Lets hope that atleast for the sake of growth of GDP of India, the GST Bill is passed finally.
Revenue Neutral Rate (RNR) can be revised due to dropping of 1% additional entry tax. This may further lead to exploration for inclusion of petroleum products under the ambit of levy of GST.
 
The RNR rate may be again decided by GST Council 
At the same, real estate’s  inclusion in GST has not been hinted so far. Its time when it has to be decided whether we are willing to have GST tax rate of 17-18% as standard rate in an era when Singapore has the lowest GST rate of 6% .

 by Anandaday Mishra, Founder Advocate , AMLEGALS 
( The author is one of the leading litigation and advisory advocate. He has published various research papers on GST . He handles cases in Tribunals  & High Courts of India. He can be contacted on anand@amlegals.com .For more, please refer www.amlegals.com ) 

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