New Delhi: Chief Economic Adviser Arvind Subramanian Thursday said while a GST rate of close to 22 percent will put inflationary pressure, higher rate of 27 percent will become totally self-defeating.
He has recommended a standard GST rate of 17-19 percent.
Subramanian said a relatively low rate reduces the chances of it being inflationary and improves compliance while a high tax rate raises chances of tax avoidance.
"If you raise tax by 1 percent, compliance comes down by 1 percent," he added.
While many state governments are of the view that the GST rate should be around 22 percent to protect their revenue requirements, experts believe an ideal rate should be around 18 percent that will bring down product prices and ensure better tax compliance.
However, there are apprehensions that prices of services could go up.
"At 27 percent it is totally self-defeating...up to 18-19 percent there will be minimal impact on inflation and if it goes to 22 percent there will be a few basis point increase," he said.
The Constitutional Amendment Bill passed on Wednesday did not have the GST rate and the GST Council, which will now work out a rate. The GST Council will have representation from both the Centre and states.
The subsequent legislations Central GST (CGST) and Integrated GST (IGST) - which are likely to come up for discussion in the Winter session of Parliament - would mention the GST rate.
With regard to compensation, Subramanian said, it should not be too high.
"Compensation is temporary but rate structure is permanent, therefore we should not burden rate structure in order to generate revenue," he said.
The government has to take a call on how to finance the compensation, he said, adding that it could be done through GST revenue itself.
The government can either preserve expenditure target, increase fiscal targets or burden the GST rates, he added.
Asked about deadline, CEA said, April 2017 is a challenging deadline.
Further probed on rate, Subramanian said that the report presented by him recommended a range of rates that depend on policy choices.
When asked about the impact GST can have on expanding GDP, he said, one has to be careful about making estimates on GDP growth at this point of time.
There can be no assurance on private investment revival by any one policy measure, he added.