Direct Tax Turnover Approach to Estimating RNR

Posted on 22 April 2023 Category : GST terms

Direct Tax Turnover Approach to Estimating RNR under GST

Direct Tax Turnover Approach to Estimating RNR

In this article, the information about Direct Tax Turnover Approach to Estimating RNR is explained. A brief description about the subject is explained here. You may contact concerned government agency for latest update.

At the producer level, the GST base is equivalent to the value added which is the value that a producer adds to his raw materials or purchases before selling the new or improved product or service. That is, the inputs (the raw materials, transport, rent, advertising, and so on) are bought, people are paid wages to work on these inputs and, when the final good or service is sold, some profit is left. So value added can be looked at from the additive side (wages plus profits) or from the subtractive side (output minus inputs).

Value added = wages + profits = output – input. If the tax rate on this value added is‘t’, there are four basic forms that can produce an identical result:

t (wages + profits) : the additive – direct (accounts) method;
t (wages) + t (profits): the additive – indirect method40,
t (output – input) : the subtractive – direct (accounts) method; and
t (output) – t (input) : the subtractive – indirect (the invoice or credit) method.

While there are four possible ways of levying a VAT, in practice, the method used (number 4) never actually calculates the value added; instead, the tax rate is applied to a component of value added (output and inputs) and the resultant tax liabilities are subtracted to get the final net tax payable. This is sometimes called the “indirect” way to assess the tax on value added. Since in actual practice, input tax credit will be allowed only on the basis of invoice, we use the subtractive – indirect method for calculating the GST base and the consequential, revenue neutral rate (RNR). The present exercise is an attempt to calculate the single RNR using this method. Mathematically,-

Total Revenues (R) = t* (output) – t*(inputs)

= t* (output – inputs)

= t* (Base)

or, Single RNR, ‘t’ = R / Base

For the purpose of estimating the RNR, we use the extensive producer level data in the form of profit and loss accounts available with the Income Tax Department. These accounts relate to 94, 31, 508 business entities for the financial year ending on 31st March, 2013 (financial year 2013-14)41. These entities comprise of all companies, partnership firms and proprietorships but do not include charitable organizations. The activities of these entities are classified into 10 sectors and further sub classified into 75 sub-sectors. We assume that these 94, 31, 508 entities constitute the universe of the GST taxpayers. This sample does not include taxpayers who have filed their tax returns in paper form42 or engaged in charitable activities or wholly engaged in agriculture.

The computation of the GST base under the SI method involves the following steps:

The receipt items on the credit side of the Profit and Loss Account, which would be liable to output tax, are identified and appropriately adjusted for indirect taxes to arrive at the ‘value of supply of domestically produced goods and services (net of indirect taxes)’ (hereinafter referred to as ‘net value of supply of domestically produced goods and services’);

Since imports are liable to GST at the point of importation, the ‘value of imports’ is aggregated with the ‘net value of supply of domestically produced goods and services’ to arrive at the ‘net value of domestically available goods and services’.

Since exports are zero rated in a GST regime, the value of exports is reduced from the ‘net value of domestically available goods and services’ to arrive at the ‘net value of goods and services available for domestic consumption’ or the ‘aggregate output tax base’.

Similarly, the expense items on the debit side of the Profit and Loss Account, in respect of which input tax credit would be potentially available, are identified and appropriately adjusted for indirect taxes to arrive at the ‘value of purchase of intermediate goods and services’.

Under the GST Model, full and immediate input credit is proposed to be allowed for GST paid on purchase of capital goods in the year of purchase. Therefore, the ‘value of purchase of capital goods’ is aggregated with the ‘value of purchase of intermediate goods and services’ to arrive at ‘gross value of purchase of intermediate goods and services’.

Since no input tax credit would be available in respect of purchases made from unregistered dealers, the ‘value of purchases from the unregistered dealers’ is reduced from the ‘gross value of purchase of intermediate goods and services’ to arrive at the ‘aggregate input tax base’.

Under the proposed GST Model, several sectors will be exempt from the scope of GST; these are petroleum, land component of real estate, the interest component in the financial sector, electricity, gem and jewellery, education and health services, and agricultural produce. Reflecting this, appropriate downward adjustments have been made to both the output and input tax base.

The threshold limit is proposed to be increased to Rs 40 lakh for both goods and services. Therefore, appropriate downward adjustment to the GST base is made to also reflect this.

The ‘aggregate output tax base’ is reduced by the ‘aggregate input tax base’ to arrive at the ‘GST Base’.

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CGST Act section 51 Tax deduction at source

CGST Act Section 52 Collection of tax at source

CGST Act section 53 Transfer of input tax credit

CGST Act section 54 Refund of tax

CGST Act Section 55 Refund in certain cases

CGST Act section 56 Interest on delayed refunds

CGST Act section 57 Consumer Welfare Fund

CGST Act section 58 Utilisation of Fund

CGST Act Section 59 Self-assessment

CGST Act section 60 Provisional assessment