By Nayanika Tiwari, NMIMS School of Law.
Should the details of party funding be made public?
Political funding, especially corporate donations, is one of the primary causes of cronyism and corruption in the country and requires urgent reform. In light of this, there has been increasing focus on principles of transparency and accountability in corporate funding. With the Central Board of Direct Taxes (CBDT) approving the setting up of an “Electoral Trust” and the new Companies Act, 2013 raising corporate donation limits to 7.5 percent of average net profits, the issue of corporate donations gains even greater relevance. The pernicious nexus between politicians and business houses, more than evident in these times, necessitates a thorough review of this dimension of funding India’s democracy.
Relevant provisions for political parties’ donations and contributions in India
According to Section 29B of the Representation of People’s Act, every political party is entitled to accept contribution offered to it by any person or company voluntarily, other than a Government company. No political party is allowed to accept any contribution from any foreign source as defined under Section 2 of the Foreign Contribution (Regulation) Act, 1976.
According to Section 29C of the Representation of People’s Act, the political parties are required to declare the details of contributions of more than Rs. 20,000 and prepare a report for the same in each financial year. Here, contribution includes contributions from both private persons as well as companies.
It is made mandatory for the political parties to submit to the Election Commission of India a list of donations they receive of over Rs. 20,000, giving names and addresses of the donors (Section 29-C, RPA). If they fail to do so, then such political parties are disentitled from getting any tax relief under that Act.
Section 182 of Companies Act, 2013 states that the companies donating contributions to the political parties must be in existence for a minimum period of three years. Also, the companies can donate only up to 7.5% of its profit in a year and is bound to disclose the amount in its profit and loss account. This exercise of the power of the companies can take place only with the approval of the board of directors through a resolution. If a company violates any of the provisions of this Section, the company shall be punishable with fine which may extend to five times the amount so contributed; and every officer of the company who were involved in such violation shall be punishable with imprisonment for a term which may extend to six months and shall also be liable to fine of 5 times the amount contributed.
The government enacted the ‘Electoral Trusts Scheme, 2013’ in order to streamline the process of funding and to ensure the transparency of corporate funding to the political parties’ poll expenses. According to this scheme, Electoral Trust companies were set up and were promised tax benefits in proportion to the funds they provided to various political outfits.
The Corporate Affairs Ministry amended its ‘Name Availability Guidelines’ for the companies to enable registration of non-profit companies. The companies were required to have the phrase ‘Electoral Trust’ before their names and get registered, so as to differentiate them from other companies, as allowed under Section 25 of the Companies Act, 1956 under the Electoral Trusts Scheme, 2013. The companies were supposed to have an affidavit to the effect that they would be limited only for the purpose of registration of companies under the Electoral Trust Scheme of Central Board of Direct Taxes.
The companies were allowed tax benefits on one condition, i.e. only if they distribute 95% of total contributions received by them in any financial year to the registered political parties within that year itself. The Electoral Trust companies were not allowed to accept contributions from foreign citizens or companies. They need to take the PAN number of all contributors who were resident Indians and passport number of NRI citizens at the time of receiving the contribution.
Current Status of Political Funding
Under the current legal requirements, political parties are generally not completely transparent in their finances and thus a huge proportion of their income remains unaccounted for. There are unknown sources of funding reported by political parties in their annual disclosure report such as ‘sale of coupons’, ‘Aajiwan Sahayog Nidhi’, ‘relief fund’, ‘miscellaneous income’, ‘voluntary contributions’, ‘contribution from meetings/morchas’ etc. for which there is no information available in the public domain.
BSP has been an excellent example of such lack of transparency in the political parties’ disclosure. Since last 8 years, it has not disclosed even a single name of the donor who has contributed above Rs. 20,000 to them, though every year its total income has been in cores.
This egregious level of opacity in the financial disclosure of political parties certainly creates a suspicion towards the dubious sources of income which ultimately affects our electoral process.
The AAP Controversy
In February 2015, AAP was engulfed into a controversy, over political funding. AAP was charged with the allegation of money laundering from AVAM (AAP Voluntary Action Manch) for 4 companies which have funded the party with 50 lakhs each, namely Goldmine Buildcon, Skyline metal, Infolance software & Sunvision agencies, which are believed to be bogus companies. These companies are found to have fake addresses and no profits or loss accounts since 3 years. Though the companies are registered with ROC, it is not enough to prove the genuineness of the company as it provides information only regarding its registered address, its existence and its paid-up capital. Whether the company is doing business currently or not is not provided under ROC.
BJP has also alleged that AAP has flouted foreign exchange law as it routed money from a foreign company which is not supposed to donate money to an Indian Company.
The latest study undertaken by Association of Democratic Reforms (ADR) put up on its website on 8th January shows that, out of Rs 435.87 crore collected by national parties between the financial years 2004-05 and 2011-12, Rs 378.89 crore was donated by corporate and business houses, thus constituting 87% of the total contribution from known sources of political parties.
After taking into account income from other known sources such as sale of assets, membership fees, bank interest, sale of publications, party levy, sale of coupons etc, about three-quarters of their income fell into the ‘unknown’ category.
“Since a very large percent of the income of political parties cannot be traced to the original donor, full details of all donors should be made available for public scrutiny under the RTI. Some countries where this is done include Bhutan, Nepal, Germany, France, Italy, Brazil, Bulgaria, the US and Japan. In none of these countries is it possible for 75 per cent of the source of funds to be unknown, but at present it is so in India,” said an ADR statement.
There is a grave need for a strict mechanism for ensuring that there is final transparency and accountability on the part of the political parties. In order to put forward a true picture of the financial position of the political parties, there must be a standardized procedure and framework of reports.