Electoral bonds, trusts, and donations: How these work, key differences

Here is how much political parties received via various modes of funding, how companies claim tax deductions, and why the SC ruled against electoral bonds

Update: 2024-03-20 06:08 GMT
The Supreme Court declared that electoral trusts are an effective alternative to electoral bonds. Representational image: Pixabay

Electoral bonds were issued to clean up political fundraising, but it took the country's highest court to lift the veil on the source of political donations.

The NDA government introduced the electoral bonds scheme on January 29, 2018 despite the fact that an option to donate funds to political parties called Electoral Trusts existed prior to 2014.

Electoral trusts effective alternative: SC

While the Supreme Court declared the electoral bonds scheme unlawful and said anonymous electoral bonds violate the right to information guaranteed by Article 19(1)(a) of the Constitution, it also stated that electoral trusts are an "effective alternative." This means that anyone can still donate to political parties via electoral trusts.

The Supreme Court also reinstated the Companies Act 2013 clause, which specifies that only profitable organisations can make political donations, making it impossible for corporations to conceal their contributions to political parties.

According to numerous accounts, electoral trusts allow firms to maintain an arm's-length distance while donating to political parties because they are legally required to be independent of the companies that create them. In 2013, the United Progressive Alliance (UPA) government approved the formation of electoral trusts, which allow cash to be pooled and various organisations or entities to make political contributions under a single trust.

The trusts are required to keep counterfoils with information such as the contributor's name and PAN number. Thus, they are more transparent than electoral bonds. Political parties must also report the value and source of donations to the Election Commission annually.

According to data from the Election Commission of India (ECI), India has 17 electoral trusts, some of which rely heavily on significant corporate contributors.

Direct donations

Aside from electoral bonds and electoral trusts, any individual or company may donate directly to their preferred political party, but they must preserve a transaction record. According to an Association for Democratic Reforms (ADR) report, the total revenues obtained by national political parties through donations of more than ₹20,000 during FY23 were a little more than ₹850 crore, significantly less than the cash received by parties through electoral bonds. There were 12,167 such donations during the year.

The BJP collected ₹719.9 crore of the total donations received through stated contributions of more than ₹20,000. At the same time, the Congress, the Aam Aadmi Party, the Communist Party of India (M), and the National People's Party (NPP) earned ₹130.6 crore in total. In comparison, the BJP received ₹6,566.11 crore in electoral bonds by the end of FY23, while the Congress collected ₹1,123.29 crore.

The genesis of electoral bonds

Electoral bonds were marketed as a financial tool for discreetly donating to political parties.

The Modi government made several modifications to the Finance Act to make it easier for businesses to donate funds. These included removing the corporate donation cap (formerly set at 7.5 per cent of a corporation's average net profits over the previous three years) and eliminating the requirement for corporations to disclose political contributions on their profit and loss accounts. Another adjustment made in last year's Finance Act was reducing the monetary donation limit to political parties from ₹20,000 to ₹2,000.

Individuals, non-governmental organisations, and others were also allowed to subscribe to the bonds. These organisations were required to file IT returns but were exempt from disclosing their donations in their yearly financial statements.

However, it should be noted that the expenditure restrictions for political parties in India vary depending on the type of election. The Election Commission of India has fixed the expenditure limit for the Lok Sabha elections at ₹95 lakh per candidate. Andhra Pradesh assembly elections have an expenditure limit of ₹40 lakh per candidate.

How did they work?

Purchase: Any Indian citizen or incorporated body could purchase electoral bonds. They were offered at select branches of the State Bank of India (SBI), the designated bank for these transactions. The bonds could be purchased at particular periods announced by the Indian government, which occurred several times a year.

Denominations: The bonds were issued in several denominations, including ₹1,000, ₹10,000, ₹1 lakh, ₹10 lakh, and ₹1 crore. This enabled a variety of donation levels to suit different financial situations.

Anonymity: The critical element of electoral bonds was their anonymity, which was one of the reasons the Supreme Court ruled against them. The identity of the donors was unknown to the general public and the political parties that received the donations. This was intended to promote donations without fear of repercussions or political bias.

Donation window: After purchasing bonds, donors had 15 days to donate them to a political party. The bonds were no longer valid if they were not contributed within this time.

Political parties were only eligible to accept donations through electoral bonds if they were registered under Section 29A of the Representation of the People Act of 1951 and received at least 1 per cent of the votes in the most recent general or assembly elections.

How parties determined the amount received

Designated account: A political party needed to have a verified account with a designated bank (SBI) to accept electoral bond donations. This account was only used for depositing electoral bonds.

Deposit and Acknowledgement: When a party received an electoral bond, it deposited it in the appropriate account. The bank credited the funds to the party's account. Although the donor's identity was kept private, the party knew the total amount received through the deposit into their account.

Political parties had to report the total money received through electoral bonds to the Election Commission of India (ECI) in their yearly audit reports. However, the donors' identities did not need to be revealed.

This is how tax deductions work

Donors to political parties or electoral trusts in India can claim income tax deductions for their contributions, even if the sums are not shown in their profit and loss statements. This is primarily intended to promote transparency and legality in political donations.

Sections 80GGC and 80GGB of the Income Tax Act of 1961 allow individuals and firms to deduct any money donated to a political party or election trust. These sections enable donors to reduce their taxable income by the amount donated, thus minimising their tax liability.

Companies are not required to report donations to political parties in their profit and loss accounts. Instead, if the donation is made by any means other than cash, it can be deducted from gross total income.

Conditions of Tax Benefits: It is vital to emphasise that only donations made through banking channels qualify for tax breaks. Cash donations are not eligible for tax breaks under these sections, so donors should employ transparent and verifiable ways for political contributions.

Key points for electoral bonds donors

Anonymous donations: While electoral bonds provided anonymity for the political party, the transaction through a bank assured a record of the donation, allowing for the claim of tax benefits.

Donors had to keep detailed documents of their donations, such as bank statements and receipts, to back up their claims for tax deductions when completing their income tax returns.

Designated Accounts: Political parties needed to have designated bank accounts in approved banks to deposit electoral bonds. This guaranteed that the donation procedure was streamlined and regulated.

Deposit and Encashment: When a party received an electoral bond, it deposited it in the allocated account. The bank subsequently credited the funds to the party's account without revealing the donor's identity.

While the donors' identities were not given to the parties, the bank recorded the total amount collected through electoral bonds, which the political party could access. This allowed the parties to keep track of the donations received.

Direct donations (excluding electoral bonds)

Receipt Issuance: Political parties must provide a receipt for all donations received. This receipt is required for donors to claim income tax deductions under Sections 80GGC (individuals) and 80GGB (businesses).

Donor Information: In direct donations (excluding electoral bonds), parties often collect basic information about the donor, such as name, PAN (Permanent Account Number), and address, mainly for donations over a specific amount. This helps them keep track of contributions and ensures legal compliance.

Political parties must submit an annual contribution report to the Election Commission of India, documenting all donations over ₹20,000. This report offers information about the donors, the amounts received, and other pertinent information for such contributions, ensuring openness in the financing process.

Electoral Trusts

Under the policy announced by the UPA-2 government on January 31, 2013, any firm registered under Section 25 of the Companies Act of 1956 can establish an electoral trust.

Section 17CA of the Income-tax Act of 1961 allows any Indian citizen, company registered in India, firm, Hindu Undivided Family, or group of persons living in India to donate to an electoral trust.

Electoral trusts must apply for renewal every three fiscal years. They must distribute 95 per cent of all contributions received in a fiscal year to political parties registered under the Representation of the People Act of 1951. Contributors must provide their PAN (if they are residents) or passport number (if they are NRIs) when making contributions.

The number of registered trusts has increased from three in 2013 to 17 in 2021-22, but only a few donate each fiscal year.

Electoral trusts vs electoral bonds

According to a report in the Indian Express, during the fiscal year 2018-19, the Janhit Electoral Trust was noted to have received a solitary donation of ₹2.5 crore from Vedanta, which it then fully allocated to the BJP, as revealed in the trust's yearly financial report.

From its inception, the Prudent Electoral Trust (formerly Satya Electoral Trust) has consistently received donations annually, amassing over ₹1,891 crore from the fiscal year 2013-2014 through 2021-2022. The report highlights that the BJP was the principal beneficiary of these funds, receiving around 75 per cent (₹1,430 crore) of the total donations. At the same time, the Congress was allocated approximately 8.4 per cent (₹160 crore).

The report pointed out that during the nine years, ₹2,269 crore was routed to political parties via Electoral Trusts (ETs), with annual contributions varying from ₹85.37 crore in 2013-14 to ₹464.81 crore in 2021-22.

In comparison, 26 parties encashed electoral bonds worth ₹12,769.08 crore between April 12, 2019 and February 15, 2024, of which the BJP received ₹6,060.51 crore or 47.46 per cent.

Tags:    

Similar News