With Petrol and diesel prices going through the roof, the government has finally decided to bite the bullet and reduce the excise duty on petrol and diesel by Rs 1.5 per litre.
It has also asked the oil marketing companies (OMCs) to cut the retail price of both diesel and Petrol by Re 1 per litre, Finance Minister Arun Jaitley told the media today.
These cuts would come into effect immediately.
Meanwhile, the government has also asked the states to effect a VAT cut of Rs 2.5 per litre of petrol and diesel.
Finance Minister Jaitley said that since the VAT is applied ad valorem with every increase in crude prices states earn more in revenue compared to the centre for which the tax remains fixed.
"Hence it is easier for the states to absorb the price cut than the centre," the minister said.
The effect of the excuse duty cut would be Rs 10,500 crore in the current financial year, which is 0.05 per cent of the fiscal deficit.
Jaitley said that despite the cut in excise duty the government is confident if sticking to the 3.3 per cent fiscal deficit target for the financial year.The FM attributed this to robust direct tax collection (net) which till September have seen 14 per cent increase to Rs 4.4 lakh crore.
When asked if good politics has finally taken over good economics, the finance minister said the cut in excise duty is not bad economics because it allows the consumers to spend on other things thus giving a boost to consumption.