The Maharashtra government on Wednesday decided to increase value-added tax (VAT) on petrol and diesel, gold and diamond jewellery, cigarettes, alcohol and soft drinks from October 1 for the next five months.

The increase in VAT on petrol and diesel is Rs 2 a litre. At the same time, the Bharatiya Janata Party-led government headed by Chief Minister Devendra Fadnavis waived the local body tax on petrol and diesel. This move, the state government claimed, would make the burden on vehicle users marginal.

While the VAT on cigarettes, alcohol and soft drinks has been raised by five per cent, the same has been increased to 1.2 per cent from one per cent on gold and diamond jewellery.

The government hopes to mobilise Rs 1,600 crore from the tax hike, which will be used for relief and rehabilitation measures in Maharashtra’s drought-hit districts.

Maharashtra Finance Minister Sudhir Mungantiwar defended the VAT rise on petrol and diesel saying it was necessitated as the state was incurring a monthly loss of Rs 300 crore due to fall in auto fuel price largely due to reduction in global crude oil prices. The government has already abolished local body tax on traders with an annual turnover of Rs 50 crore.

The state government’s move comes at a time when there are concerns that the revenue deficit, currently estimated at Rs 3,757 crore, would be higher than Rs 7,500 crore by the end of 2015-16 due to burgeoning expenses and a fall in revenues due to a slump in the economy.

Meanwhile, Ashok Minawala, director of All India Gems & Jewellery Trade Federation, said the government’s decision would encourage illegitimate business with jewellers as they would prefer to deal in cash to showing sales on their books of account.