Budget – Reforms on election funding

The fundamental of a vibrant democracy is periodic elections. Elections to be meaningful should be conducted free and fair with a level playing field to all in the fray.

The Representation of People’s Act 1950 and 1951 aims to achieve the same through the Election Commission, a constitutional body.

The problem in recent days has been use of immense money power in elections and hence disturbing the balance.

Expected Questions Critically analyse the need for electoral reforms in light of growing money power and issues of paid news. Analyse the problems associated with ‘Electoral Bonds’ and offer solutions.

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General Studies 3

• Conservation, Environmental pollution and degradation, environmental impact assessment
• Government Budgeting – issues

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Issue:
The Union Budget 2017 saw the finance minister announce a slew of reforms aimed at cleaning the field of election funding.

The four elements of the scheme announced by the Finance Minister to “cleanse the system of funding of political parties” are –

• First, he claimed to follow the Election Commission in proposing a ceiling of Rs 2,000 on the amount of cash donation that a political party can receive from one person in a year.
• Second, he announced that political parties would be “entitled to receive” donations by cheque or digital mode from their donors.
• Third, he proposed a new scheme of Electoral Bonds.
• Fourth, he said that every political party would have to file its Income Tax return within the prescribed time limit in order to enjoy exemption from payment of income tax.
• He insisted that this scheme will bring about “greater transparency and accountability in political funding, while preventing future generation of black money”.

Analysis:
The second and the fourth components of this scheme are redundant, as these are no different from what the existing law provides for.

• It does not require a new law to say that political parties are “entitled” to receive donations by cheque or digitally. They were always entitled to this and were already doing so.
• We needed a new law to mandate that the parties would be “required” to receive donations by cheque or digitally. The Finance Minister did not propose any such thing.
• Similarly, the existing law requires political parties to file their income tax returns to enjoy tax exemption. The Finance Bill now proposes a new proviso in Section 13A clause (d) of the Income Tax Act 1961 that explicitly says that the return should be filed within the stipulated time limit.
• So far, all major parties have routinely flouted this requirement. Big national parties file their return months after the due date and many parties don’t file the return at all. No one gets penalised for this non-compliance. The government really did not need this amendment if it had the will to enforce the existing law.

The case of Limiting cash donations

• The proposal about limiting cash donations to Rs 2,000 has been widely misunderstood and therefore welcomed as a first step in the right direction.
• Everyone was made to believe that the limit for anonymous donations, contributions that are exempt from reporting, has been reduced from the existing Rs 20,000 to Rs 2,000.
• That is what the Election Commission (EC) had asked for in its revised compendium of Proposed Electoral Reforms in December 2016. The Finance Minister’s speech claimed to follow the EC’s advice.
• The Finance Bill reveals something different. The existing limit of Rs. 20,000 on anonymous donation as per Section 23 of the Representation of the People Act (RPA) has been left untouched.
• The Minister has merely proposed a new, additional, clause that limits cash donation from one source to Rs.2,000 in one year.
• Notice that there was and is no requirement to disclose a contribution by cheque or digital transfer up to Rs,20,000. There was and is no limit to how much a party can receive from anonymous donations.
• More importantly, there was and is no limit to how much overall a party can receive in cash from all sources put together.
• Following the Law Commission’s recommendations, the EC had proposed that no party should be allowed to receive more than Rs.20 crore or 20% of its overall donations from anonymous sources. The Minister did not pay heed to this.
• A small amount enters the coffers of the party and becomes party funds. A tiny fraction of party funds is placed in the bank accounts of the party to meet some expenses that cannot remain invisible.
• The figures widely discussed in the media relate to that tiny fraction of party funds, which is a small proportion of political funds. Most of this is not voluntary contribution or donation.
• Much of what political parties show as donations is black money generated by party leaders which is turned into white money by way of book entries as donations to the party.
• So far, the accountant who had to covert, say, Rs 100 crore had to make sure than the entire amount was broken down into entries of Rs 20,000 or below. Now they will absorb the same amount by breaking it down into entries of Rs 2,000 or below. All that the proposed law would ensure is more book entries and perhaps a higher fee for the accountant. Otherwise, it would be business as usual.

‘Electoral Bonds’
In order to structure the political funding better and to bring transparency, the Modi Government made several provisions in the Union Budget recently.

An unprecedented announcement was made introducing electoral bonds for which the Government is gearing up to amend the rules of Reserve Bank of India.

The proposal has found favour generally but the plan is seen as yet another attempt by the Government to step on the turf of the RBI. The electoral bonds which will be issued by notified banks can be redeemed by recognised political parties within a prescribed time limit.

Electoral bonds are more to do with eliminating black money and less to do with electoral reforms. The Government already took a step in the Budget that the political parties cannot take cash of more than Rs.2000 from a particular donor. This will go a long way in ensuring electoral reforms.

The identity of the donor will not be disclosed if there is use of electoral bond which in case of cheque payment gets fully disclosed showing which companies and industrial houses are supporting a particular political party even if the funding is legitimate.

Even if there are electoral bonds, there is no limitation on giving cash to the political parties. At present also, the amount being paid as donation is shown less than the amount being actually given to the political parties.

Since the money will come through banks, so to some extent black money will be reduced. But as far as corruption is concerned, it is still difficult to put a check with this step.

Rather than having political funding, government funding can be a better tool to curb corruption which is followed in many countries of the world.

However, in country like India, this might lead to further problems when already Government has expenditures on other serious issues like poverty, unemployment etc.

In order to bring electoral bonds, RBI Act will have to be amended because right now under the law only RBI can issue these bonds.

After this the banks designated by RBI to issue these bonds will come into picture. These will be short duration bonds which means that they will have to be encashed within a period of 30 or 45 days as suggested by the Finance Minister.

The scheme is left at the discretion of political parties or companies which means that it does not really addresses the issue of political funding.

There is nothing in the scheme that will encourage the companies or industrial houses to buy these bonds by payment of cheques and political parties to take those bonds.

The new proposal of Electoral Bonds, although the detailed rules are yet to be framed, the basic outline of the scheme is clear.

The Problem with the bonds
Once introduced, these bonds will mask whatever little transparency exists in the current system. Instead of the usual practice of converting black money into white, these bonds will push white money into a grey, if not black, trail.

Indeed, the black money in politics might go down, as the white money has been provided a perfect cover of secrecy. Why would anyone give any money to a political party through cheque or digital payment and face all the hassle of disclosure?

Trouble with electoral bonds

• Anyone who wants to donate to a political party would be able to purchase bonds from authorized banks. This purchase will have to be in ‘white money’ against cheque and digital payments only.
• Once purchased, these bonds will be like bearer bonds and will not contain the name of the eventual beneficiary.
• These bonds shall be redeemable only in the designated account of a registered political party within a prescribed period.
• So, the donor’s bank would know about who bought how much of Electoral Bonds, but not the name of the party which received it.
• The party’s bank would know the amount deposited through Bonds, but not the identity of the donor.
• The Income Tax authorities and the EC would not know anything: reporting of donor, beneficiary, or even the amount of contribution has been exempted by amending the Income Tax Act Section 13A (b) and the RPA, Section 29C.
• The net effect, and indeed the purpose, of the Bonds will be that no one except the fund giver and the fund receiver would know about this exchange done in white money with full tax exemption.

Consider an example
Let us think of a classic quid pro quo. A government favours a business house in a mining or spectrum or oil deal to the tune of ₹5,000 crore. Both of them have a fifty-fifty deal.

Under the existing arrangement, the business house would have to either declare in its balance sheet a ‘donation’ of Rs.2,500 crore to the ruling party, or find that much cash to secretly hand over to the party bosses.

If the payment is in white, the party will have to declare the amount and the name of the company to the Income Tax authorities and to the EC. Now, the company could simply purchase Election Bonds worth Rs.2,500 crore and hand it over to the party.

The company’s balance sheet will show “purchase of Election Bonds” with no name of the beneficiary, while it enjoys 100% tax deduction on that amount.

The party will simply deposit the money in its account, with no obligation to report anything to the IT authorities or to the EC.

It may well report an innocuous amount of, say, Rs.3.8 crore as its annual reportable income.So much for transparency.

Way Ahead

1. If the country is moving towards digitization, even the Rs.2000 which can be paid in cash to the political parties should be paid online.
2. If all the transactions and accounts being done and used by political parties are regulated under a piece of legislation, it might prove to be more effective and simple. There are many political parties at present which do not file the return every year.
3. Setting aside the election of such candidates against whom there are evidences of spending black money or excluding them from future elections as penalty can be a strong measure.
4. Voters have to be made aware through awareness campaigns as often illiterate voters are bribed for votes before elections.

These measures if taken into consideration seriously along with the will to control illicit funding in elections, some changes can be expected in future.

The need for electoral reforms is less emphasised. But the reforms should be designed in the right spirit and aim to bring change at the ground level.

The reforms in the current budget are less transparent than the transparency they seek to bring about.