The report produced by the Ministry of Finance Committee on the Revenue Neutral Rate (RNR) and structure of rates for the Goods and Services Tax (GST) (which was headed by the Chief Economic Adviser – CEA) has given a new perspective to the discussion on the introduction of GST in India. At first glance the report suggests that GST can effectively be implemented at more reasonable rates when compared to rates being discussed in earlier press reports, without any loss of revenue to the centre or on average to the states. As is often argued, lower rates of tax are always more attractive since they would be compliance-friendly. The representatives of industry as well as the consultancy firms have pronounced that these are the correct estimates and provide a more reliable basis for introducing GST in India. Lower rates of tax are always attractive and it is the prerogative of the government to take a call on the appropriate rate at which to introduce GST. However, estimating a RNR should be viewed as an exercise to determine the rate of tax at which the government concerned can implement the new regime and obtain the same revenue as it currently does.
Any exercise to estimate the RNR would be based on assumptions other than on data which is available. There are two sets of estimates discussed in the public domain, one by the National Institute of Public Finance and Policy (NIPFP) and the other by the committee headed by the CEA (these estimates will be referred to as NIPFP and CEA estimates respectively).
As discussed in the CEA's report, the Ministry of Finance Committee's estimates have been derived by making ‘suitable corrections’ to the NIPFP estimates or the indirect tax turnover estimates as they have been referred to in the report. These two sets of estimates vary considerably and there is a need to identify the sources of difference and the rationale for such a difference. In what follows, an attempt is made to assess each of the changes proposed by the CEA's study. To begin with, a brief summary of the overall approach adopted by both these studies.