The Government issued a notification on January 2, 2018, on electoral bonds, which was provided in the Finance Act 2017. The electoral bonds scheme is billed as an effective tool for cleaning political funding.

Most political parties receive funds from corporates as well as rich individuals. The ruling parties usually get the lion’s share of these funds. The donors, however, take care of the opposition parties too because they understand the risk of putting all their eggs in one basket. But the incongruity of political parties depending on corporate funds to fight elections and sustain democracy at times is troubling; therefore the Government looks for ways to regulate it.

Changes in the Act

Consequently, in 2003, the Representation of People Act 1951 was amended and sections 29B and 29C inserted. Section 29B says political parties may accept contributions of any amount from any person or company except from a government company or foreign source.

Section 29C says that every political party which receives such funding should prepare a report on contributions above ₹20,000 from individuals and companies and submit the same to the Election Commission before the income tax returns are filed. If any party fails to do this, it will not get tax exemption for that year under the Income Tax Act.

Similarly, section 13A of the Income Tax Act 1961 provides for exemption of all voluntary contributions received by a political party from payment of income tax. But such exemption is conditional on the recipient party maintaining such books of accounts and other documents as would enable the officers of the I-T department to properly deduce the income received by it and also maintaining a record of such contributions and the names and addresses of donors as well as amounts above ₹20,000.

This provision also says that if the party fails to submit the report as stipulated in Section 29C of the RPI Act 1951, it will not get the tax exemption.

The Finance Act, 2017 amended both these Acts and exempted electoral bonds from the purview of section 29 C of the RP Act 1951 as well as section 13 A of the IT Act 1961. This means the income received by way of electoral bonds is not required to be disclosed in the report which goes to the Election Commission.

Further, political parties are not required to maintain any record of the same or the names and addresses of donors of these bonds. This is the essence of the bonds scheme.

The electoral bonds scheme has been designed in such a way as to keep the identity of the donor absolutely confidential. Para 7(4) of the notification says that the authorised bank will not disclose any information about the purchaser of the bonds to any authority for any purpose.

The bank will not know who the recipient of the bonds is. The Government seems to think this is the best way to deal with the questions that arise in relation to political funding.

About turn

The basic question is why such secrecy and confidentiality in the case of political funding by way of electoral bonds? The existing laws allowed any amount of contributions to political parties with tax exemption but also laid down certain conditions like maintaining records of the amounts received as well as the names of donors. Failure to submit the report containing all these details to the constitutional authorities would entail tax exemptions being denied to the recipient party. A path-breaking legal provision introduced by the Centre last year is that any contribution above ₹2,000 can only be made through cheques, drafts, etc. This provision should adequately take care of the problem of black money flowing into the coffers of political parties.

But by introducing electoral bonds the Government has resiled from this position. Electoral bonds are a pathetic admission of its failure to curb black money in political funding. It is a regressive measure because it prevents the public from knowing who has contributed how much and to which party. The Election Commission will not be allowed to have a record of the electoral bonds received by a political party. It is also not clear whether the I-T authorities will have an opportunity to get all the details of the contribution despite the applicability of section 139 4(a) by which a political party is required to show all incomes, including political contributions by way of bonds.

The ostensible purpose of this scheme is to conceal from public scrutiny the identity of the corporates and moneybags who contribute huge amounts to political parties, especially to the ruling parties. Political funding will become more opaque.

The scheme of electoral bonds seems to suffer from serious legal infirmities. Section 13A and 139 (4B) of the IT Act deal with tax exemptions for political contributions and furnishing of income returns by parties, respectively. Section 139 (4B) requires a political party to furnish total income including the exempted contributions with all the particulars. Section 13A, as amended in 2017, says that there is no need to maintain a record of the electoral bonds or details of the donor. Obviously, these provisions contradict each other.

Questionable moves

Taxing is a sovereign function. It is the social policy to tax all incomes for the benefit of society. So, all tax statutes lay down specific conditions for exempting any particular category of income. The amendments made in Section 13A of the Income Tax Act 1961 and 29C of the RPI Act 1951, excluding all the extant conditions in favour of the bonds and making them highly secretive to maintain the anonymity of donors, are against the scheme of taxation laws. Any legislative exclusion of public scrutiny of financial transactions having a bearing on public revenue is against constitutional policy. Protecting the anonymity of donors to political parties is not an action done with the best of intentions.

Further, a notification issued under an Act cannot make a substantive provision. Only an Act can make such a provision. Para 7(4) of the notification issued by the finance ministry categorically prohibits disclosure of any information about a donor to any authority; this is a substantive provision. This notification has been issued under section 31 of the Reserve Bank of India Act 1934. This Act does not contain any such provision. How can a notification which is a subordinate legislation, travel far outside the parent Act? Clearly, this provision is ultra vires and therefore invalid.

The writer was secretary-general of the Lok Sabha

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