Union Budget 2017-18: Why Arun Jaitley’s big political funding reform is just an eye wash

The Union Budget for 2017-2018 presented by the Finance Minister in the Lok Sabha on 1 February, 2017 has been widely hailed. One of the features that attracted a lot of adulation is the section in the Finance Minister’s budget speech, titled "Transparency in Electoral Funding". This is what this section said:

"164. India is the world's largest democracy. Political parties are an essential ingredient of a multi-party Parliamentary democracy. Even 70 years after Independence, the country has not been able to evolve a transparent method of funding political parties which is vital to the system of free and fair elections. An attempt was made in the past by amending the provisions of the Representation of Peoples Act, the Companies Act and the Income Tax Act to incentivise donations by individuals, partnership firms, HUFs and companies to political parties. Both the donor and the donee were granted exemption from payment of tax if the accounts were transparently maintained and returns were filed with the competent authorities. Additionally, a list of donors who contributed more than Rs 20,000/- to any party in cash or cheque is required to be maintained. The situation has only marginally improved since these provisions were brought into force. Political parties continue to receive most of their funds through anonymous donations which are shown in cash.

Union Finance Minister Arun Jaitley. PTI

Union Finance Minister Arun Jaitley. PTI

165. An effort, therefore, requires to be made to cleanse the system of political funding in India. Donors have also expressed reluctance in donating by cheque or other transparent methods as it would disclose their identity and entail adverse consequences. I, therefore, propose the following scheme as an effort to cleanse the system of funding of political parties:

a) In accordance with the suggestion made by the Election Commission, the maximum amount of cash donation that a political party can receive will be Rs 2000/- from one person.

b) Political parties will be entitled to receive donations by cheque or digital mode from their donors.

c) As an additional step, an amendment is being proposed to the Reserve Bank of India Act to enable the issuance of electoral bonds in accordance with a scheme that the Government of India would frame in this regard. Under this scheme, a donor could purchase bonds from authorised banks against cheque and digital payments only. They shall be redeemable only in the designated account of a registered political party. These bonds will be redeemable within the prescribed time limit from issuance of bond.

d) Every political party would have to file its return within the time prescribed in accordance with the provision of the Income-tax Act. Needless to say that the existing exemption to the political parties from payment of income-tax would be available only subject to the fulfillment of these conditions. This reform will bring about greater transparency and accountability in political funding, while preventing future generation of black money.”

Amendments to the Income Tax Act

In pursuance of the above, the Finance Bill 2017 proposes amendments to several existing laws, one of which is the Income Tax Act. The proposed amendment to the IT Act is contained in para 11 of the Finance Bill 2017 which reads as under:

"11. In section 13A of the Income-tax Act, with effect from the 1st day of April, 2018,—

(I) in the first proviso,—

(i) in clause (b),—

(A) after the words “such voluntary contribution”, the words “other than contribution by way of electoral bond” shall be inserted;

(B) the word “and” occurring at the end shall be omitted;

(ii) in clause (c), the word “; and” shall be inserted at the end;

(iii) after clause (c), the following clause shall be inserted, namely:—

‘(d) no donation exceeding two thousand rupees is received by such political party otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through electoral bond.

Explanation — For the purposes of this proviso, “electoral bond” means a bond referred to in the Explanation to sub-section (3) of section 31 of the Reserve Bank of India Act, 1934.’;
(II) after the second proviso, the following proviso shall be inserted, namely:—

“Provided also that such political party furnishes a return of income for the previous year in accordance with the provisions of sub-section (4B) of section 139 on or before the due date under that section.”

The existing Section 13A of the Income Tax Act reads as under:

“Special provision relating to incomes of political parties.

13A. Any income of a political party which is chargeable under the head “Income from house property” or “Income from other sources” or “Capital gains” or any income by way of voluntary contributions received by a political party from any person shall not be included in the total income of the previous year of such political party:

Provided that


(a) such political party keeps and maintains such books of account and other documents as would enable the Assessing Officer to properly deduce its income therefrom;

(b) in respect of each such voluntary contribution in excess of twenty thousand rupees, such political party keeps and maintains a record of such contribution and the name and address of the person who has made such contribution; and

(c) the accounts of such political party are audited by an accountant as defined in the Explanation below sub-section (2) of section 288 :

Provided further that if the treasurer of such political party or any other person authorised by that political party in this behalf fails to submit a report under sub-section (3) of section 29C of the Representation of the People Act, 1951 (43 of 1951) for a financial year, no exemption under this section shall be available for that political party for such financial year.
Explanation.—For the purposes of this section, “political party” means a political party registered under section 29A of the Representation of the People Act, 1951 (43 of 1951).”
If the proposed amendment is approved by the Parliament which it would be because the ruling party has a majority in the Lok Sabha and the Rajya Sabha cannot amend the Finance Bill 2017 since it a “money bill”, the amended Section 13A of the Income Tax Act would read as under (the amended portions have been italicised):
“13A. Any income of a political party which is chargeable under the head “Income from house property” or “Income from other sources” or “Capital gains” or any income by way of voluntary contributions received by a political party from any person shall not be included in the total income of the previous year of such political party :

Provided that 
(a) such political party keeps and maintains such books of account and other documents as would enable the Assessing Officer to properly deduce its income therefrom;
(b) in respect of each such voluntary contribution other than contribution by way of electoral bond in excess of twenty thousand rupees, such political party keeps and maintains a record of such contribution and the name and address of the person who has made such contribution;
(c) the accounts of such political party are audited by an accountant as defined in the Explanation below sub-section (2) of section 288 :; and
(d) no donation exceeding two thousand rupees is received by such political party otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through electoral bond.

Explanation — For the purposes of this proviso, “electoral bond” means a bond referred to in the Explanation to sub-section (3) of section 31 of the Reserve Bank of India Act, 1934.


Provided further that if the treasurer of such political party or any other person authorised by that political party in this behalf fails to submit a report under sub-section (3) of section 29C of the Representation of the People Act, 1951 (43 of 1951) for a financial year, no exemption under this section shall be available for that political party for such financial year.

Explanation — For the purposes of this section, “political party” means a political party registered under section 29A of the Representation of the People Act, 1951 (43 of 1951).

Provided also that such political party furnishes a return of income for the previous year in accordance with the provisions of sub-section (4B) of section 139 on or before the due date under that section.

Amendment to the Representation of the People Act

Now, we come to the amendments to the Representation of the People Act, 1951. The only amendment to this Act is to Section 29C which requires political parties to make annual declarations of contributions received from individuals and companies in excess of Rs. 20,000/-. This section, as it exists now, reads as follows:

“29C. Declaration of donation received by the political parties.—

(1) The treasurer of a political party or any other person authorised by the political party in this behalf shall, in each financial year, prepare a report in respect of the following, namely: —

(a) the contribution in excess of twenty thousand rupees received by such political party from any person in that financial year;

(b) the contribution in excess of twenty thousand rupees received by such political party from companies other than Government companies in that financial year.

(2) The report under sub-section (1) shall be in such form as may be prescribed.

(3) The report for a financial year under sub-section (1) shall be submitted by the treasurer of a political party or any other person authorised by the political party in this behalf before the due date for furnishing a return of its income of that financial year under section 139 of the Income-tax Act, 1961 (43 of 1961), to the Election Commission.

(4) Where the treasurer of any political party or any other person authorised by the political party in this behalf fails to submit a report under sub-section (3) then, notwithstanding anything contained in the Income-tax Act, 1961 (43 of 1961), such political party shall not be entitled to any tax relief under that Act.

The proposed amendment, contained in para 135 of the Finance Bill 2017, reads as follows:

“135.The provisions of this Part shall come into force on the 1st day of April, 2017.
136. In the Representation of the People Act, 1951, in section 29C, in sub-section (1), the following shall be inserted, namely:––

‘Provided that nothing contained in this sub-section shall apply to the contributions received by way of an electoral bond. Explanation — For the purposes of this sub-section, “electoral bond” means a bond referred to in the Explanation to sub-section (3) of section 31 of the Reserve Bank of India Act, 1934.”

What does this mean?
Reading the amended Section 13A, and translating it from legalese to simple English means the following:

Political parties do not need to include donations by electoral bonds in their record of “such voluntary contributions in excess of twenty thousand rupees”. This is the meaning of the amendment of clause (b).

Political parties cannot accept donations in cash in amounts more than Rs 2,000. This is what insertion of clause (d) achieves. It is important to note that earlier there was no law specifying how much amount can a political party received in cash as donation.

The insertion of an additional proviso, after the second proviso, to require political parties to furnish “a return of income for the previous year in accordance with the provisions of sub-section (4B) of section 139 on or before the due date under that section” seems superfluous because Sub-section 4B of Section 139 of the Income Tax Act already has that provision.

It reads as follows: "(4B) The chief executive officer (whether such chief executive officer is known as Secretary or by any other designation) of every political party shall, if the total income in respect of which the political party is assessable (the total income for this purpose being computed under this Act without giving effect to the provisions of section 13A) exceeds the maximum amount which is not chargeable to income-tax, furnish a return of such income of the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and all the provisions of this Act, shall, so far as may be, apply as if it were a return required to be furnished under sub-section (1).”

This is just reiteration of this provision and there is nothing new in it.

Since the only amendment to the Representation of the People Act is that “nothing contained in this sub-section shall apply to the contributions received by way of an electoral bond,” it simply means that any contribution by way of an electoral bond will not be included in the “report in respect of the … the contribution in excess of twenty thousand rupees received by such political party from any person in that financial year.”

What this means is that the statement submitted to the Election Commission under Section 29C will (a) continue to be limited to donations above Rs.20,000 each, and will not need to include donations below Rs.20,000, which means that donations above Rs.2000, though received by cheque or by digital means, do not have to be declared, and (b) donations received through electoral bonds do not need to be declared.

What the above paragraph means is that the statement that “the limit has been reduced from Rs 20,000 to Rs 2,000 is not really true. However, all of the above is in keeping with the statement of the Finance Minister that all the changes suggested will “keep the donor anonymous.”

“Keeping the donor anonymous” does nothing to change the situation where 69 percent of all income of 57 political parties is from unknown sources.

So, what does Rs 20,000 to Rs 2,000 mean? In effect, nothing!


Published Date: Feb 06, 2017 06:12 pm | Updated Date: Feb 06, 2017 08:29 pm


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