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16 February 2017 Question Bank

 

16th FEBRUARY 2017

QUESTION BANK

 (1 Question)

Answer questions in NOT MORE than 200 words each. Content of the answer is more important than its length.

Links are provided for reference. You can also use the Internet fruitfully to further enhance and strengthen your answers.

 

GS II : GOVERNANCE

1.   The Finance Minister announced initiatives to “cleanse the system of funding of political parties” in Budget 2017-18. Critically analyse them.

http://www.thehindu.com/opinion/lead/The-devil-is-in-the-fine-print/article17308089.ece

The four elements

The four elements of the scheme announced by the Finance Minister to “cleanse the system of funding of political parties” are:

  1. First, he claimed to follow the Election Commission in proposing a ceiling of ?2,000 on the amount of cash donation that a political party can receive from one person in a year.
  2. Second, he announced that political parties would be “entitled to receive” donations by cheque or digital mode from their donors.
  3. Third, he proposed a new scheme of Electoral Bonds.
  4. Fourth, he said that every political party would have to file its Income Tax return within the prescribed time limit in order to enjoy exemption from payment of income tax.

 

Donations by cheque or digital mode:

  • Now, the second and the fourth components of this scheme are redundant, as these are no different from what the existing law provides for.
  • It does not require a new law to say that political parties are “entitled” to receive donations by cheque or digitally. They were always entitled to this and were already doing so. We needed a new law to mandate that the parties would be “required” to receive donations by cheque or digitally. The Finance Minister did not propose any such thing.

 

Filing Income Tax return within the prescribed time limit

  • The existing law requires political parties to file their income tax returns to enjoy tax exemption.
  • The Finance Bill now proposes a new proviso in Section 13A clause (d) of the Income Tax Act 1961 that explicitly says that the return should be filed within the stipulated time limit.
  •  So far, all major parties have routinely flouted this requirement. Big national parties file their return months after the due date and many parties don’t file the return at all. No one gets penalised for this non-compliance.
  • The government really did not need this amendment if it had the will to enforce the existing law.

 

Limiting cash donations

  • The limit for anonymous donations, contributions that are exempt from reporting, has been reduced from the existing ?20,000 to Rs.2,000.
  • The Finance Minister’s speech claimed to follow the EC’s advice.
  •  Following the Law Commission’s recommendations, the EC had proposed that no party should be allowed to receive more than Rs.20 crore or 20% of its overall donations from anonymous sources. The Minister did not pay heed to this.
  •  The existing limit of Rs.20,000 on anonymous donation as per Section 23 of the Representation of the People Act (RPA) has been left untouched.
  •  The Minister has merely proposed a new, additional, clause that limits cash donation from one source to Rs.2,000 in one year.
  • Notice that there was and is no requirement to disclose a contribution by cheque or digital transfer up to Rs.20,000. There was and is no limit to how much a party can receive from anonymous donations.
  • More importantly, there was and is no limit to how much overall a party can receive in cash from all sources put together.

 

Limiting cash deposits will make no difference:

  • This proposal is unlikely to make any difference to the business as usual for political parties.
  •  The fact is that most political funds remain in the pockets of party leaders. A small amount enters the coffers of the party and becomes party funds.
  • A tiny fraction of party funds is placed in the bank accounts of the party to meet some expenses that cannot remain invisible.
  •  The figures widely discussed in the media relate to that tiny fraction of party funds, which is a small proportion of political funds.
  • Most of this is not voluntary contribution or donation. Much of what political parties show as donations is black money generated by party leaders which is turned into white money by way of book entries as donations to the party.
  • So far, the accountant who had to covert, say, Rs.100 crore had to make sure than the entire amount was broken down into entries of Rs.20,000 or below. Now they will absorb the same amount by breaking it down into entries of Rs.2,000 or below.
  • All that the proposed law would ensure is more book entries and perhaps a higher fee for the accountant. Otherwise, it would be business as usual.

 

Electoral bonds

  • Anyone who wants to donate to a political party would be able to purchase electoral bonds from authorised banks.
  • This purchase will have to be in ‘white money’ against cheque and digital payments only.
  •  Once purchased, these bonds will be like bearer bonds and will not contain the name of the eventual beneficiary.
  • These bonds shall be redeemable only in the designated account of a registered political party within a prescribed period.

 

Trouble with electoral bonds

  • The donor’s bank would know about who bought how much of Electoral Bonds, but not the name of the party which received it.
  • The party’s bank would know the amount deposited through Bonds, but not the identity of the donor.
  •  The Income Tax authorities and the EC would not know anything: reporting of donor, beneficiary, or even the amount of contribution has been exempted by amending the Income Tax Act Section 13A (b) and the RPA, Section 29C.
  •  The net effect, and indeed the purpose, of the Bonds will be that no one except the fund giver and the fund receiver would know about this exchange done in white money with full tax exemption.


An example:

  • Let us think of a classic quid pro quo. A government favours a business house in a mining or spectrum or oil deal to the tune of Rs.5,000 crore. Both of them have a fifty-fifty deal. Under the existing arrangement, the business house would have to either declare in its balance sheet a ‘donation’ of Rs.2,500 crore to the ruling party, or find that much cash to secretly hand over to the party bosses. If the payment is in white, the party will have to declare the amount and the name of the company to the Income Tax authorities and to the EC. Now, the company could simply purchase Election Bonds worth Rs.2,500 crore and hand it over to the party. The company’s balance sheet will show “purchase of Election Bonds” with no name of the beneficiary, while it enjoys 100% tax deduction on that amount. The party will simply deposit the money in its account, with no obligation to report anything to the IT authorities or to the EC.
  • Once introduced, these bonds will mask whatever little transparency exists in the current system.
  •  Instead of the usual practice of converting black money into white, these bonds will push white money into a grey, if not black, trail.
  •  Indeed, the black money in politics might go down, as the white money has been provided a perfect cover of secrecy.
  • Why would anyone give any money to a political party through cheque or digital payment and face all the hassle of disclosure?





 

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