Definition
Revenue Neutral Rate (GST)
The revenue neutral rate is the single GST rate that would have raised the same revenue as all the taxes GST replaced, used as a benchmark in rate design.
When GST was being designed, experts estimated a revenue neutral rate (RNR) — the average rate at which GST would collect as much as the multiple central and state taxes it subsumed, so that neither lost revenue. It served as a reference point for setting the GST slabs.
In practice, the multi-slab structure and exemptions meant the effective average rate drifted below early RNR estimates, contributing to revenue concerns and the compensation debate. The concept remains central to discussions on rationalising slabs without hurting collections.
Related terms
- GST SlabsGST slabs are the multiple tax-rate categories under GST into which goods and services are classified, ranging from nil-rated essentials to higher rates on luxury and sin goods.
- GST CouncilThe GST Council is the constitutional body that decides the rates, exemptions and rules of GST through consensus between the Centre and the states.
- GST Compensation to StatesGST compensation is the mechanism by which the Centre made good any shortfall in states' revenue caused by the shift to GST during a guaranteed transition period.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.