Political Funding


The political funding in India began in 1920s when Congress under leadership of Mahatma Gandhi began fund raising from business houses and individuals for freedom struggle. The companies and individuals donated generously for what they considered a “noble cause”. This practice continued even after freedom and became increasingly politicised. The fund raised by political parties now was mainly to run everyday affairs of the party and to fight and win elections. All political parties today rely on both legitimate and illegitimate sources for money. While the practice of financing by corporate and businessmen continued, it was supplemented by kickbacks and commissions received from the foreign deals.

Current Rules and Regulations about contributions

The political parties receive funds from three main sources viz., individual contribution, corporate contribution and foreign contributions. Currently, there are no limits on individual contributions. Corporate contribution are allowed from only non-Government companies, which is at least three year old, and does not make total contribution in a year more than 7.5% of its average net profit of last three years. Such contribution must be authorised by the board of directors resolution. Foreign contributions – till recently, there was a ban on foreign contribution to candidates and political parties. Foreign funding of political parties was banned under section 3 of the Foreign Contribution (Regulation) Act, 2010. In April 2016, Government amended the Foreign Contribution Regulation Act (FCRA), 2010 through the Finance Bill, 2016.

Implications of FCRA Amendments

The main objective of this amendment was to make way for the political parties to receive donations from foreign companies such as Vedanta as “Indian Sources” despite of their being “foreign”. All multinational corporations operating in India like IBM, Samsung, General Motors etc., can finance parties. This will be in addition to the donations by the Indian corporate legal. As per the current rules, the companies need to show the amount contributed to political parties in their profit and loss statements with names of the parties. On the other hand, each political party is required to report all contributions above

₹ 20,000 received from any company or person to Election Commission every financial year.

Disclosure of amount exceeding ₹ 20,000/-

Since rules ask the parties to show only those contribution which exceed ₹ 20,000/-, most of the funding sources are “unknown sources”. Similarly, around half of the total donations to major parties come from the donors whose details are not available in public domain. These details are only available when political parties file their returns. The biggest issue in transparency is that “most contributions” to political parties are below ₹ 20,000/- limit. Further, this funding by donations is only a fraction of their total income. Details of their income from remaining sources is still unavailable. Thus, there is a huge cover of secrecy and opaqueness in who gives them money.

The question of political funding in the country is inextricably linked to two major issues. First, it is corruption and black money generation. It is an open secret that corporates take heavy loans from the public sector banks and then give part of this loan towards political party funding. As a standard practice, the companies show inflated value of equipments aboard and use this mechanism to create corpus of cash in tax heavens abroad. Part of this fund comes back to India to fund political parties. So far, no substantial steps have been taken to bring overall transparency in political funding. Secondly, the amendment of FCRA via Finance Act was called subversion of democracy.

Time to institutionalise Funding of Political Parties

The question of how political parties in India should be funded is inextricably linked to corruption and black money generation. Therefore, funding to political parties be made totally transparent and above board. But how to do it? A modest beginning has been made in this direction in the Budget 2017/18.

Transparency in Electoral Funding

The existing provisions of Section 13A of the Act, inter alia provides that political parties that are registered with the Election Commission of India, are exempt from paying income tax. To avail the exemption, the political parties are required to submit a report to the Election Commission of India as mandated under sub-section (3) of section 29C of the Representation of the People Act, 1951 (43 of 1951) furnishing the details of contributions received by a political party in excess of ₹ 20,000/- from any person. However, under existing provisions of the Act, there is no restriction of receipt of any amount of donation in cash by a political party.

Secondly, a political party is also required to file its return of income under Section 139(4B) of the Act, if its income exceeds the maximum amount not chargeable to tax (without considering the exemption under Section 13A). However, filing of the return is not a condition precedent for availing exemption under the said section.

In order to discourage the cash transactions and to bring transparency in the source of funding to political parties. It is proposed to amend the provisions of Section 13A to provide for additional conditions for availing the benefit of the said section which are as under:-

(i) No donations of ₹ 2,000/- or more is received otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through electoral bonds.

(ii) Political party furnishes a return of income for the previous year in accordance with the provisions of sub-section (4B) of Section 139 on or before the due date under section 139.

Further, in order to address the concern of anonymity of donors, it is proposed to amend the said section to provide that the political parties shall not be required to furnish the name and address of the donors who contribute by way of electoral bond. Electoral bond means a bond referred to in the Explanation to sub-section (3) of Section 31 of Reserve Bank of India Act, 1934.

Electoral Bond is a financial instrument for making donations to political parties. These are issued by Scheduled Commercial banks upon authorisation from the Central Government to intending donors, but only against cheque and digital payments (it cannot be purchased by paying cash). These bonds shall be redeemable in the designated account of a registered political party within the prescribed time limit from issuance of bond.

Electoral Bond is an effort made to cleanse the system of political funding in India. The scheme of electoral bonds addresses the concerns of donors to remain anonymous to the general public or to rival political parties.

Further, in accordance with the suggestion made by the Election Commission, the maximum amount of cash donation that a political party can receive is stipulated at ₹ 2,000/- from one person, pursuant to the announcement in Union Budget 2017-18. However, political parties will be entitled to receive donations by cheque or digital mode from their donors, who in turn are entitled to deduction u/s. 80GGB and u/s. 80GGC of the Income-tax Act, 1961. Every political party would have to file its return within the time prescribed in accordance with the provision of the Income-tax Act. Existing exemption to the political parties from payment of income-tax would be available only subject to the fulfilment of these conditions.

However, there is apprehension that lowering the limit for anonymous cash donation from ₹ 20,000/- to ₹ 2,000/- will not help to bring about transparency in political funding, as earlier those who did not want to declare donations used to issue receipt for less than ₹ 20,000/-, now they will do the same for less than ₹ 2,000/-.

H. N. Motiwalla
Joint Editor

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