Black Money In Politics

The recent demonetisation of high-value currency notes has thrust the perennial problem of black money back into focus and the initiatives needed in different sectors to control it. One such sector is politics. The political ecosphere is both a source and a sink for black money. Black money is generated to meet contributions to political parties. To this extent, politics is a sink for black money. At the time of elections and political stress, this sector becomes a source of black money, which is then mostly spent on consumption. This article argues that the Election Commission of India (ECI) should proactively implement electoral reforms aimed at improving transparency in electoral funding and ensuring that political parties do not misuse the tax benefits provided to them.

For the purposes of this analysis, we adapt the lessons learned from the ancient Greeks on rhetorical appeals to public policy.1 It can be argued that any public policy initiative can be implemented successfully only if it meets four challenges—the tests of ethos, logos, pathos, and kairos. Ethos represents the character and credibility of the implementing agency. Logos reflects the soundness of the legal foundation of the reform. Pathos appeals to feelings and emotions of the persons affected by the reform (in this case, all citizens of the country). Kairos represents the timeliness of the initiative. The article examines the proposed electoral reforms to control black money in politics with reference to these four challenges. It finds that the ECI should proactively implement these reforms immediately.

The ECI, the Supreme Court, and the Comptroller and Auditor General (CAG) are acknowledged as the three pillars of our democratic and federal polity. All these institutions have tremendous credibility and their actions carry widespread acceptance. The ECI implemented a series of proactive and path-breaking initiatives to clean up the election process between 1990 and 2004, often resolutely even taking on parties in power. These steps further enhanced its credibility. The ECI is today seen as a world-class institution, which ensures the integrity and objectivity of the election process in the world’s largest democracy.

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 undoubtedly has the ethos to implement reforms in this critical area.

The ECI is fully empowered by the existing law to implement reform relating to the funding of political parties without seeking any legislative amendments. This proposition is examined in detail in the four sections below. Section 1 examines the present legal framework on the funding of political parties. Section 2 discusses issues relating to transparency in the accounts of political parties. Section 3 examines regulating donations to political parties. Section 4 deals with deregistering of political parties.

1 Legal Framework on Funding of Political Parties

The ECI had registered 1,646 parties under the Representation of the People (RoP) Act, 1951 as on May 2014.2 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. The remaining 1,182 registered political parties were then, and are presumably now, dormant. New parties are also coming into the fold. As on December 2016, the Election Commission was in the process of registering 10 new parties.3

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. Some of them are equally capable of being used as sinks for black money, as has been apprehended in the context of the demonetisation.4

In July 2004, the ECI submitted a booklet entitled Proposed Electoral Reforms (2004 Proposals) to the Prime Minister for consideration.5 This booklet had two parts. Part I contained 15 new proposals, including affidavits to be filed by candidates, restricting publication of results of opinion polls, and prohibiting surrogate advertisements. Part II contained seven proposals for reform that were then pending with government. Proposal No 9 of Part I was titled, “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.

The ECI, in December 2016, released yet another booklet entitled Proposed Electoral Reforms (2016 Proposals).6 This booklet contains 47 proposals classified in 10 chapters. The preface mentions, “The Commission considers it necessary to put all proposals on electoral reforms in public domain for the benefit of the people.” While it does subsequently say that “the Commission believes that these suggested reforms will be extremely useful,” it does not mention how many of these proposals have been endorsed by the ECI to the government for necessary action and when they were so endorsed.

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.7 Interestingly, five of the seven recommendations that were shown as pending in the 2004 report are still included in the 2016 proposals.8

Chapter VII of the 2016 proposals entitled “Reforms Related to Political Parties” contain 12 proposals. We review below the proposals to do with (1) transparency in the accounts of political parties; (2) regulating donations to political parties; and (3) deregistering political parties.

2 Transparency in Accounts

This proposal was originally made by the then ECI to the government in 1998—19 years ago. It called for political parties to improve transparency in both the collection of funds as well as their expenditure by recommending that their audited accounts be published.9 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. In its 2016 proposal, the 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.

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 have released a report entitled “Analysis of Donations Received by National Political Parties FY 2015–16.”10 The report (hereafter NEW–ADR) finds that all the six national parties have submitted incomplete information to the ECI on donations received above ₹20,000. In one party’s case, no detail of the mode of contribution was provided for any donation. In another party’s case, details of cheque numbers, banks on which drawn and date of encashment were missing. In other cases, PAN numbers of donors were missing in the mandatory statement.

The Central Information Commission in its full bench decision in June 201311 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.12

NEW–ADR also found that 75% of the sources of funding of the six national political parties were not known. Citing the practice in Bhutan, Nepal, Germany, France, Italy, Brazil, Bulgaria, US, and Japan, the report found that in none of these countries is it possible for 75% of the sources of funding political parties to be unknown, as it is in India today. It recommended that “national and regional political parties must provide all information on their finances under the Right to Information Act.”

The Supreme Court order of 2 May 200213 (ADR judgment) recognised that “the Election Commission has from time to time issued instructions in order to meet with the situation where the field is unoccupied by legislation.” The Court further 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.”

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. No enabling amendments were made to the Conduct of Elections Rules 1961—as ECI had originally planned to do so to achieve this end. This is one occasion when the ECI used its “residuary power” after the ADR judgment.

Earlier, in 1994, the ECI had suo motu, exercised its residuary power when it amended the Election Symbols (Reservation and Allotment) Order 1968 (Symbols Order) to introduce Section 16A. This section empowers the commission to suspend or withdraw recognition of recognised political parties for failure to “observe the Model Code of Conduct or follow the lawful directions and instructions of the Commission.”

The Model Code of Conduct (MCC) was formally introduced in January 199414 to prevent the ruling party from taking unfair advantage of its dominant position, and thus to provide a level playing field for all contesting parties. The MCC has no legal status whatsoever. The ECI itself does not desire to provide it with a statutory footing15 since it feels this may delay action initiated on violation of the MCC. Despite lack of a statutory backing, the MCC is strictly enforced by the ECI. Political parties comply with the MCC because of Section 16A which threatens them with derecognition for a breach.

This de facto position was recognised by the Department Related Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice, which in its 61st Report on Electoral Reforms—Code of Conduct for Political Parties and Anti Defection Law16 stated,

“The ROP Act does not empower the Election Commission to deregister political parties. However, the Election Commission has assumed the power under Para 16A of the Election Symbol (Reservation and Allotment) Order 1968.”

In view of the above, it is clear that the ECI has residuary power in areas where the field is unoccupied by legislation, and such a power has been exercised by it in the past.

The proposal for publication of accounts of political parties by amending the ROP Act has been pending for 19 years with the government. In its affidavit before the Supreme Court, the government has expressed its lack of support for such a proposal. And yet this is a critical proposal, vital to controlling the role of black money in politics. If the ECI does not act proactively, this long-delayed proposal to control the use of black money in political funding and expenditure will continue to languish. This field is unoccupied by legislation. The ECI should seize the opportunity and use its inherent power to issue an order (similar to the 2002 order requiring affidavits to be filed by candidates) mandating all political parties to submit details of all donations above ₹20,000. Where donations below ₹20,000 exceed 20% of the party’s total receipts or ₹10 crore, details of all donations should be provided in the annual return required under Section 29C of the ROP Act 1951.

3 Regulating Donations

As per reports,17 the ECI has recently 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.” These proposals find place as items 2 and 6 in Chapter VII of the 2016 proposals. However, it is not clear whether the ECI has endorsed these proposals to the government for initiating legislative action.

The proposal to prohibit anonymous contributions above ₹2,000 may be redundant if the proposal for political parties to identify all contributions above ₹20,000, and also those below it if such contributions exceed 20% of the total receipts or ₹10 crore, is implemented.

The proposal to restrict exemption from income tax to parties that contest elections and win seats may raise the entry barrier for forming new political parties to unacceptably high levels, and unnecessarily reinforce the dominant position of the national and state parties in the country today.

Section 13A of the Income Tax Act grants this exemption to all parties registered under Section 29A of the ROP Act 1951. 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. The power to deregister political parties lies within the inherent power of the ECI, as argued subsequently.

Thus, neither of these two proposals need consideration, as their raison d´être has been included in the earlier proposal for making party accounts, including donations, received fully transparent.

4 Deregistration

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 themselves of income tax exemption.

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. It cites four reasons in its support.18

(i) The Supreme Court in its judgment in Indian National Congress (I) v Institute of Social Welfare and Others19 (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.

(ii) 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.

(iii) A similar recommendation had also been made by the Department Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice in its 61st Report on Electoral Reforms—Code of Conduct for Political Parties and Anti Defection Law.

(iv) 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.

This interpretation of the ECI that it lacks the power to independently review the registration of political parties without amendments to the ROP Act does not appear credible for the following reasons.

(i) The ECI does not appear to have considered the ADR judgment referred to earlier which recognises that Article 324 of the Constitution provides a reservoir of powers to the ECI in a field that is not occupied by legislation. Deregistration of political parties is a field not occupied by legislation. Based on this judgment, the ECI can assume its inherent powers to issue orders on deregistration of parties.

(ii)  The ADR judgment was delivered by a three-member bench on 2 May 2002. The INC judgment was delivered by a two-member bench on 10 May 2002. Both these judgments appear to have been made independently of each other. Both push the ECI in opposing directions. It can be argued that the three-member bench ADR judgment should hold sway over the two-member INC judgment.

(iii) Such an inherent power has been recognised and acted upon by the ECI as late as December 2016. The ECI on 21 December 2016 informed the Chairman of the Central Board of Direct Taxes20 that it had deleted 225 registered unrecognised political parties from the list maintained by it under Section 29A of the ROP Act on the ground that these parties were no longer in existence or functioning. Though the ECI has euphemistically called this process “delisting” in its letter, its action is tantamount to deregistration of these parties, since these lists are maintained under Section 29A of the act, which deals with registration.

(iv) The reference to the proposal to amend the ROP Act in 1994 is not relevant, as it sought to empower high courts to deregister political parties. For this, an amendment is required as high courts will be new agencies to be included in Section 29 of the ROP Act. This discussion focuses on the ECI remaining the deregistering authority. The ECI already finds mention in the ROP Act.

For these reasons, it can be argued that the ECI has inherent powers to deregister political parties and consequently it can also deprive such deregistered parties of the benefit of income tax exemption.

The ECI chose to pick the low hanging fruit by deregistering 225 registered unrecognised parties, which were completely defunct and non-functional in December 2016. As mentioned earlier, there are 1,646 registered parties. Only 464 participated in the 2014 election. The remaining 1,182 registered political parties are presumably dormant. Of these, the ECI has deregistered 225 in December 2016. That leaves 957 dormant but registered political parties that are still eligible for tax exemptions.

Further all the 464 registered active political parties presently do not make their accounts public, nor do all of them publish a list of donors contributing more than ₹20,000. Some of them are equally capable of being used as sinks for black money.

In view of the above, the ECI should continue its drive to deregister dormant political parties without prejudice to its efforts to seek legislative changes. They should also move against active political parties that are not transparent about their funding. This will limit the scope for political parties to become sources and sinks for black money.

Pathos: The demonetisation of high-value currency notes implemented by the government on 8 November 2016 affected India’s population personally as no other reform initiative of the government had done before. People’s access to their own funds in banks was constrained and they had to stand in long queues to draw money from ATMs and banks. Daily wagers, small traders and small industrialists suffered considerable inconvenience and losses. Despite this, the people have been bearing this privation cheerfully as they see this move as a part of the government’s ongoing campaign against black money. The people see this as a much-wanted attack on illegal wealth held by a few. They have been sensitised to the need to control the generation and consumption of black money. They would therefore strongly support all collateral moves aimed at this objective, including regulating black money in politics. They will therefore support this move.

Kairos: The Bharatiya Janata Party’s (BJP) election manifesto released prior to the 2014 election clearly outlined the party’s commitment to “ensure minimisation of the generation of black money. BJP is committed to initiate the process of tracking down and bringing back black money stashed in foreign banks and offshore accounts.”21

The role of black money in politics has been acknowledged officially in Government of India reports. One such report22 states,

“It is widely believed that the election process requires considerable funds whereas resources declared by major political parties do not appear to be sufficient to meet the actual expenditure and therefore are believed to be funded also through black money.”

In the preface to another report,23 the then finance minister stated,

“There is no doubt that manifestation of black money in social, economic and political space of our lives has a debilitating effect on the institutions of governance and conduct of public policy in the country.”

The Prime Minister in his address to the nation24 on 31 December 2016, said,

“Political parties, political leaders and electoral funding, figure prominently in any debate on corruption and black money. The time has now come that all political leaders and parties respect the feelings of the nation’s honest citizens, and understand the anger of the people. It is true that from time to time, political parties have made constructive efforts to improve the system. I urge all parties and leaders to move away from a “holier than thou” approach to come together in prioritizing transparency, and take firm steps to free politics of black money and corruption.”

The time is now ripe. There is a sense of urgency on tackling the issue of black money. India has to be in a hurry. We can no longer afford to wait 19 years for even consideration of reform proposals, far less implementing them. The environment has kairos—timeliness of the reform initiative.

5 Conclusions

As postulated earlier, public policy interventions can be successfully implemented if the challenges of ethos, logos, pathos and kairos are met. Proposals to reform the funding of political parties meet with all these tests. The ECI should therefore proactively order the following.

(i) All political parties should be brought under the purview of the RTI Act. As part of this effort, they should publish their accounts after a firm approved by the CAG has audited them.

(ii) Political parties should submit details of all donations above ₹20,000 to the ECI in the annual return required under Section 29C of the ROP Act 1951. Where donations below ₹20,000 exceed 20% of the party’s total receipts or ₹10 crore, details of all donations should be provided.

(iii) The ECI should deregister all political parties who do not provide the above information. It should also deregister political parties that do not undertake any political activity like contesting elections. While the ECI has deregistered 255 unrecognised political parties recently, 937 unrecognised political parties that did not contest the 2014 election still remain registered and eligible for tax exemptions. The funding of the other functioning 464 parties also needs scrutiny.

As emphasised earlier, no legislative changes are required to bring these changes into force and the ECI is fully empowered to implement them. Only after these changes are in place will discussion on other electoral reform issues such as election expenses and state funding of political parties be meaningful.

Editor’s Note: This post was originally published in epw

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