CEA says the Council has taken decision to bring down rate from 6% to 5% and move few products from 26% to 28% but many go from 26% to 18%

The finance ministry on Thursday said that the Goods and Services Tax (GST) Council's decision to impose five per cent tax on essential items would bring down inflation and levying a cess on luxury and sin goods over the peak rate would not burden the central kitty for compensation to states.

Chief Economic Adviser Arvind Subramanian said the Council's decision "should bring prices down. I don't think there is any fear on inflation because six per cent goes to five per cent. A few products move from 26 to 28 per cent but many go from 26 per cent to 18 per cent. On average this should probably serve to lower inflation."

If at all, the impact on inflation will be very small, he said. "Today's change should probably bring it down." He added the mood at the GST Council meeting was "very good" and the rate structure was unanimously decided.

Finance Secretary Ashok Lavasa said: "Now, you have a system by which additional burden of compensating the states is not being passed to consumers in a way it would have otherwise passed in terms of taxes. So, this is a very reasonable arrangement that has been agreed to, keeping in view the interest of the consumer and state governments." It also enables the central government to set apart a fund by which states will be compensated, he said.

About Rs 50,000 crore will be needed to compensate states for the loss of revenue from the roll-out of GST, which is to subsume a host of central and state taxes such as excise duty, service tax and value added tax, in the financial year beginning April 1.

The previous GST Council meeting headed by Finance Minister Arun Jaitley reached a consensus on the way states are to be compensated for any loss of revenue from implementation of the new indirect tax regime from April 1, 2017.

The base year for calculating the revenue of a state will be 2015-16 and secular growth rate of 14 per cent will be taken for calculating the likely revenue of each state in the first five years of implementation of GST. States getting lower revenue than this will be compensated by the Centre fully for the first five years.