The Karnataka Government on Friday increased the VAT (value-added tax) rates on goods belonging to two slabs by 0.5 % to cover the Rs.3,200 crore shortage caused by waiver of farm loans.The waiver, announced by the government two days ago, is expected to provide relief to 16 lakh drought-hit farmers in the state.

Chief minister Jagadish Shettar told the legislative assembly that the goods which attract a tax of 5% and 14% will now invite 5.5 and 14.5%, respectively. The new rates will be applicable for a year from August 1.

"The government hopes to mobilise Rs.1,000 crore through additional taxes," Shettar said in reply to a debate on the Finance Bill for 2012-13 that was passed in the assembly along with an amendment bill to the Karnataka Value-Added Tax Act, 2003.