The government Thursday announced a Rs 2.50 per litre cut in petrol and diesel prices after it reduced excise duty by Rs 1.50 a litre and asked oil companies to absorb another Re 1.
Price cut in states like Gujarat and Maharashtra would be Rs 5 after they matched the announcement with a similar reduction in local sales tax or VAT rates.
The price cut would be effective from midnight tonight.
The reduction in excise duty, only the second in four years of BJP-led NDA rule, will dent government revenues by Rs 10,500 crore and was aimed at cooling retail prices that had shot up to an all-time high.
Announcing the decision, Finance Minister Arun Jaitley asked the state governments to match the move with a similar reduction in sales tax or VAT.
The BJP-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 instalments 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.
It had resisted the call for a reduction in excise duty since May when retail rates first shot up and then again from mid-August when fuel prices started moving up.
In Delhi, where the fuel prices are the lowest among all metros and most of the state capitals, petrol is currently sold at Rs 84 per litre and diesel at Rs 75.45.
Jaitley said he on Wednesday met Oil Minister Dharmendra Pradhan and inter-ministerial consultations continued on Thursday.
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, he 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.
Following the Centre's announcement, BJP-ruled Maharashtra and Gujarat - which are among the highest taxing state, announced Rs 2.50 per litre reduction in the VAT.
Last month, Rajasthan, Karnataka and Andhra Pradesh had reduced VAT to cushion consumers for a spate of price increases.
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.
The move to ask state-owned oil firms, who were given pricing freedom, to absorb Re 1 per litre was seen as a return of government control over pricing, leading to stocks of Indian Oil Corp (IOC), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) tanking.
Jaitley, however, said asking oil companies to bear a part some burden is not going back on deregulation.
For state-owned fuel retailers absorbing Re 1 per litre price would mean about Rs 10,700 crore dent in their revenue on an annualised basis. Of this, IOC's share would be roughly half and the rest split equally between HPCL and BPCL.
Brent, the benchmark for more than half the world's oil, has touched USD 86 per barrel mark, the highest in four years. Also, the rupee dropped to its lowest ever level of 73.77 against the dollar, resulting in expensive crude imports.
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.
Before the reduction, Mumbai had 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 hike in duties had led to 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.
Jaitley said the total impact of Rs 1.50 cut in excise duty is about Rs 21,000 crore for full year and Rs 10,500 crore the reminder of current fiscal. "So the impact will be Rs 10,500 crore in current fiscal which is only 0.05 per cent of fiscal deficit. Absorbing this Rs 10,500 crore in increased collection and maintaining fiscal deficit I am confident we will be able to do that. We are committed to 3.3 per cent figure, we will maintain that," he said.
On OMCs absorbing Re 1, he said they would adjust it over present and future prices.
"For oil security, we need strong OMCs. OMCs are fully competent to deal with the situation their financial position today is much stronger compared to what has been in the past where they had to charge much lesser. Therefore they would be in a position to absorb this," he said.