The Karnataka government's fiscal health faces a potential strain in the current financial year, as highlighted in the Mid-Year Review on State Finances 2025-26. The report, tabled in the Assembly on Wednesday, December 17, 2025, projects that recent central government policy changes and a legislative delay could widen the state's revenue deficit.
Fiscal Pressures from GST and Mining Tax
The review identifies two primary challenges: the GST rate 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. These factors are expected to lower revenue collections below initial targets.
Initially, the state's Mid-Term Fiscal Plan had estimated a revenue deficit of Rs 19,262 crore for the 2025-26 fiscal year. This was based on projected revenue receipts of Rs 2,92,477 crore and revenue expenditure of Rs 3,11,739 crore. The government had successfully reduced the deficit from Rs 27,354 crore in 2024-25, but the new developments threaten to reverse this progress.
"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 stated. To counter this, the state has begun implementing expenditure rationalisation to curb non-essential spending and has launched additional revenue mobilisation strategies.
A Silver Lining: Karnataka Tops National FDI Charts
Amidst the fiscal concerns, the review presented a significant economic achievement. Karnataka has surpassed industrial powerhouses Maharashtra and Gujarat to emerge as India's leading recipient of Foreign Direct Investment (FDI) equity inflows.
In the 2024-25 fiscal year, the state attracted FDI inflows worth $6.6 billion, accounting for 13.2% of India's total FDI. The momentum continued strongly into the first quarter of FY26 (April-June 2025), with Karnataka receiving $5.6 billion out of the country's total $18.6 billion in FDI equity inflows.
State's Own Tax Revenue Performance
The review provided a snapshot of the state's tax collection efforts in the first half (H1) of 2025-26. The state achieved 43.7% of its budget estimate for its own tax revenue (SOTR) during this period. The overall tax revenue growth stood at 7.1% compared to the previous fiscal.
Breaking down the components, state excise revenue grew by 10.6%, while commercial tax collections saw an 8% increase. Against a full-year SOTR budget estimate of Rs 2.08 lakh crore, the state generated Rs 90,981 crore from various tax sources in the first two quarters.
The Mid-Year Review underscores a period of contrasts for Karnataka's economy: robust external investment confidence juxtaposed with internal revenue collection challenges stemming from policy shifts and procedural delays.
