Will Opacity In Political Funding Scupper Modi’s Anti-Black Money Drive?

Experts claim existing loopholes could help political parties convert black money to white.

An illustration of Indian Prime Minister Narendra Modi as Lord Krishna sitting on a horse in Muzaffarpur, Bihar, India, on Saturday, July 25, 2015. (Photographer: Prashanth Vishwanathan/Bloomberg)
An illustration of Indian Prime Minister Narendra Modi as Lord Krishna sitting on a horse in Muzaffarpur, Bihar, India, on Saturday, July 25, 2015. (Photographer: Prashanth Vishwanathan/Bloomberg)

Consider this. A person donates Rs 15,000 of his black money, in invalidated Rs 500 and Rs 1,000 currency notes, to a political party and the party deposits the currency in its bank account claiming that the donation was made before November 8. Soon after, let’s say during an upcoming state election, the person bills the party for services provided worth Rs 7,500 and the party pays from its account.
Now, the person and the party each have Rs 7,500 as legitimate income without having to pay tax on it or be compelled to participate in an income disclosure scheme.

This illustration is how Jagdeep Chhokar, founder of Association for Democratic Reforms, an independent think-tank focused on political funding, explained the loopholes in existing tax provisions that apply to political parties.

While speaking to BloombergQuint, he said that the exemption given to political parties from disclosing names of those donating less than Rs 20,000 combined with the tax exemption to the parties could be counterproductive to the anti-black money drive unleashed by demonetisation.

According to Section 13(A) of Income Tax Act, registered political parties in India are exempt from paying tax on their voluntary contribution income if they record, maintain and get audited books of accounts listing donors providing more than Rs 20,000 in donations.

While this caveats are meant to serve as a safeguard against the unchecked flow of unaccounted income into the bank accounts of these parties, most political parties claim to receive over half of their income in anonymous donations of less than Rs 20,000 instead, an analysis by ADR found.

A comparison of total donations declared by the parties in their income tax returns (both above and below Rs 20,000) and that declared in the donations report shows that only 49 percent of the total donations of the parties came from voluntary contributions above Rs 20,000.
ADR’s Analysis of Income & Expenditure of National Political Parties for 2014-15  

In the case of some parties, anonymous donations make for almost all their funding says economist Ajit Ranade who has also studied political funding and analysed disclosures of various political parties.

Already political parties enjoy double tax exemption as both the donor and the party get a tax rebate on donations. In addition, we analysed income tax returns and we found that some big parties revealed in their tax returns that they received more than 90 percent of their funds from undisclosed sources and that’s a big issue if you talk about transparency.
Ajit Ranade, Economist

Demonetisation Bonanza For Political Parties?

The confusion started on Friday, December 16, when Finance Secretary Ashok Lavasa reportedly said that political parties are ‘exempted under Income Tax law to deposit old currency notes in their bank accounts,’ as reported by the Indian Express newspaper.

Lavasa’s comments validated Chkokar’s fears. Subsequent statements from the tax department did not deny that political parties can continue to accept Rs 500 and Rs 1,000 currency notes up to December 30.

As the matter threatened to snowball into a major controversy Finance Minister Arun Jaitley clarified, on Saturday, December 17, that political parties were not permitted to accept invalidated currency after November 8.

Post demonetisation, no political party can accept donations in Rs 500 and 1,000 notes since they were rendered illegal tenders. Any party doing so would be in violation of law. Just like anyone else, political parties can also deposit their cash held in the old currency in banks till December 30 provided they can satisfactorily explain the source of income and their books of accounts reflect the entries prior to November 8. If there is any discrepancy in the books or records of political parties, they are as liable to be questioned by the Income Tax authorities as is anyone else. They enjoy no immunity whatsoever.
Arun Jaitley, Finance Minister

More Than 2,000 Political Parties

Jaitley’s statement sought to reassure that political parties will not be spared income tax scrutiny, but Chhokar remained unconvinced.

There are more than 2,000 political parties in India and more than 90 percent of these parties do not contest elections implying that they have been formed for other purposes than electoral which raises questions about their financial propriety, he said.

Ranade added that political parties are largely governed by the Election Commission of India and that too only during an election.

“Very few laws apply to them. So many laws are applicable to all other organisations like school, hospitals, temples but political parties are largely governed by the EC and only during election times while a majority of them have never contested a single seat. They can go through the route of claiming that they received contributions of Rs 19,999 to deposit huge sums and they can escape all disclosures,” Ranade said.

But Nalin Kohli, spokesperson of the Bharatiya Janata Party insists political parties will not find it easy to game the system.

No political party can fake donations after November 8. How can they take tender which is no longer legal? You would have to show a significant amount of cash in hand from April - November. If anyone else in the country can deposit old notes, why can’t a political party do that? Putting money in the bank is not equivalent to a clean chit.
Nalin Kohli, Spokesperson, Bharatiya Janata Party

No Exemption And More Sunshine

That may be true but it can also be rendered ineffective by how political parties are often late in filing financial information. The ADR report indicates that for the financial year 2014-15, only three national parties filed their annual returns on time - Communist Party of India, Communist Party of India (Marxist) and Bahujan Samaj Party. The other three, Nationalist Congress Party, BJP, and Indian National Congress, filed two-four months late. Many smaller parties may be tardier, and without data, there can be no scrutiny fear activists like Chhokar.

On December 18, the Election Commission called for an amendment to the income tax law to ban anonymous contributions to political parties for amounts more than Rs 2,000, as reported by news agency PTI.

Chhokar added that the best way to ensure transparency in political funding is to bring political parties under the ambit of the Right to Information Act.

“It is anybody’s guess how accurate disclosures are when it comes to political parties. They need to be made answerable to the laws of the land and brought under the purview of RTI so that clear information can be gathered on a timely basis,” Chhokar added.