REPORT ON THE REVENUE NEUTRAL RATE AND

STRUCTURE OF RATES FOR THE GOODS AND SERVICES TAX (GST)

of the Committee headed by Chief Economic Advisor Arvind Subramanian

December 4, 2015

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Content

Foreword

I

Introduction

II

Benefits of Proposed GST

Governance

Make in India by Making one India

The growth effect via the boost to investment

III

Current Structure of Indirect Tax : Highlights

Centre

States

Centre and States

IV

Estimating India's Revenue Neutral Rate (RNR) under the GST

Macro Approach

Indirect Tax Turnover Approach

Direct Tax Turnover Approach

V

Recommendations

The Magnitude of the RNR

Critical assessment of the methodology of the three approaches

Recommendations and validation

A risk analysis

Allocation of RNR between Centre and states

The structure of rates

Exemptions

Lower, standard and “demerit” rates

Assigning products to rates

Exemptions threshold

Rates or Rate Bands and the issue of fiscal autonomy of States under the GST

Potential price impact of GST

Current taxes on the consumption basket

Distribution of taxes by income groups

The price impact of the GST Regime

Concluding observations

Compensation

Other issues

VI

Conclusion

Tables

Table 1  : Comparison of Federal VAT Systems

Table 2  : Impact of the Central Sales Tax

Table 3  : Effect of Countervailing Duty (CVD) Exemptions: An Illustration

Table 4  : Summary of India's Indirect Tax System

Table 5  : Summary of approaches to estimating RNR

Table 6 : Committee’s recommendations compared with other approaches to estimating RNR

Table 7  : RNR and Standard Rate structure for Centre and states (per cent)

Table 8  : Gold rate and it impact on Standard Rate

Table 9  : Exemptions Thresholds: Current and Proposed

Table 10 : Summary of Recommended Rate Options (in percent)

Figures

Figure 1  : Collection-efficiency in Major VAT/GST Economies

Figure 2  : Standard rate of VAT in High and Emerging Market Economies

Figure 3  : Comparing “Desirable” Taxation with Actual Taxation of Selected Commodities

Figure 4  : Food, rent and clothing have high weight in CPI

Figure 5  : A large part of CPI is exempt from Excise/VAT

Figure 6  : Only 15% of CPI is taxed at a "normal" rate

Figure 7  : Low average tax rate on most large categories

Figure 8  : Average tax rates by category for top 60%

Figure 9  : Average tax rates by category for bottom 40%

Figure 10 : CPI would have high sensitivity to single RNR

Figure 11 : Scenario 1: some categories to see inflation

Figure 12 : Dual rate sensitivity (Normal on 11% of CPI)

Figure 13 : Scenario 2: Less than 3% inflation for items seeing price rise

Figure 14 : Scenario 3: Only health to see high inflation

Boxes

Box 1 : Estimating the association between rates and compliance

Box 2 : Will There be Large Compensation Requirements? An Illustrative Exercise

Box 3 : Evidence-based tax policy? Incorporating social policy objectives in the GST

Annexure

Annex 1 : Macro-Approach to Estimating RNR

Annex 2 : Indirect Tax Turnover-based Approach to Estimating RNR

Annex 3 : Direct Tax Turnover Approach to Estimating RNR

Annex 4 : The possible impact of the GST on Small Scale Industries

Annex 5 : Effective tax rates by commodities under 3 GST scenarios

References