New Delhi: To curb the skyrocketing fuel prices, Finance Minister Arun Jaitley on Thursday announced a cut of Rs 2.5 in the prices of both petrol and diesel. The move comes amid the petrol breaching the psychological mark of Rs 90 in Mumbai and Rs 84 in the national capital.

“Excise duty to be reduced by Rs 1.50 and OMCs will absorb 1 rupee. So, a total of Rs.2.50 will be reduced on both diesel and petrol,” said Finance Minister Arun Jaitley.

Jaitley also said that the Finance Ministry is writing to the state governments to cut Rs 2.50 from the VAT imposed on petrol and diesel prices.

Soon after the announcement, the NDA-led governments in 13 states — Uttar Pradesh, Gujarat, Maharashtra, Madhya Pradesh, Chhattisgarh, Tripura, Jharkhand, Assam, Arunachal Pradesh, Himachal Pradesh, Haryana, Uttarakhand and Goa — followed the Centre’s footsteps announcing a cut of Rs 2.50 per litre in fuel prices. Jammu and Kashmir, which is currently under Governor’s rule, also announced a reduction of Rs 2.50 on fuel prices.

While eleven states announced cut in both petrol and diesel prices, the Maharashtra government announced a reduction of Rs 2.50 on petrol and said that a decision on diesel prices will be taken soon.

Petrol in Mumbai will now be available at Rs 86.34 per litre while in Ahmedabad, it will be available for Rs 78.21 per litre.

The relief to consumers will be in three parts — centre will cut excise duty by Rs 1.5, and oil marketing companies (OMCs) will factor in Re 1 in their pricing, and states have been asked to cut VAT as they have raked in windfall gains due to ad valorem nature of the levy that results in higher realisation whenever rates move up, the finance minister said.

“The states’ revenue increases because of increased crude oil prices and hence it is easier for the states to absorb Rs 2.50,” he said.

Jaitley said it will be a test for those states whose leaders were only tweeting and indulging in lip sympathy. “What will they do now and last time also only BJP and NDA-led state governments reduced VAT. This time if other state governments do not do it then people will ask them,” he said.

The Finance Minister said that the cut in excise duty will have an impact of Rs 10,500 crore on the central revenue.

Jaitley said the move followed Brent crude oil touching four-year high of USD 86 a barrel Wednesday and interest rates in US reaching seven-year high.

Inflation in India, however, is still moderate at less than 4 pe cent and higher direct tax collections give comfort with regard to fiscal deficit, he said adding domestic macroeconomic indicators are strong and stable, except for current account deficit (CAD).

The major announcement comes after Jaitley met Oil Minister Dharmendra Pradhan to look at options to mitigate the impact of hiking fuel prices on the economy.

Petrol prices were Thursday hiked by 15 paise a litre and diesel by 20 paise, according to price notification of state-owned oil firms.

The hike pushed petrol price in Delhi to an all-time high of Rs 84 per litre and diesel to Rs 75.45.

Rates of subsidised domestic cooking gas, too, have breached the Rs 500-mark for the first time.

India is the third largest importer of crude oil and rising international oil prices are inflating domestic transport fuel costs in a strong demand environment. Brent, the benchmark for more than half the world’s oil, is trading at a four-year high of over USD 84 per barrel.

Rupee Thursday dropped to 73.77 against the dollar, resulting in expensive crude imports.

Since mid-August, the petrol price has risen by Rs 6.86 a litre and diesel by Rs 6.73 – the most in any six-week duration after the daily price revision was introduced in mid-June last year.

While a cut in excise duty that the central government levies will impact fiscal deficit, states like Bihar, Kerala, and Punjab are not in a position to cut sales tax (or VAT), they said.

Rajasthan, Andhra Pradesh and Karnataka are among the handful of states which have reduced VAT to give some comfort to consumers.

A one rupee per litre cut in excise duty results in over Rs 14,000 crore of revenue loss to the centre on an annualised basis.

Almost half of the fuel price is made up of taxes. The centre levies a total of Rs 19.48 per litre of excise duty on petrol and Rs 15.33 per litre on diesel. On top of this, states levy value added tax (VAT) – the lowest being in Andaman and Nicobar Islands where a 6 per cent sales tax is charged on both the fuels.

Mumbai has the highest VAT of 39.12 per cent on petrol, while Telangana levies the highest VAT of 26 per cent on diesel. Delhi charges a VAT of 27 per cent on petrol and 17.24 per cent on diesel.

The central government had raised excise duty on petrol by Rs 11.77 a litre and that on diesel by Rs 13.47 a litre in nine installments between November 2014 and January 2016 to shore up finances as global oil prices fell, but then cut the tax just once in October last year by Rs 2 a litre.

This led to its excise collections from petro goods more than doubling in last four years – from Rs 99,184 crore in 2014-15 to Rs 2,29,019 crore in 2017-18. States saw their VAT revenue from petro goods rise from Rs 1,37,157 crore in 2014-15 to Rs 1,84,091 crore in 2017-18.