All the cuts will be effective from midnight, as clarified by Dr. Hasmukh Adhia, finance secretary.
She said that the Centre can dictate the BJP-ruled states but not the others.
Jaitley has also asked state governments to follow suit by cutting a sales tax or VAT by a similar amount. A high-level meeting convened by the Prime Minister Narendra Modi has made a decision to reduce the Excise Duty by 1.50 Rupees.
Meanwhile, West Bengal Chief Minister Mamata Banerjee blamed the Centre for high fuel prices and demanded that the Union government should roll back the Rs 10 cess it levied on petrol and diesel before asking the states to reduce taxes.
This is the second time in one year that the Centre has cut excise duty on petrol and diesel as rising prices pinch the common man. What Jaitley did on Thursday was to increase that squeeze and make it formal.
Reacting to the development, Karnataka chief minister H D Kumaraswamy said the Congress - JD (S)-ruled state has already cut fuel price by Rs 2 last month.
Jaitley said it will be a test for those states whose leaders were only tweeting and indulging in lip sympathy. "Thus petrol & diesel wd be Rs. 5 cheaper in the State of Gujarat".
Last month, Rajasthan, Karnataka and Andhra Pradesh had reduced Value-Added Tax to cushion consumers for a spate of price increases. "So, a total of Rs 2.50 will be reduced on both diesel and petrol", said Jaitely.
The shares of Indian oil marketing companies sank after the announcement, with Indian Oil Stocks down by 18.24 percent, HPCL stocks tumbled by 22 percent and BPCL stocks declined by 19 percent. Party spokesperson Sambit Patra expressed hope that people would get the Rs-5-per-litre relief at the earliest, PTI reported. Of this, IOC's share would be roughly half and the rest split equally between HPCL and BPCL. Also, the rupee dropped to its lowest ever level of 73.77 against the dollar, resulting in expensive crude imports. Banerjee claimed that fuel prices were reduced in the global market and asked why these were increasing in the country. If the Centre is serious, it should reduce the tax to what it was when it assumed office.
"The government has cut down borrowing this year by Rs 70,000 crore".
Asked by a reporter about the economic implications of the move, Jaitley said the decision was "good economics" as it won't impact the fiscal deficit and will allow consumers to boost spending on other goods. You (Centre) have increased cess by Rs 10.