When Finance Minister Arun Jaitley announced the Budget on February 1, he estimated that the Centre would collect Rs 19.46 lakh crore from all the taxes it imposes. Reading the fine print of the document, it turned out that this figure was rosier than it otherwise might have been.

Jaitley has been able to add Rs 1.07 lakh crore to the Centre’s column in the ledgers by employing two strategies: by taking advantage of the choppy implementation of the Goods and Services Tax regime after April and by using inventive accounting policies.

The first strategy helped the Centre appropriate Rs 46,951 crore that should have actually have gone to the states as State GST, one of the four subsets of GST. State GST shows up only in the Budgets of the states.

The portion that is collected by the Centre, and which it gets to spend, is called Central GST. Integrated Goods and Services Tax is collected on goods and services sold between two or more states. It is divided between the Centre and the states on a 50:50 basis. The fourth subset is the GST cess, which is collected by Centre but can be used only to compensate states for any loss of revenues that have resulted from the shift to GST from the previous indirect tax regime.

The Budget estimated that total GST collections will increase 63.1% from Rs 4.45 lakh crore in 2017-’18 to 7.44 lakh crore in 2018-’19. But some projections seem puzzling. For instance, the government estimated that collections from Central Goods and Services Tax would grow from Rs 2.22 lakh crore this financial year to Rs 6.04 lakh crore next year. That would mean a 172% increase in tax collections in a period when the size of the economy is forecast to grow at 11.5%, and the GST rates for several items are expected to be lowered over the year.

Paradoxically, as Central CST is projected to more than double, the collection of tax on the inter-state sale of goods is projected to fall from Rs 1.61 lakh crore this year to a mere Rs 50,000 crore next financial year.

The only GST subset that seems to show a realistic increase over the year is the GST cess, which is estimated to grow 46.75% from Rs 61,331 crore this year to Rs 90,000 crore next year.

Some of the projected increase in the overall GST number can be explained by the fact that the regime was implemented only in July 2017 and that revenue began to be collected only from August. As a consequence, the revenue from GST for 2017-’18 is only for eight months of the year. Yet, the dramatically different growth trends in each of the subsets – one actually running in a contrary direction – is inexplicable.

A deeper analysis of these GST estimates shows how the government shored up its overall tax revenue numbers for 2017-’18, partially at the cost of the states.

Centre-state tax split

When GST was introduced, many businesses were thrown into confusion, struggling to keep pace with the thicket of regulations and constantly crashing online filing systems. Many were specially baffled by how they were expected to account for the tax to be paid on sales and purchases made between states – Integrated GST.

R Kavita Rao, a professor at the National Institute of Public Finance and Policy, explained that Integrated GST is mainly a mechanism to transfer revenues from one state to another. The Centre collects Integrated GST on behalf of both the states and itself. Only half the amount collected is the Centre’s revenue, or Central GST, she said. The other half belongs to states as State GST. But figuring out which states should get this other 50% can take some time because it requires establishing where the final sale of the goods took place.

But with the confusion in the implementation of GST and other back-end problems in the online tax management system, the government finds itself unable to resolve precisely how to divide 50% of most of the Integrated GST it collected between specific states. As a result, it has said it will not be able to distribute Rs 1.61 lakh crore that it has collected as Integrated GST by the end of this financial year.

The finance ministry has taken advantage of this in the Budget to show this Rs 1.61 lakh crore of Integrated GST as its own revenue – though the Centre’s share is actually only Rs 80,590 crore. This has helped the government make its gross tax collection numbers look much brighter.

A small note on one of the thousands of pages of the Budget document explained this move. “The first year of implementation of GST has also resulted in a large amount of unsettled IGST money that has come to the Government of India,” says paragraph 59 of the “Fiscal Policy Strategy Statement”. “However, in the true spirit of cooperative federalism, it has been decided that the estimated IGST receipts to the tune of Rs 1.61 lakh crore in RE [Revised Estimates for] 2017-’18 will be divided between the Centre and the states on an equitable manner similar to the pattern of devolution of taxes that are being undertaken by the Government.”

The 42% formula

This unsettled Integrated GST helped the government pocket an additional Rs 46,951 crores that belonged to the states.

This is how.

The Constitution requires that the Centre share a part of the annual central tax revenue with states in a proportion determined by the Finance Commission. At present, the Centre is required to share 42% of its tax revenues with states – including a portion of its share of Integrated GST. So of the Centre’s Rs 80,950 crore share of Integrated GST, states should have got Rs 33,999 crore.

But, as the note says, the government plans to share only 42% of the total Rs 1.61 lakh crore IGST with states. Instead of getting Rs 1.15 lakh crores, states will be paid only Rs 67,998 crore. The Centre will keep Rs 46,951 crore that should actually go to the states.

Inconsistent accounts

Days after the Budget, several economic analysts and investment firms noticed this accounting strategy. “The 2017-’18 GST tax collections have been supported by the one-time creation of an ‘IGST float’ of Rs 1.61 lakh crore,” noted the brokerage firm CLSA. “This is not sustainable. The 2017-’18 collections were inflated and a ‘total GST collection’ approach in understanding the GST maths is not really a like-to-like comparison. Component-wise analysis is critical, with a focus on IGST.”

An optical illusion

Another accounting policy that the Budget has used to create the illusion of brighter illusion of good GST revenues is including of GST cess in the revenue figures. For 2017-’18, the Budget reflects a revised estimate of Rs 61,331 crore being collected as GST cess.

Though the Finance Commission has awarded the states a portion of central tax collections, that stipulation does not apply to the revenues it collects as cesses. For cesses, the Centre gets to keep the entire amount. However, the GST cess, collected by the Centre on the sale of products such as cigarettes and beverages, is an exception to that rule. The GST cess can only be used to compensate the states for the loss of revenue they will face in the transition from the previous regime of indirect taxes to the GST system.

The accounting policy used by the government has allowed it to first show the GST cess as additional income and subsequently to show the amount as an expenditure when it is being transferred it to the states.

This device inflated the revenue collections reflected in the Budget by Rs 61,331 crore for this year and by Rs 90,000 crore for 2018-’19. Similarly, it inflated the expenditure the government is making in these two years by the same amount. This allowed the government to look Rs 63,331 crore more healthy.

Had the Centre not deployed these strategies, its gross revenue collections for 2017-’18 would have fallen Rs 1.07 lakh crore short of its target.