The GST rationalisation initiated by the Centre earlier this year and the delay in granting assent to the Karnataka Mineral Rights and Mineral Bearing Lands Tax Bill 2024 are projected to potentially increase Karnataka’s revenue deficit in the current financial year, according to the Mid-Year Review on State Finances 2025-26, tabled in the Assembly on Wednesday.
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The Mid-Term Fiscal Plan had estimated a revenue deficit of Rs 19,262 crore for the current fiscal with revenue receipts and revenue expenditure being estimated at Rs 2,92,477 crore and Rs 3,11,739 crore, respectively.
“State, with revenue mobilization measures, has made consistent efforts to increase the revenue receipts and had reduced the revenue deficit from Rs 27,354 crore estimated in 2024-25 to Rs 19,262 crore in 2025-26. However, the recent GST rate rationalisation and non-realisation of tax on mines is expected to lower revenue collections compared to the estimated targets, potentially increasing the revenue deficit in the current financial year,” the review said.
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To mitigate this impact, the state has initiated expenditure rationalisation measures to curb non-essential spending and implemented further revenue mobilisation strategies aimed at narrowing the revenue deficit, according to the review.
On the bright side, Karnataka continued to attract robust foreign direct investment (FDI) equity inflows. In the 2024-25 fiscal year, FDI inflows to the state amounted to $6.6 billion, which was 13.2 per cent of India’s total FDI equity inflows.
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“Notably, in the first quarter of FY26, FDI equity inflows to Karnataka reached USD 5.6 billion out of the total USD 18.6 billion received by the country,” the review said, noting that the state surpassed states such as Maharashtra and Gujarat to emerge as the leading recipient of FDI inflows.
In terms of the state’s own tax revenue (SOTR), 43.7 per cent of the budget estimate was reached in the first half of 2025-26. The overall growth in tax revenue was 7.1 per cent compared to the previous fiscal, with state excise revenue registering 10.6 per cent growth and commercial tax collection growing by eight per cent.
While the budget estimates of SOTR were Rs 2.08 lakh crore, in the first two quarters of the current fiscal, Rs 90,981 crore was generated as tax revenue from various sources.