November 15, 2013

The good and bad of political donations

In a healthy democracy, citizens’ involvement in the political process should not end at voting alone.

How much does an election cost? Conducting the 2009 general elections cost the government Rs 1120 crores. The actual expenditure incurred in the elections by candidates and political parties has been estimated to about $3 billion (about Rs 14,000 crores).

So elections are an expensive affair, and political parties depend on donations from individuals and organisations. But unlike philanthropists contributing to social causes mostly out of an altruistic spirit, political donations are generally motivated by support for an ideology or out of an interest to see a particular party in power. And a large proportion of these donations come from businesses.


Before independence, the business class actively participated in politics, either by contesting elections or funding political parties. The cost of election campaigning increased drastically after adult franchise was introduced by the Constitution and political parties felt the need for larger funding apart from membership fees and individual donations.

In this light, the Companies Act was amended in 1960 to allow companies to donate to political parties up to a certain limit. In the days of License Raj, the ruling Congress party and the pro-market Swatantra Party were the major beneficiaries of corporate donations for presumably opposite reasons. The ability of big businesses to influence governments through money power came under criticism and so in 1969, the Companies Act was amended with support from the socialists. This amendment not only prohibited corporate funding but also made it punishable.

With rising election expenditure on one hand, and a ban on transparent and legal corporate funding on the other, the entry of unaccounted cash donation from tax evasion and illegal activities only increased. Although this ban was lifted in 1985, the low ceiling on corporate donations did little to reduce black money in politics. Election expenditure of a candidate did not include expenditure of the party head office or the candidate’s supporters, hence the candidates could show expenditure well within the limit, but benefited by expenditure made by others.

It was in 2003 when the Election and Other Related Laws (Amendment) Act was brought in with the stated intention of making the electoral process clean, fair and corruption-free. It first clarified that electoral expense included expenditure by party and supporters and set a limit to it. The act also sought to incentivise donations by cheque payment to parties by making these donations tax-deductible – a request industry associations had been making for a decade.

Thereafter, the Income Tax Act made a provision to reduce the taxable income of a person by the amount of donation made. Section 80GGB of the I-T Act offers a tax deduction to companies on a condition that the contribution is not more than 5 percent of its profits and the details of the beneficiaries are well documented in account books and audited annual reports. Section 80GGC if the I-T Act offers the same tax deduction to non-corporates (individuals, partnership firms, associations, trusts, etc.) without any limit.

Does the Government lose out on revenue because of tax deduction? It does not, asserted the then Law Minister in Parliament, because if an incentive is given to pay in cheque at an early stage, this money is going to be in the tax net at a subsequent stage. To verify this, it is useful to look at the “Statement of Revenue Foregone” which is brought out with the Union Budget. This report gives an estimate of the tax revenue that did not come into the coffers of the government due to tax exemptions, deductions and rebates.

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(Amount in crores)

Except for one year 2008-09, it is seen that the contribution of non-corporates is greater than that by companies. (The peak in individual contributions in 2009-10 is likely due to the fact that it was an election year.)

Therefore, the corporate sector which has a larger capacity for political funding does not seem to have the major share. One reason is the limit on donations a company can make. The more likely reason is the fear of reprisal out of vindictiveness by parties it did not donate. Hence it is found that despite the availability of transparent legal routes to fund parties, these are not availed of by majority of the donors. The Association of Democratic Reforms in a recent analysis on the income of major political parties from 2004 to 2012 found that the legal donations amount to only 8.9 percent of their total income whereas the majority share of 75 percent of their income comes from unknown sources – read as cash donations.

In 2009, the tax deduction provision was extended to donations to electoral trusts – non-profit companies which collect the contributions and disseminate to political parties. This has become the preferred route of contribution by big corporate houses and a glance at the income statements of the major parties reveals that these electoral trusts play a substantial role. But even then, the contributions from electoral trusts come within the minority proportion of the legal route. The malaise of political funding continues to be that of cash donations.

One of the main reasons for the dominant role of cash in elections is limit on election expenditure  – Rs 4 million for a Lok Sabha candidate – due to which candidates and political parties are compelled to channelise unaccounted cash. Aruna Urs in a Pragati article and MV Rajeev Gowda and E Sridharan in a 2012 paper “Reforming India’s Party Financing and Election Expenditure Laws” have made reasonable arguments for the raising or removing this limit. The criticism against this is that it would benefit only the bigger parties and lead to the marginalisation of smaller parties and independent candidates who have limited financial sources. However, there is not much evidence to show that excessive spending always translates to a victory. But the current limits prevent even genuine and legitimate expenses – even for smaller parties and independents.

While the removal of expenditure limits can ensure transparency at the constituency level, there is a need for an increase in the transparency norms at the central party level to restrict funding for quid pro quo through undue discretionary favours. This should come with simultaneous tightening of scrutiny and audit of the disclosures made by the parties by independent authorities. These disclosures should include more details of voluntary donors such as their PAN (Permanent Account Number) which is linked to other transactions of the donor such as bank accounts and credit cards. Corporate donations also need to be more transparent by requiring companies to consult their shareholders before making political donations.

Another issue is that of allowing anonymous donations. The current limit of Rs 20,000 on anonymous cash transactions is routinely bypassed by the donation of multiple smaller sums. The channels of real estate companies, education and religious trusts, which deal with large-scale cash transactions, are known to be used to route anonymous donations. Disallowing anonymous donations or taxing them is an idea that should be seriously considered.

Electoral reform therefore should be aimed at increasing the bottom-to-up flow of funds or grassroot funding rather than a top-to-bottom flow of funds from the high command. This can be done by increasing the incentives for individuals and non-corporates to donate to local branches of parties. The tax deduction is only one such incentive.

Encouraging cleaner money to enter politics goes hand-in-hand with encouraging the contribution of individuals in political parties. In a system where political parties are seen to be dominated by a monetarily powerful minority, greater participation by individuals in parties – not just through membership but also donations – should lead to intra-party democracy at the grassroots level.

In a healthy democracy, citizens’ involvement in the political process should not end at voting alone. It should extend to supporting the political ideologies and the candidates they believe in.

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