The Aam Aadmi Party, (AAP) a regional party which is in power in Delhi state, has just received a notice from the Income tax Department alleging that it had “incorrectly disclosed hawala money as voluntary donations”. Hawala is a colloquial Indian term for the informal and illegal transfer of cash across borders. The IT Department has raised a demand for Rs 300 million in taxes, upon the sum of Rs 680 million which AAP declared it had received in the fiscal year, 2014-15.
Political parties in India are supposed to receive 100 per cent exemption from tax under Section 13A of the Income Tax Act. But parties have to file income tax returns, along with the details of every entity that has contributed over Rs 20,000.
The AAP’s leaders have responded angrily to the IT notice, saying that this is a “vindictive” attempt on the part of the BJP, which rules at the Center, to use government agencies to harass the AAP. The AAP has also pointed out that national parties such as the BJP and the INC receive far more in the way of funding from “unknown sources”.
Indeed, the reported financials of India’s two largest national parties do indicate vast amounts coming from anonymous sources. The Association for Democratic Reforms (ADR), an NGO working for electoral and political reforms, has released many reports analyzing the nature of political funding.
Big Spending, Low Transparency
According to the ADR analysis for 2015-16 (April 2015-March 2016), the BJP declared Rs 5.708 billion in total income for 2015-16. As much as Rs 4.6 billion (81% ) came from unknown sources. The INC declared Rs 2.615 billion in total income and received Rs 1.86 billion (71 %) from unknown sources. Anonymous funding is possible due to a loophole in tax-reporting norms. Until March 31, 2017, political parties could receive cash donations of up to Rs 20,000 per donation from anonymous sources. This meant that in effect, large cash donations could be broken up into multiples of Rs 20,000 and entered anonymously. Political observers claim that this mode of “book-cooking” is standard practice.
Campaign expenditure is believed to be the biggest sinkhole for black money in the Indian economy. Hundreds of billions are spent in every General Election, much of it on buying local goons, as well as on the gratification of voters by offers of cash and liquor.
The Center for Media Studies, a Delhi-based NGO estimated that around Rs 300 billion was spent in the General Election of 2014 . This is orders of magnitude more than the officially declared expenditure of all parties and candidates. This CMS estimate includes Rs 35 billion which was spent by the Election Commission. The major political parties declared that they spent only about Rs 17 billion in campaigning.
The BJP claims that it spent Rs 7.1 billion while the INC stated that it spent around Rs 5.2 billion. Individual candidates could also spend up to an official personal limit of Rs 7 million, in addition to party expenditure (which has no mandated upper limit).
Mysterious Changes
The last Union Budget in February introduced two clauses that could change the nature of political funding. One was cosmetic. The Budget lowered the limit for anonymous donations to Rs 2,000. As cynics pointed out, this would mean a little more work for accountants, who would have to break up large cash donations into smaller fractions.
The second change was puzzling, given that it was touted as a move towards transparency. The Budget introduced the concept of “election bonds” a new financial instrument, which would allow corporates to donate anonymously to political parties. What’s more, the Budget amended Company Law to remove a cap on corporate donations to political parties.
Eight months into the fiscal, further details about the nature of the proposed bonds are unavailable. Right To Information (RTI) requests for information have been stonewalled with various departments of the Ministry of Finance, the RBI and the Election Commission denying that they have any information to furnish.
Under the previous tax regime, a corporation could not donate more than 7.5 per cent of the average net profit of the past three years to political parties. Corporations had to declare the quantum of political donations and the recipients of those donations in their audited balance sheets. This was a fairly transparent system.
Under the new rules, corporations can donate as much as they choose, to any party. They also don’t have to disclose the recipients. The instrument for this is a bearer bond, which is to be issued by the RBI. A corporation can buy these election bonds and transfer them to the political party of choice, which can then encash these instruments.
This scheme would make the process of donation completely opaque to citizens. It would also encourage the setting up of shell companies purely as vehicles to funnel political donations. Under this system it would be unclear to citizens which corporate donated how much, to which party.
However, the RBI will have to oversee this instrument, which would be processed through the banking system. Hence, the RBI would be aware of the identity of both donor and recipient. Opposition politicians and Right To Information activists say that this, in effect would mean that only the ruling party would have access to this information via its control of government agencies. That is a situation, which could lend itself to obvious abuse.
Assuming this system gets off the ground, it could remove all transparency and completely skew access to funding in future elections.