To end black money in political funding, Modi govt must do more than blame old law

On Saturday, Union Finance Minister Arun Jaitley embarked on a spree of damage control mode by issuing a statement on the Narendra Modi government’s stance on political funding and black money. Political parties have not been granted any exemption after demonetisation and the introduction of Taxation Laws (Second Amendment) Act, 2016 which came into force on 15 December, said Jaitley.

He added: “Income and donations of political parties fall under the purview of Section 13A of the Income Tax Act 1961 and there is no change in its provisions. In this era of instant outrage, a 35-year-old law is presented as a new law being passed by the NDA Government.”

 To end black money in political funding, Modi govt must do more than blame old law

Representational image. PTI

This statement came in response to media reports and a political storm brewing among certain Opposition parties after the revenue secretary Hasmukh Adhia said, "If it is a deposit in the account of political parties, they are exempt. But if it is deposited in any individual account, in anyone’s account, that information will definitely come on our radar." Adhia’s statement drew immediate media and political attention in the context of the ongoing demonetisation exercise. The plan, originally announced on 8 November gives time to deposit old, invalidated Rs 500, Rs 1,000 currency notes in banks till 30 December (in bank branches) and 31 March (at Reserve Bank of India counters).

Going by Adhia’s statement, political parties could have deposited any amount without paying taxes or facing any investigations. Hence, the possibility opens up for tax cheats to approach a registered political party to make their loot legit with an understanding that the money will be returned at a later date — with a cut going into the pocket of the agent (in this case, the political party).

Under the current rules, no political outfit needs to show the source of funds for cash donations under Rs 20,000. Hence, parties have a logical opportunity to show a majority of their deposits under this category by creating thousands of backdated receipts and can, thus, launder black money with no questions asked. Typically, political parties do not even keep receipts for donations.

According to an analysis of political funding by the Association of Democratic Reforms (ADR) in the past few years, around 75 percent of such funding in India remains opaque and falls in the anonymous donation category.

Here, we have a serious problem.

Political parties have a clear option to print backdated receipts and launder black money. This is a major hole in the implementation of demonetisation, one of the main goals of which is to unearth the black money in the system. What the finance minister clarified in his carefully-worded statement on Saturday is absolutely true to every word. Exemption to political parties is not a law that was created by the Modi government. This is a law that has been in existence for a while.

But, there are few things of which the government has to take note:

First, whether the law is old or new, the fact is that political parties presently enjoy a big loophole to make their black money white openly. They do enjoy immunity from paying tax and tax scrutiny/prosecution if these outfits show that money came through small donations. This is what Adhia probably meant and what the finance minister reiterated in his statement when he said that the income and donations of political parties "fall in the purview of Section 13A of the Income Tax Act of 1961" and that "there is no change in its provisions".

The question is given that the Modi government has waged an all-out attack on black money, shouldn’t it have plugged this loop hole before demonetising 86 percent of the currency in circulation, risking serious economic and social repercussions? The government managed to amend the income tax law for individuals, why didn’t it expand the purview for political parties? The demand of the Election Commission, seeking an amendment of laws to allow exemption from tax only to parties that win seats in elections and ban anonymous contributions of Rs 2,000 and above to parties, should be an eye opener to the Modi government and prompt it to ponder over the holes in the black money war plan.

Second, it is true that under Section 13A of the I-T Act, political parties have to submit audited accounts, income and expenditure details, and balance sheets as Jaitley says in the clarification. The finance minister also says that following demonetisation, no political party can accept donations in Rs 500 and Rs 1,000 notes since they were rendered illegal tender. Any party doing so would be in violation of the law. "Just like anyone else, political parties can also deposit their cash held in the old currency in banks till 30 December, provided they can satisfactorily explain the source of income and their books of accounts reflect the entries prior to 8 November," he said.

Here, isn’t Jaitley himself giving a clue to political parties how to deal with their black money — that parties can still take invalidated higher denomination currency notes (including those from black money hoarders for a decent cut) and make thousands of backdated receipts to show the funds arrived before the cut-off date?

If the parties choose to act as conduits of ill-gotten wealth, isn’t it almost impossible for the government and taxman to track down the tax cheats?

Third, at a time when the Modi government is aggressively pushing for electronic transactions (cashless), why is the government silent on making political funding can’t be made cashless including that of the ruling party? According to PTI, there are 1,866 registered political parties in India as on August, 2015, including six national parties. Many of them haven’t even contested elections. There has been a rush for registration of political parties, with as many as 239 new outfits enrolling themselves with the Election Commission between March 2014 and July this year, taking their number to 1,866.

According to data compiled by the EC, in the last Lok Sabha election in 2014, 464 political parties had fielded candidates. The present figure could be much more than 1,866 since 2015, many more parties would have joined the club. Political parties get massive donations from individuals and institutions. They need funds for those who contest elections from their parties and spend substantial funds on administrative, functional expenses. There are no official records for most of these transactions. The possibility of crooks launching political parties solely with the aim of laundering funds is high.

Four, what prevents the government from asking banks details of deposits done by political parties in the months prior to demonetisation (remember the sharp surge in bank deposits between July and September) and after 8 November, including those of the BJP and thereby, setting an example? Asking party members to hand over details of bank deposits to party president alone wouldn’t suffice if clean transparency is the goal. Given the radical nature of the demonetisation exercise and considering that banning 86 percent currency in one go isn’t a conventional step, the government shouldn’t hesitate in going the whole hog to attack all sources of black money. Unarguably, the most critical part of the black money battle is tackling political funding, which is missing here.

Jaitley’s clarification that the I-T Act that protects politicians is an old law and the Modi government had nothing to do with it is not a valid argument

It was the responsibility of this government to plug the necessary loop holes before attempting a big gamble to hunt tax cheats, who have been looting the country. The government should have foreseen that crooks will think far ahead and use one of the 1866 political parties as black money laundering machines to make a mockery of the system. If that happens, isn’t the pain and trauma forced up on the common man who has, by far, stood by the Modi government on this move going in vain?

When it comes to political funding and black money, the Modi govt could surely do much more than blaming an old law and hoping tax cheats will follow the rules of the game.

Updated Date: Feb 06, 2017 14:56:22 IST