New Delhi: Just months after the Narendra Modi government proposed a four-point action plan to “cleanse the system of funding of political parties” in Budget 2017, the Election Commission (EC) has said that certain amendments to the Income Tax Act, the Representation of the People Act, 1951 and the Companies Act, 2013 “will have a serious impact on the transparency aspect of political finance and funding of political parties”.

In response to an RTI application filed by Vihar Durve, a Pune resident, the EC has provided details of the letter sent by its then director (election expenditure) Vikram Batra to the secretary of the legislative department of the Ministry of Law and Justice on May 26, 2017.

In the letter, the poll panel had noted how the amendments to the three laws were retrograde as far as transparency of donations was concerned, how they would open the possibility of shell companies being set up only for the purpose of making political donations and cautioned that allowing firms to not show political contributions in its profit and loss statement will compromise transparency.

EC instructions on RPI Act

The official had said the amendment in Section 29C of the Representation of the People Act, 1951 had inserted a new proviso and explanation to sub-section (1) stating:

“Provided that nothing contained in this sub-section shall apply to the contributions received by way of an electoral bond”. Its explanation stated that “for the purposes of this subsection, ‘electoral bond’ means a bond referred to in the explanation to sub-section (3) of Section 31 of the Reserve Bank of India Act, 1934.”

The letter noted:

“it is evident from the amendment which has been made that any donation received by a political party through an electoral bond has been taken out of the ambit of reporting under the Contribution Report as prescribed under Section 29C of the Representation of the People Act, 1951 and therefore this is a retrograde step as far as transparency of donations is concerned and this proviso needs to be withdrawn.”

‘Amend RP Act to reduce the limit on anonymous donations to Rs 2,000’

Further, the EC letter stated that “an amendment has been made in Section 13A of the Income Tax Act whereby no donation exceeding Rs 2,000 can be received by a political party otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through electoral bond”.

It adds that “however, the limit for receipt of anonymous donations by political parties still remains at Rs 20,000 in Section 29C of the RR Act, 1951”. As such, the EC has demanded that “the RP Act needs to the amended to reduce the limit of anonymous/cash donations to Rs 2,000 so as to bring these two Acts in consonance with each other”.

EC cautioned shell companies may be formed for the purpose of political donations

Even in case of the Companies Act, 2013, the EC found several lacunae. It noted that “certain amendments have been proposed in Section 182 of the Companies Act, where the first proviso has been omitted and consequently the limit of seven and a half percent (7.5%) of the average net profits in the preceding three financial years on contribution by companies has been removed from the statute.”

In light of this development, the EC has cautioned that “this opens up the possibility of shell companies being set up for the sole purpose of making donations to political parties, which no other business of consequence having disbursable profits”.

‘Allowing firms to not show political contributions in P/L statement will compromise transparency’

The EC also pointed out that the second amendment to Section 182(3) had abolished “the provision that firms must declare their political contributions in their profit and loss statements, as this requirement is now reduced to only showing a total amount under this head, which again, would compromise transparency.”

In view of all these issues impacting transparency and fair play in political donations, the EC demanded that “the amendments made in Section 29C of the Representation of the People Act, 1951 and Companies Act, 2013 introduced in the Finance Act, 2017” be “reconsidered and modified so as to provide for transparent reporting of contributions received by the political parties through electoral bonds under section 29C of the RP Act, 1951”.

‘Declare party-wise contributions by companies’

It also said that “a provision should be made in the Companies Act to declare the party-wise contributions made by companies in the P&L A/c so that the transparency in the fundraising by political parties is maintained.”

Finally, the commission also expressed its apprehension that the abolition of the relevant provision of Section 182 of the Companies Act would “lead to increased use of black money for political funding through shell companies” and therefore noted that as “the earlier provisions ensured that only profitable companies with a proved track record could provide donations to political parties”, the provision may be “re-introduced”.

Centre did not heed EC’s advice and warnings

Incidentally, amendments for reforms in poll funding were proposed by finance minister Arun Jaitley in the Union Budget 2017 and he had elaborated that “in accordance with the suggestion made by the Election Commission, the maximum amount of cash donation that a political party can receive will be Rs 2000 from one person.”

Jaitley had also spelt out that “as an additional step, an amendment is being proposed to the Reserve Bank of India Act to enable the issuance of electoral bonds in accordance with a scheme that the government of India would frame in this regard.”

However, RTI activists had slammed the move as “farcical” since lowering the disclosure limit required an amendment to the Representation of Peoples Act, which had remained unchanged.

Subsequently, Delhi-based NGO Association for Democratic Rights (ADR) had filed a public interest litigation (PIL) challenging the amendments related to political funding. In October 2017, the Supreme Court had issued a notice to the Centre and the Election Commission in the matter. The PIL had charged that the amendments had not made the process of political funding more transparent.

Appearing for ADR, senior advocate Prashant Bhushan had also questioned why political parties had now been allowed through the amendment to accept political donations by way of electoral bonds without disclosing their source.

But despite the RTI activists, civil society and election commission flagging the issue, the Centre has not acted in the matter so far.