Mid year assessment: GST rate rationalisation to further hit revenues

Karnataka, which estimated a revenue deficit of ₹19,262 crore at the commencement of 2025-26 financial year, is now expecting the deficit to further increase following the GST rate rationalisation and non-realisation of tax on mines.

The revenue deficit — primarily caused by the five guarantee schemes — in 2025-26 budget had come down to 0.63% from 0.96% of the 2024-2025 budget. Considering the growth rate, the government was estimated to overcome revenue deficit by 2027-28.

The Mid Year Assessment of Medium Term Fiscal Plan (MTFP) 2025-2029 tabled in the Winter Session of the Legislature here, estimates an expected lower revenue collections compared to the estimated targets — potentially increasing the revenue deficit in the current financial year. Due to GST rate rationalisation, the State estimates the revenue shortfall of ₹9,000 crore in addition to the revenue loss of about ₹9,500 crore due to non-merger of Cess.

The 2025-26 budget estimated a revenue expenditure of about ₹3.11 lakh crore against the estimated revenue receipts of about ₹2.92 lakh crore in the total budget size of ₹4.09 lakh crore.

The first half of this fiscal, the State, however, has recorded a revenue surplus of ₹68 crore with revenue expenditure of ₹1,28,924 crore against revenue receipts of ₹1,28,987 crore. By the end of September, total spending was 36.4%. The capital expenditure increased by 32.3% in the first half of 2025-2026 over 2024-2025. The Union Finance Ministry has projected the State’s GSDP to be around ₹30.91 lakh crores for 2025-2026.

The assessment noted that the increase in committed expenditure, including the State’s spending on guarantees and various welfare schemes, has increased the revenue expenditure, and the GST rationalisation has further constrained the State’s fiscal position.

Stating that the GST rate rationalisation will have significant impact on the State’s finances, it said any reduction in SGST or other own tax revenue for States directly reduces fiscal capacity, potentially forcing them to either borrow more or cut essential services.

The cessation of GST compensation mechanism has left States fully responsible for any revenue shortfall when the compensation period ended in 2022. State’s GST to GSDP ratio fell sharply from 3.5 % in 2020 to 2.4 % in 2024. The GST revenue as percentage of GSDP has still not surpassed the levels recorded in the pre -GST era, it noted.

SC order on mines

The assessment also noted the negative IGST settlement of ₹2,074 crore in April, 2025, that has moderated the overall revenue growth during the first half of the current fiscal year. While Karnataka expected a tax revenue of ₹3,000 crore from mines after it enacted the Karnataka Mineral Rights and Mineral Bearing Lands Tax bill, 2024, following Supreme Court direction, the Bill is still pending Presidential assent, it said.

Meanwhile, the non -tax revenue has increased to ₹9,827 crore in the first six months of 2025-26 from ₹6,624 crore in the corresponding period last year. The own tax revenue has also increased from ₹84,945 crore in 2024-25 to ₹ 90,981 crore in 2025-26. The assessment noted that the revenue collections had shown a 7.7% increase over the corresponding period last year.

Centre’s aid falls

However, the grant in aid from the Centre has decreased by 38.2 % in 2025-2026 from ₹8,309 crore in first half of last year to ₹5,139 crore received in the first six months of this fiscal. The assessment noted that the transfers from the Centre have shown no growth.

The assessment said that State’s revenue and fiscal deficits remain comfortably placed, leaving adequate space for expenditure during the rest of the fiscal year. The report said that to mitigate this impact, the State has initiated expenditure rationalisation measures to curb non essential spending, increase state’s own tax revenue, protect allocations for priority development sectors and implemented further revenue mobilisation strategies aimed at narrowing the revenue deficit.

FDI inflow grows remarkably

Karnataka has recorded a remarkable year on year growth of 149.3 % in FDI equity inflows in the first quarter of 2025-2026 compared to 2024-2025. In the first quarter this fiscal, the FDI equity inflows to Karnataka reached $5.6 billion out if $ 18.6 billion received by the country.

In 2024-2025, State received $ 6.6 billion, representing 13.2 % of the nation’s total FDI equity inflows.