In a relief to consumers hit hard by the unrelenting rise in fuel prices, the government on Thursday cut petrol and diesel prices by Rs 2.50 per litre.
It also asked the states to effect a similar cut so that the relief could be to the tune of Rs.5 per litre.
Announcing the much sought-after relief, Finance Minister ArunJaitley told a press conference that the cut will be effected through slashing of excise duty to the tune of Rs1.50 per litre while the oil marketing companies (OMCs) will absorb the impact to the tune of Rs1.
"I am also writing to the states to make corresponding cuts in VAT of equivalent amount so that consumers get Rs 5 relief in retail prices," he said. "The notification in this regard (giving a relief of Rs 2.50) will be issued today (Thursday) and prices will be applicable immediately afterwards," he said.
Last month, the governments of Karnataka, West Bengal, Rajasthan and Andhra Pradesh cut taxes on petrol and diesel.
Jaitley also said the revenue impact of the decision would amount to around Rs 10,500 crore for the rest of the fiscal, which amounts to "only 0.05 per cent of the fiscal deficit". The minister expressed confidence about meeting the fiscal deficit target despite the excise duty cut, saying increased revenue collections would absorb the impact of the cuts.
"The government's aim is to give relief to the consumer by increasing their purchasing power without impacting the fiscal deficit," he said.
"The government's capacity to provide relief is only when domestic factors are strong," he said. It is only the international factors, primarily rising prices of crude and domestic policy and other measures like the interest rate hike by the US, which have affected India, Jaitley said adding domestic indicators were strong and stable. Responding to a query about state governments following suit with similar tax cuts, Jaitley said that this measure would be a "a test for all state governments, especially those whose leaders have been demanding cuts while paying lip service to people".