Events & Issues

New Delhi, 8 February 2017

Party Funds & Tax Laws

NEED TO PLUG LOOPHOLES

By Dr S Saraswathi

(Former Director, ICSSR, New Delhi)

Operation “clean up” of political parties has begun. Questions regarding political funding, electoral expenditure and related accounting system, and tax law governing party income are once again brought to the forefront in India.

This has been done through Budget 2017-18, by putting a ceiling on cash donations by individuals at Rs. 2,000, instead of Rs 20,000. A scheme of “electoral bond” that can be purchased from authorised banks and redeemable only in the designated accounts of registered political parties according to a time frame is also on the anvil. No limit is placed on donations by cheque or digital mode. 

The proposals have added significance even as five important State Assembly elections are underway. Multiple direct elections are conducted in every State from panchayat bodies and State Assemblies to Parliament keeping political parties busy throughout the year which means enormous income and expenditure.

Political parties are not income generating enterprises, but their display of money power is astounding. Hence, regulation of their income and expenditure is in public interest to prevent crimes arising from money power and to ensure level playing in electoral contests.

It has also become urgent in the present context of demonetisation. Common people facing cash shortage raise numerous questions on the need, implementation and outcome of this move. The case of political parties is brought up by people caught unawares and struggling to cope with the rules and restrictions on deposits and withdrawals. They are inclined to compare their situation with that of political parties.

A political party -- an organisation with certain structural properties and functions--is essentially a social group organised to achieve certain aims. It is different from other organisations and associations because its aims are to be achieved through political tools and actions for which  control over public decision-making and implementation is necessary.

In the early years of elective democracy in India, the emphasis of political parties was on ideology, policies and programmes, and commitments and promises. Money played no direct    part in winning election, say for the Communists who came to power in Kerala in 1957, or for  the  DMK to  defeat the  Congress  in Tamil Nadu in 1967,  or to the TDP to wrest power from the Congress in Andhra Pradesh in 1983.

Money power gradually established itself as the principal factor in winning elections with proliferation of parties leading to growth of political offices and career politics. Party funds and campaign funding are the principal sources of income for running party organisations and meet election expenditure.

Political parties in India till the present Budget proposals were required to declare to the Election Commission (EC) all donations exceeding Rs. 20,000. The declarations are taken as given and not and cannot be verified by the EC. Donations below the specified amount need not be shown with the result that big donations came in small instalments and anonymous donors became the major financiers of parties. India is said to be one of the nine countries in the Asian region to allow political parties to receive anonymous donations. In the US, there is a ban on cash contributions exceeding $100 by a single individual.

Significantly, an order issued by the Central Information Commission (CIC) in 2013 to bring political parties under the Right to Information Act was unanimously opposed by all political parties – big and small. The two communist parties vehemently rejected the order on the plea that their funds did not come either from the Government or from the corporate world.

While the Commission held that parties were public authorities and answerable to citizens, it was  reported that the Union government, instead of seeking a legal way out was inclined to amend the Act to keep the coffers of the parties beyond public knowledge. Meanwhile, the parties chose to ignore the order rather than challenging or complying with it.

The CIC repeated the order in 2015. A petition filed in the Supreme Court is now pending. More significant is that income and donations of political parties enjoy 100 per cent tax exemption under Section 13 A of the IT Act 1961 for their income from house property, “other  sources”,  capital gains, and voluntary contributions. All registered political parties are eligible to benefit from this provision.

Critics are prone to suspect that this legal cover to escape income tax is a reason behind   emergence of small parties particularly those centred round a wealthy individual or a small clique. Parties and private business get merged and play pressure politics.

A petition challenging the constitutionality of Section 13A was dismissed by the Supreme Court.   The petitioner argued that this exemption to political parties was “a serious financial and life injury to the citizens of India” and if it was not quashed, it would be a “serious danger to the whole society, livelihood, and life of the citizen of India”. The Section has the effect of facilitating unlimited deposits of  demonetised currency notes in party accounts.

The hold of money power in deciding election outcome and the problem of regulating political funding bother all democracies. Several countries are experimenting with various measures to clean up elections said to be the fountain head of corruption. Political funding through party subsidies by the Government is in vogue in almost all established democracies. Notable exceptions are India and Switzerland.

In EU countries, regulations on party expenditure are well set. New members are said to be keen on making financial transactions of political parties transparent. The European Parliament provides an annual grant to all members for the specific purpose of developing relations within the EU.

Political donations made by individuals are not tax-deductible in Britain if they are paid through a company they control. Company donations are legal and are declared to the Election Commission which was established by a statute in the year 2000. No limits were put on  donations, but excessive spending by candidates in elections is supposed to be prevented under an old Act of 1883 and under campaign financing regulations under the Representation of People Act. State funding and control over election expenditure are still under consideration.

In Australia, most of the political donations come from corporations besides affiliation fees of members and organisations like trade unions. The Australian Election Commission monitors donations and publishes annual list of political donors. Only parties registered with the Election Commission are eligible to receive political funds. Parties are required to make public disclosure of political funding for which the threshold limit, which is increased every year, stands at $13,200 by 2016-17.

In the US, fund raising is a routine activity of parties. Besides membership subscriptions and corporate donations, State Aid, government and public funding constitute political funds. In Canada, political funding is subsidised by tax credits, and pre-vote subsidies are paid to parties according to votes. Parties obtaining at least two per cent of  total votes  or at least five per cent in “ridings”, that is, electoral districts in which they fielded candidates, get reimbursement up to  50 per cent of campaign expenses.

That no country has evolved a clean and transparent system of political funding is a fact, but no consolation for India where corruption record is deep and pervasive. A re-look into the field situation must start immediately to plug the loopholes in our system.---INFA

(Copyright, India News and Feature Alliance)