Finance Minister Arun Jaitley said the excise duty cut would have an impact of Rs 10,500 crore on central government's tax revenues.
The government on Thursday announced a Rs 2.50 a litre cut in petrol and diesel prices, factoring in excise duty reduction of Rs 1.50 per litre and asking oil companies to absorb another Re 1.
Finance Minister Arun Jaitley said the excise duty cut would have an impact of Rs 10,500 crore on central government's tax revenues.
He also asked state governments to follow suit by cutting a sales tax or VAT by a similar amount.
The reduction followed petrol and diesel prices touching new highs.
In Delhi, where the fuel prices are the lowest among all metros and most state capital, petrol is sold at Rs 84 per litre and diesel at Rs 75.45.
Jaitley said the move followed Brent crude oil touching four-year high of $86 a barrel on Wednesday and interest rates in US reaching seven-year high.
Inflation in India, however, is still moderate at less than 4 per 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).
Petrol becomes cheaper in few states
Petrol will be cheaper by Rs 5 in Maharashtra, Haryana and Himachal Pradesh with the central and the state governments on Thursday announcing a cut of Rs 2.50 per litre.
Thanking Prime Minister Narendra Modi and Union Finance Minister Arun Jaitley, Mahrashtra Chief Minister Devendra Fadnavis said the reduction in fuel prices will give a huge relief to citizens.
Maharashtra Finance Minister Sudhir Mungantiwar told PTI that the state uses 900 crore litres every year and the decision will cause a loss of Rs 2,250 crore to the state exchequer.
An official from the state finance ministry said a decision to cut the prices on diesel is being assessed with the technical team.
The Centre has brought down the base price of one litre of petrol by 38 paise, which means a revenue loss of Rs 187 crore, he explained.
"The state government has cut Rs 2.50 per litre on petrol which brings down the revenue collection by Rs 1,247 crore. Hence the cumulative loss is of Rs 1,434 crore," he added.
An official from the state's Sales Tax department said if the international prices continue to soar, petrol and diesel prices will increase further.
"In such scenario, the current decision of the Centre and the state will bring temporary relief," he added.
Maharashtra's Minister of State for Finance Deepak Kesarkar said historically, Maharashtra has always been reducing prices of fuel in accordance with the Centre.
"The government has always remained positive on the issue of reducing fuel prices. We are happy to reduce prices of fuel as much as announced by the Centre," Kesarkar said.
The Himachal Pradesh government has decided to reduce the value added tax (VAT) on petrol and diesel to effect a Rs 2.50 per litre reduction in fuel prices in order to facilitate the general public.
Petrol and diesel would be cheaper by Rs 5 per litre in the state.
The BJP government in Haryana on Thursday also announced a Rs 2.50 per litre cut in petrol and diesel prices while the Punjab government has called a meeting Friday to assess the implications of the Centre's suggestions on slashing fuel prices.
Jharkhand, too, cut diesel price by Rs 2.5 per litre.
Karnataka not to cut fuel prices further
Karnataka Chief Minister H D Kumaraswamy ruled out any further cut in fuel prices as it had already done it a fortnight ago.
The state government had slashed the petrol and diesel prices by 2 per litre on September 17 in view of the public outcry against spiralling fuel prices.
Photograph: Amit Dave/Reuters
