"We will also write to states, asking them to reduce VAT taxes by another Rs 2.5 per litre".
Mr. Jaitley said this would have only a marginal impact on the fiscal deficit - less than 0.05% of the fiscal deficit - since the excise duty cut would be balanced out by higher direct tax collections.
The reduction followed petrol and diesel prices touching new highs.
"This is perfectly good economics. we want consumers to spend money on other items also.to do it without impacting the fiscal deficit is surely good economics", he announced after an inter-ministerial discussion with petroleum ministry.
The cuts will cost the Centre Rs 10,500 crore in tax revenues, he said.
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In a tweet, Gujarat Chief Minister Vijay Rupani announced that "the government of Gujarat has chose to cut Rs 2.50 on both petrol and diesel".
The minister also maintained that Thursday's decision did not represent a re-regulation of fuel prices.
On the centre's recommendation to the states, Jaitley said: "Now all states will be on test". Following the announcement made by the government, five BJP-ruled states - Maharashtra, Gujarat, Chattisgarh, Uttar Pradesh and Tripura - also reduced the fuel prices by Rs 2.50 per litre. "What will they do now and last time also only BJP and NDA-led state governments reduced Value-Added Tax".
"When the prices go up the Centre receives a fixed amount per litre, whereas the revenue of states go up".
Fuel prices across the country have been scaling new heights everyday on the back of sustained depreciation of the rupee against the dollar and crude prices trading around its four-year high of $86 per barrel.
In Delhi, where the fuel prices are the lowest among all metros and most state capitals, petrol is sold at Rs 84 a litre and diesel at Rs 75.45.