Politics And Black Money

Relevance: G.S paper II: Polity: Governance: Important aspects of governance, transparency and accountability, e-governance- applications, models, successes, limitations, and potential; citizens charters, transparency & accountability and institutional and other measures.

Constitutional bodies – Election Commission, Salient features of RPA

ADR judgement and powers of EC

• 75% of the sources of funding of the six national political parties were not known.
• May 2002 ADR judgment
• The Court noted,

Where the law is silent, Article 324 of the Constitution is a reservoir of power to act for the avowed purpose of free and fair elections. Constitution has taken care of leaving scope for exercise of residuary power by the Commission in its own right as a creature of the Constitution in the infinite variety of situations that may arise from time to time in a large democracy as every contingency could not be anticipated by enacted laws or rules.

Extent of powers of EC

Based on this judgment, the ECI had ordered that all contesting candidates file affidavits providing information on assets and liabilities and their criminal antecedents. This order was only by way of a regulatory fiat.

• This is one occasion when the ECI used its “residuary power” after the ADR judgment.

In context of funding of political parties

• The ECI, the Supreme Court, and the Comptroller and Auditor General (CAG) are acknowledged as the three pillars of our democratic and federal polity.
• While the election process from notification of elections to the declaration of the winning candidates has undergone considerable reform since 1990, not much attention has been paid to the issues arising from funding political parties.
• The ECI is fully empowered by the existing law to implement reform relating to the funding of political parties without seeking any legislative amendments.

Efforts of EC

2004 Proposals

• In July 2004, the ECI submitted a booklet entitled Proposed Electoral Reforms (2004 Proposals) to the Prime Minister for consideration.
• Proposals included
• affidavits to be filed by candidates,
• restricting publication of results of opinion polls, and
• prohibiting surrogate advertisements,
• Compulsory Maintenance of Accounts by Political Parties and Audit Thereof by Agencies Specified by the Election Commission.
• It reiterated a proposal made by the ECI to the government in 1998 aimed at ensuring more transparency in the matter of collection of funds by political parties— that all political parties be required to publish their audited accounts annually.
• In 2004, the ECI had while endorsing this proposal suggested that a firm approved by the CAG audit these accounts.

2016 Proposals

• The ECI, in December 2016, released yet another booklet entitled Proposed Electoral

Reforms (2016 Proposals).

• Many of the 2016 proposals are the same as those contained in the 2004 proposals.
• Others have been drawn from the 255th Report of the Law Commission of India on

Electoral Reforms.

Registration and recognition of parties

• The ECI had registered 1,646 parties under the Representation of the People (RoP) Act, 1951 as on May 2014.
• These included six national parties, 39 state recognised parties, and 1,593 registered unrecognised parties.
• Of these, six national parties, 39 state recognised parties, and 419 registered unrecognised parties, totalling 464, participated in the 2014 elections.
• Thus, only 28% of the registered political parties—464 out of 1,646—participated in the election.
• Under Section 29 of the ROP Act 1951, all political parties need to register themselves with the ECI.
• Section 29A provides the procedure for registration of political parties;
• 29B empowers them to accept contributions from individuals and private companies; and
• 29C requires them to submit an annual declaration to the ECI detailing the donations received by them above ₹20,000 from any person or company, to avail them of income tax exemption.

EC proposal

• The 2016 proposal finds that Section 29 of the ROP Act provides only for registration of political parties by the ECI and not deregistration.
• It therefore proposes that the act be amended to empower it to deregister political parties also.

Analysis

• The Supreme Court in its judgment in Indian National Congress (I) v Institute of Social Welfare and Others (INC judgment) held that the law does not empower the commission to deregister a political party on the grounds of violations of any provisions of the Constitution or any undertaking given to the commission.
• It held that the registration can only be cancelled on the grounds of fraud, change of party objectives which infringe its obligations to abide by the Constitution, and where the party is declared unlawful.
• The Law Commission in its 255th Report on Electoral Reforms recognising this position, recommended that a comprehensive legislation regulating the registration, recognition, deregistration and derecognition of political parties be enacted.
• A similar recommendation had also been made by the Department Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice in its 61^st Report on Electoral Reforms—Code of Conduct for Political Parties and Anti Defection Law.
• In June 1994, the ROP (Second Amendment) Act 1994 was introduced in the Lok Sabha with the objective of amending Section 29 of the act to provide for a complaint to be made in the high court of jurisdiction to consider petitions for deregistration of parties. This amendment lapsed. This implies that the government also subscribes to this view.

Exemption from Income Tax

• All the registered parties are eligible under Section 13A of the Income Tax Act to exclude (i) income from house property; (ii) income from capital gains; (iii) income from other sources; and (iv) income from voluntary contributions from their income for the purposes of determining income tax liability.
• These classification heads cover practically all the income a political party can get.
• The only remaining head is income from salaries, wages, pension, annuity, and gratuity, which are unlikely sources of funding for any political party.
• The 1,182 registered unrecognised and dormant political parties provide opportunities to be used as sinks for black money, in view of their tax-exempt status.
• The 464 registered active political parties do not make their accounts public, nor do all of them publish a list of donors contributing more than ₹20,000.

EC proposal

• ECI in 2016 proposals proposed to the government that “anonymous contributions
• above and equal to ₹2,000 should be prohibited,” and “Exemption from income tax should only be extended to political parties that contest elections and win seats.”
• If a registered political party is not undertaking any political activity, including contesting elections, the proper course of action is to remove it from the list of registered parties—that is, deregister it, which will make it ineligible for income tax exemption.

Transparency in Accounts

Past efforts

• In 2003, the law was amended to require that when the contribution exceeded ₹20,000, details of the donor were to be provided to the ECI.
• In its 2004 proposal, the ECI found this amendment “not sufficient for ensuring
• transparency and accountability in the financial management of political parties.”
• It therefore reiterated the 1998 proposals with the rider that only auditors approved by the CAG should conduct such audits.

2016 proposal

• ECI drawing on the Law Commission’s 255th report goes one step further—it proposes amending Section 25 of the ROP Act to require that political parties maintain, audit, and publish their accounts.
• It also proposes that political parties provide full details of all contributions above ₹20,000.
• In case contributions below ₹20,000 aggregate to more than ₹20 crore or 20% of the total contributions, then details of even these lower value contributions should be provided.

Current situation

• As per the present law, political parties are not required to submit their annual accounts to the ECI.
• They are merely required to submit an annual report providing details of donations received beyond ₹20,000.
• Failure to submit such a report debars parties from obtaining tax benefits under the

Income Tax Act.

Following this, all national parties and some other parties submit reports on donations to the ECI.

• National Election Watch and the Association of Democratic Reforms report finds that all the six national parties have submitted incomplete information to the ECI on donations received above ₹20,000.

CIC judgement 2013 and RTI

• The Central Information Commission in its full bench decision in June 2013 held that the six national parties “have been substantially financed by the Central Government. The criticality of the role played by these political parties in our democratic setup and the nature of duties performed by them also point to their character as public authorities.”
• It consequently held that these parties should provide information under the Right to Information Act (RTI Act) on all aspects of their functioning, including finances.
• No party complied with these directions.
• A public interest litigation (PIL) was filed for enforcement of this order in the

Supreme Court.

The central government opposed this direction in its affidavit before the Supreme Court arguing that complying with it would adversely affect the independent functioning of political parties.

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