Why BJP’s Fortunes In Gujarat And GST’s Pain-Points Are Closely Linked

The Prime Minister was right to point out yesterday (16 October) that the goods and services tax (GST) was a joint decision of centre and states, and all parties were consulted on it. With the Congress making hay over the anger among small businessmen and traders in the run-up to the Gujarat polls, Narendra Modi said: “The Congress is an equal partner in the GST decision and it should not spread lies about GST. The decision was not taken by Parliament or Narendra Modi. The decision was made by governments of all political parties, including the Congress governments of Punjab, Karnataka, and Meghalaya.”

However, the mere fact that Modi had to make this statement indicates a degree of concern over how the GST issue will play out in the Gujarat assembly elections. Also, in terms of popular perception, GST is Modi’s baby, and few non-BJP parties are going to take responsibility for things going wrong.

Whether he likes it or not, Modi will have to take ownership of the GST fallout if he has to carry Gujarat in the December elections. If not, there is a danger that he will lose the narrative, and possibly the state election too.

There are three reasons why Modi cannot avoid carrying the can for GST.

First, the BJP’s position before 2014, including Modi’s own position when he was Gujarat chief minister, was not pro-GST. It was only after he won 2014 and became Prime Minister that the idea of GST gathered steam. This happened because the states opposed to GST all came within the BJP’s sway, reducing the opposition voice in the GST Council. Put simply, the GST is closely identified with the BJP and Modi, and the mere fact that there is consensus in the GST Council does not mean Modi will not be answerable for the glitches and pain-points that keep surfacing.

Second, unlike most other states, Gujarat has a very high proportion of small and medium businesses, and a lot of their trades have traditionally been in cash. Demonetisation and GST have ravaged cash-based supply chains and gutted margins. This means a lot of marginal businesses will go under, and those that survive will still pay a high price in terms of compliance costs for many more quarters. Anecdotal evidence suggests that there is deep anger among small traders and businessmen over GST, an anger that was not visible over demonetisation, which was seen as a one-off disruption. A few days ago, a Karnataka minister, Roshan Baig, used an expletive against Modi, and was universally condemned for his boorishness, but the reality is that many small businessmen have been talking precisely this kind of language in the context of GST. This sentiment will surely play out in the assembly elections.

Third, the problem with GST is that it will take months to sort out, since there are simply too many kinks and anomalies and glitches still around. In recent days, business channels have been hosting Hasmukh Adhia, Revenue Secretary, to answer questions regarding GST problems, and almost every businessman seemed to have some issue or the other.

While the manufacturing sector will probably pipe down at some point since it will benefit from input tax credits, the services sector is facing not only higher taxes, but higher compliance issues since it now needs to register with many state authorities. Manufacturing units had to do this earlier with value added tax, but services companies had to deal with only one tax administration, the excise department of the centre. Now, with states getting a share of service taxes under GST, they too will have jurisdiction over services companies that do business in multiple states.

Put simply, the political problem for Modi is that GST pain-points are not going to disappear before the Gujarat polls. Trying to spread the responsibility to Congress or other opposition parties will not help.

What Modi needs to do is to take ownership of GST and convince people – especially small businesses – that their pain will steadily reduce, and there could be benefits from compliance in future as they get more formal funding and can raise more capital for investment from the markets.

In India’s federal structure, GST success will benefit all, but failure will only cost the BJP and Modi.

Modi cannot distance himself from GST’s success or failure.