The devil is in the fine print

Given his interest in cricket, this must be called Finance Minister Arun Jaitley’s ‘doosra’. His announcement on electoral reforms in his Budget speech combined an element of surprise, some degree of deception and a sleight of hand — all that go into a doosra in cricket. It is a mark of his deftness that his delivery foxed many a seasoned player.

Initial reactions to Mr. Jaitley’s announcement ranged from gushing to lukewarm approval. Breathless TV anchors announced it as a historic act of cleansing our polity, just as Mr. Jaitley would have us believe. More sober commentators saw it as a significant though inadequate step forward in the right direction. Even the sceptics felt that the Finance Minister had at least put the issue of political funding on the table. Everyone thought the ball was headed in the right direction. It took a while for democratic reform and right to information activists to find out that this was the wrong one. The fine print of the Finance Bill showed that Mr. Jaitley’s proposals for bringing ‘transparency and accountability’ would achieve exactly the opposite. Ranging from redundant to sinister, these proposals would rob the system of whatever little transparency and accountability that it has today. Worse, they draw national attention away from a series of electoral funding reforms that the Election Commission and democratic reform activists have been asking for a long time.


All the four elements
This might sound like the usual oppositional and alarmist reaction. So, let us carefully unpack each of the four elements of the scheme announced by the Finance Minister to “cleanse the system of funding of political parties”. First, he claimed to follow the Election Commission in proposing a ceiling of ₹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”.

Now, 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.

Limiting cash donations
The proposal about limiting cash donations to ₹2,000 has been widely misunderstood and therefore welcomed as a first step in the right direction. Everyone was foxed into believing that the limit for anonymous donations, contributions that are exempt from reporting, has been reduced from the existing ₹20,000 to ₹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 ₹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 ₹2,000 in one year.


Notice that there was and is no requirement to disclose a contribution by cheque or digital transfer up to ₹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 ₹20 crore or 20% of its overall donations from anonymous sources. The Minister did not pay heed to this.

This proposal is unlikely to make any difference to the business as usual for political parties. The fact is that most political funds remain in the pockets of party leaders. 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, ₹100 crore had to make sure than the entire amount was broken down into entries of ₹20,000 or below. Now they will absorb the same amount by breaking it down into entries of ₹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.

Trouble with electoral bonds
Still, one can say that this change would do no harm. But that is not the case with the new proposal of Electoral Bonds. Although the detailed rules are yet to be framed, the basic outline of the scheme is clear. Anyone who wants to donate to a political party would be able to purchase bonds from authorised 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.


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 ₹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 ₹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, ₹3.8 crore as its annual reportable income! So much for transparency!

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?

Arun Jaitley’s doosra is a great leap backwards in the history of election funding reforms.

Yogendra Yadav is President of the newly formed party, Swaraj India.