Political funding in India refers to the financial resources raised and spent by political parties and candidates for election campaigns, crucial for democratic participation but often debated for transparency and accountability.
NEW DELHI: Political funding refers to the financial resources raised and spent by political parties and candidates during election campaigns. In India, it plays a crucial role in conducting elections, managing campaign expenses, and promoting democratic participation.
However, concerns about transparency and accountability persist, particularly regarding corporate donations and electoral bonds. Various mechanisms, including individual donations, state funding, corporate contributions, and electoral trusts, regulate political funding.
Proposed reforms include introducing state funding, enhancing transparency in political donations, and bringing political parties under the Right to Information (RTI) Act to ensure greater accountability.
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What is Political Funding?
Political funding refers to the financial contributions that political parties and candidates receive and spend during election campaigns. It has been a contentious issue in India due to concerns about transparency, accountability, and the growing influence of money in politics.
Why is Political Funding Necessary in India?
- Conducting Elections: India, the world’s largest democracy, requires significant funds to conduct free and fair elections.
- Cost of Campaigning: Political campaigns have become increasingly expensive due to advertising, rallies, outreach efforts, and other campaign activities.
- Democratic Participation: Adequate funding allows more individuals to contest elections, fostering a more diverse political landscape.
- Transparency and Accountability: A regulated funding system mandates the disclosure of significant donations, enabling voters to identify potential policy influences.
- Reducing Corruption: Formalized funding with oversight minimizes reliance on unregulated private donations that could lead to quid pro quo arrangements.
Political Funding Mechanisms in India
Political funding in India comes from various sources, including individuals, corporations, and state support. The funding process is governed by laws such as the Representation of the People Act, 1951 and the Income Tax Act, 1961. However, transparency and accountability remain key concerns.
Recent debates, including the Supreme Court’s ruling striking down the electoral bonds scheme, highlight ongoing challenges in balancing transparency with donor anonymity.
Individual Donations
Individual donations form a significant portion of political funding, regulated by legal provisions to ensure transparency and accountability.
Key Regulations:
- Representation of the People Act, 1951 (RPA):
- Section 29B allows political parties to accept voluntary contributions, except from government-owned companies.
- Section 29C mandates political parties to report donations above ₹20,000 to the Election Commission of India (ECI).
- Income Tax Act, 1961:
- Section 13A limits anonymous cash donations to ₹2,000.
- Section 80GGB provides tax deductions for donations to registered political parties.
Trends and Transparency:
- In 2022-23, individual donations accounted for 25% of political parties’ income.
- A significant portion of funding comes from unknown sources, raising concerns about transparency.
- Donations above Rs.2,000 must be made through traceable methods like cheques or digital transactions.
State funding In India
State funding (public funding) of elections involves government financial support to reduce political parties’ reliance on private donors and mitigate the influence of vested interests.
Types of State Funding:
- Direct Funding: The government provides monetary assistance for election campaigns (rarely implemented due to misuse concerns).
- Indirect Funding: Includes benefits like free media access, public spaces for rallies, subsidized transport, and tax exemptions under Section 13A of the Income Tax Act.
Reports on State Funding in India:
- Indrajit Gupta Committee (1998): Recommended partial state funding for recognized parties but suggested in-kind support due to economic constraints.
- Law Commission Report (1999): Advocated for full state funding, conditional on banning private donations, and stressed internal party democracy.
- National Commission to Review the Working of the Constitution (2001): Opposed state funding but supported financial transparency reforms.
- Second Administrative Reforms Commission (2008): Suggested partial state funding to curb illicit election spending.
Corporate Funding
Corporate donations are a major source of political funding, governed by various laws and amendments over the years.
Key Regulations:
- Companies Act, 2013:
- Section 182 allows Indian companies to donate to political parties with board approval.
- The 2017 amendment removed the 7.5% cap on corporate donations, raising transparency concerns.
- Representation of the People Act, 1951: Requires political parties to be registered with the Election Commission to receive corporate donations.
- Foreign Contribution (Regulation) Act, 2010 (FCRA): Allows foreign-owned companies with majority Indian ownership to contribute to political parties, increasing concerns over foreign influence.
Transparency Concerns:
- Companies must disclose total political contributions in financial statements but are not required to specify recipient parties.
- Donations occur via bank transfers or electoral trusts, ensuring legal compliance but limiting transparency.
Electoral Trusts
Electoral trusts were introduced to promote transparency by channeling corporate and individual donations to political parties.
Key Features:
- Formation and Regulation: Electoral trusts must be registered with the Central Board of Direct Taxes (CBDT) and operate as intermediaries.
- Contribution Process: Donors contribute to a trust, which then distributes funds to political parties.
- Disclosure Requirements: Donations above ₹20,000 must be disclosed, but the amount given to each political party remains confidential.
- Major Electoral Trusts: Prudent Electoral Trust, backed by Bharti Enterprises, is one of the largest contributors.
Electoral Bonds
Electoral bonds, introduced in 2018, were designed to facilitate political donations while maintaining donor anonymity. However, they became a subject of intense debate over transparency.
Key Features of Electoral Bonds:
- Bearer Instrument: Bonds function like promissory notes, without revealing the donor’s identity.
- Eligibility: Indian citizens and entities can purchase them using KYC-compliant bank accounts.
- Denominations: Available in ₹1,000, ₹10,000, ₹1 lakh, ₹10 lakh, and ₹1 crore.
- Validity: Must be encashed within 15 days of purchase.
- Eligible Political Parties: Only parties securing at least 1% of votes in the last election can receive funds.
- Purchase Process: Bonds were sold exclusively through designated State Bank of India (SBI) branches during specific windows in January, April, July, and October.
Transparency and Criticism:
- While transactions occurred through formal banking channels, the anonymity of donors raised concerns about undue corporate and foreign influence.
- Political parties had to disclose total bond amounts received, but donor identities remained hidden.
Recent Supreme Court Verdict (2024)
- On February 15, 2024, the Supreme Court struck down the electoral bond scheme, declaring it unconstitutional in the case of Association for Democratic Reforms v Union of India 2024 INSC 113.
- The CJI identified two fundamental concerns raised by the petitions challenging the Electoral Bonds Scheme:
- Unrestricted Corporate Funding and Electoral Fairness: The question arose whether unlimited corporate contributions to political parties undermine the principles of free and fair elections and violate Article 14 of the Constitution, which guarantees equality before the law.
- Transparency and the Right to Information: Another crucial issue was whether the confidentiality of voluntary donations infringes upon citizens’ right to information under Article 19(1)(a) of the Constitution.
- Unlike the United States, where electoral campaigns predominantly revolve around individual candidates, India’s parliamentary system places political parties at the core of electoral politics. Consequently, any comprehensive campaign finance framework must focus on regulating the funding of political parties, as this issue is central to ensuring the integrity of India’s democracy.
Legal Framework Governing Political Funding in India
- Corporate Contributions under the Companies Act, 2013
Section 182 of the Companies Act, 2013 governs corporate donations to political parties, allowing Indian companies to contribute any amount, subject to certain conditions:
- The contribution must be authorized by the Board of Directors.
- Donations must not be made in cash.
- The contribution must be disclosed in the company’s profit and loss (P&L) account.
Previously, companies could contribute only up to 7.5% of their average net profits of the preceding three financial years. However, amendments in 2017 removed this cap, allowing unlimited corporate donations. Additionally, the requirement to disclose the name of the recipient political party in financial statements was also eliminated.
- Income Tax Act, 1961 – Tax Deductions for Political Contributions
Under the Income Tax Act, 1961, contributions made to recognized political parties or registered electoral trusts are eligible for tax deductions, incentivizing political funding through formal channels.
Prevention of Corruption Act, 1988 (POCA) – Addressing Risks of Political Contributions
A key concern regarding political donations is whether they could be construed as bribery under the Prevention of Corruption Act, 1988 (POCA). POCA criminalizes the acceptance of gratification by public servants in exchange for favors.
For a political donation to be deemed corrupt under POCA, it must be established that:
- There is a direct nexus between the contribution and an act of favoritism by a public servant.
- The act is arbitrary, unfair, or against public interest to benefit the donor.
A political contribution alone is not illegal unless it is linked to an unlawful benefit received from the government. Additionally, if an industry-wide policy benefits a donor, it does not automatically imply corruption unless the policy itself is deemed unlawful.
- Foreign Contributions and Political Funding
The Representation of the People Act, 1951 (RPA, 1951) and the Foreign Contribution (Regulation) Act, 2010 (FCRA, 2010) prohibit political parties from accepting funds from foreign sources.
However, a 2016 amendment to FCRA redefined the term “foreign source”, allowing Indian companies with foreign investments exceeding 50% (as long as it is within the permissible foreign exchange limits) to donate to political parties.
- Disclosure and Transparency in Political Funding
Although the Companies Act, 2013 no longer mandates the disclosure of the recipient political party in corporate financial statements, there are independent disclosure requirements:
- Political parties must submit annual reports of contributions received to the Election Commission of India (ECI), which is publicly accessible.
- Electoral Trusts, which serve as intermediaries for political donations, are also required to disclose the names of their donors and total amounts received. However, they are not required to link specific contributions to individual political parties.
Electoral Bonds Scheme, 2018 – Ensuring Donor Anonymity
To address concerns over donor anonymity, the Electoral Bonds Scheme was introduced in January 2018. Electoral bonds function as bearer instruments, which means:
- They can be purchased from designated State Bank of India branches via cheque, demand draft, or electronic transfer.
- They do not disclose the donor’s identity and are valid for 15 days.
- Only registered political parties that have secured at least 1% of the votes in the previous general or assembly elections are eligible to encash them.
The government has clarified that the serial numbers on electoral bonds are not recorded or used to trace donors, reinforcing anonymity. The scheme has seen widespread adoption, with electoral bonds worth Rs.222 crores sold within 10 days of launch in March 2018, compared to ₹325 crores donated via electoral trusts in 2016-17.
Regulations on Political Expenditure and Disclosures
While candidate election expenditure is capped under the Representation of the People Act, 1951, there is no limit on political party expenditure.
- Candidate expenditure limits vary: up to ₹70 lakh ($101,731) for parliamentary elections and Rs.28 lakh ($40,686) for state assembly elections.
- Candidates must submit their election expenses account within 30 days of result declaration.
- Political parties must submit election expenditure reports within 75 days (for assembly elections) and 90 days (for Lok Sabha elections).
Additionally, under Section 75A of RPA, 1951, elected representatives must declare their assets and liabilities within 90 days of taking office.
Penalties for Non-Compliance
Non-compliance with political funding regulations can lead to:
- Disqualification of candidates for up to three years if found guilty of corrupt practices or failure to submit election expenses.
- Loss of tax exemptions for political parties under Section 13A of the Income Tax Act.
The Supreme Court of India, in a 2018 ruling on a petition by Lok Prahari, made it mandatory for candidates to disclose sources of income of their spouse and dependents in their election affidavits (Form 26).
India has a well-defined legal framework for political funding, balancing the need for financial support to parties with transparency and accountability. While corporate and individual donations remain largely unrestricted, disclosure norms and regulatory oversight ensure that political contributions are tracked and monitored. The Electoral Bonds Scheme further provides a confidential channel for donors, though concerns over transparency persist.
For businesses and individuals, compliance with political funding laws is essential to support democratic governance while ensuring adherence to legal and ethical standards.
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