Verdict corner: Reforming India’s party financing

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Updated: April 9, 2015 3:31:49 AM

Failure to institutionalise political funding has opened the floodgates of corruption, and has led to lack of transparency in electoral system...

From asking political candidates to disclose all contributions received by them to making it mandatory for corporates to seek shareholders’ approval at their annual general meetings before donating funds to political parties, the Law Commission has recommended sweeping electoral reforms in its 255th report submitted to the government.

Noting that “the current system tolerates, or at least does not prevent, lobbying and capture, where a sort of quid pro quo transpires between big donors and political parties/candidates,” the report has recommended that companies must place their plans to fund a political party before shareholders for approval.

The rationale behind the suggestion, according to Law Commission chairman Justice AP Shah, is that when corporates influence political parties, the latter start protecting the interests of the former. He also proposed to make it mandatory for political parties to disclose contributions over R20,000 received by them, even if from a single donor. The report states that political candidates should not only disclose all contributions received from any person or company, and even from the political party, but also submit proper details of expenditure within the prescribed time, failing which he/she should be disqualified to contest the next election. He has recommended amendments to the relevant election rules, the Companies Act as well as the income tax laws.

This is in tune with the view of the Election Commission, which has been batting for a stro xdng law regarding political funding to check misuse of black money during elections. To usher in “good accountability,” CEC HS Brahma feels that black money and money power, followed by muscle power in electoral process, create imbalances in a democratic system. Instead, the poll panel has favoured setting up a “national electoral trust” where corporates could give donations, which could then be distributed among the parties.

The Election Commission in its background paper on the issue said that the big money, used in non-transparent manner, may be black money or tainted money and it undermines the rule of law, as the elected representatives become captive in the hands of those who provide such funds.

Though the poll panel claimed there is a consensus among political parties on banning direct funding, the BJP and the Congress have disagreed with the proposals to ban direct corporate funding of political parties and capping their election time expenditure.

The government in 1968 had banned corporate donations. But an amendment to the Companies Act in 1985 allowed corporate donations to political parties under certain conditions. The most important was that companies could donate a maximum of 5% of their average net profit over the previous three years, subject to the approval of the Board of Directors and disclosure in the profit and loss account statement in the audited annual accounts of the company, notes the poll panel. The limits of contribution to political parties have been increased to 7.5% of average net profits during the three immediately preceding financial years from the existing 5%, the background paper said.

Even income tax laws were amended in 2010, exempting donation of voluntary contributions received by electoral trust to any political party, but correspondingly there is no amendment of the Representation of People Act, 1951, as a result the trusts are not required to disclose any information to the Commission.

The candidates can raise fund from any source, as there is no restriction under the law on fund-raising, nor there is any requirement to maintain and disclose the names and addresses of the persons from whom they are receiving funds. There is also no direct state funding of parties in India.

In 2012, the CII taskforce on electoral reforms suggested legitimising political funding and sought imposition of a “democracy cess” of 0.2% on all income tax payers, including corporates, for funding political activity and elections. The body wrote to the government suggesting that Section 182(3) of the new companies law that calls for full disclosure—including naming parties that have been given money—must be altered, as it felt that the industry is apprehensive that full disclosure may lead to a backlash from parties that are less generously funded.

Assocham also suggested the creation of a government fund of R5,000 crore over five years for part funding of candidates’ spending, besides bringing political parties under the purview of income tax. It noted they can be taxed at the rate of 30% in respect of anonymous donations received, and should also be subjected to penalty for not filing returns well in time.

Even the AAP, which is facing allegations of receiving funds from “dubious” companies, demanded probe funding of all three major parties in Delhi polls. All eyes are now set on the Supreme Court which is hearing appeals filed by the Congress and the BJP challenging a Delhi High Court order for taking action after an investigation into funds received from foreign companies for election campaign. The High Court had found prima facie violation of the Foreign Contribution (Regulation) Act as “donations accepted by the political parties from Sterlite Industries and Sesa Goa accrue from foreign sources within the meaning of law.” Several other firms, including public-sector company State Trading Corporation of India and MMTC, have been named in the judgment.

The current form of political funding has become a burden on the economy. Many parliamentarians have raised concerns over the use of excessive money in election campaigns. However, all stakeholders have unanimously identified that the root of the problem is the failure to institutionalise political funding, which has opened the floodgates of corruption, lack of transparency in electoral system and governance, and finally the dire need of electoral reforms in the Indian political system.

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