What is the Full Form of RNR?

3 minute read
What is the Full Form of RNR?
What is the Full Form of RNR?

While there are multiple full forms of RNR, the most common RNR full form is “Revenue Neutral Rate”. The primary objective of GST is to establish rates that maintain the current revenue generation for both the Central and State governments. This is achieved through a Revenue Neutral Rate (RNR) structure, which aims to match the existing revenue with the revenue collected under GST. 

The calculation of RNR considers the cascading effect on certain goods that are not subject to excise or sales tax. For instance, if the RNR for diesel is set higher than the current tax rate, it would lead to an increase in the cost of wheat, even though wheat itself does not have any excise or sales tax implications.

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Ratio for Distribution of RNR

Determining the Revenue Neutral Rate (RNR) faces a major challenge in deciding the distribution ratio between the central and state governments. This ratio must consider the impact on the finances of various state governments. 

Two different ratios were assessed: a 60:40 ratio in favor of the central government or a reverse ratio of 40:60. The subramanian committee, in their report shared with CBEC on RNR and GST rates, stated that arriving at an RNR involves both subjective judgment and factual analysis. They referred to it as “as much soft judgment as hard science.”  

Setting a low RNR could have a drawback as it might lead to a decrease in the long-term growth rate of the economy.

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RNR recommendation from Subramanian committee

The government of India constituted a committee led by Dr. Arvind Subramanian, which released a comprehensive report on calculating the Revenue Neutral Rate (RNR) and the tax structure. 

The committee employed three different approaches for RNR calculation:  

Macro approach: 

This method considers total data for domestic output, net imports, and capital inputs consumption. Assuming a positive rate for GST and zero rates on exports, the RNR was found to be 11.6% after factoring in an 80% compliance rate for GST.  

Indirect tax turnover approach: 

Shared by NIPFP (National Institute of Public Finance Policy), this approach involves three steps: 

a. Estimating the goods revenue base at the state level. 

b. Estimating the services revenue base at the national level. 

c. Making adjustments for certain goods and services not to be taxed under GST. 

Under this approach, the RNR is projected at 18.86%.  

Direct tax turnover approach: 

Introduced by the Thirteenth Finance Commission, this method calculates the RNR based on input tax data from all registered entities. 

The RNR derived from this approach is 11.98%. It is expected that after incorporating some modifications to the indirect tax turnover approach, the RNR would likely be finalized around 18%.

Also Read: What is the DICGC Full Form?

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