Practice Questions:

Q.1. What do you understand by the term ‘electoral bonds’? What are the benefits of introduction of electoral bonds compared to earlier methods of electoral funding? – 150 words.

Q.2.  The government has recently introduced electoral bonds as a method of funding to political parties. Do you think electoral bonds would successfully tackle the issue of black money in elections? What are your suggestions to improve the electoral bonds scheme? – 250 words.

What are electoral bonds?

Electoral Bond is a financial instrument (similar to a promissory note) for making donations to political parties. These are issued by Scheduled Commercial banks upon authorisation from the Central Government to intending donors, but only against cheque and digital payments (it cannot be purchased by paying cash). These bonds shall be redeemable in the designated account of a registered political party within the prescribed time limit from issuance of bond. Electoral bond was announced in the Union Budget 2017-18.

Electoral bond is an interest free banking instrument issued on a non-refundable basis and are not available for trading. Further, no loan would be provided against these bonds. A citizen of India or a body incorporated in India will be eligible to purchase the bond. It would be issued/purchased for any value, in multiples of Rs.1,000, Rs.10,000, Rs.1,00,000, Rs.10,00,000 and Rs.1,00,00,000 from the Specified Branches of the State Bank of India (SBI). The purchaser would be allowed to buy Electoral Bond(s) either singly or jointly with other individuals, only on due fulfilment of all the extant KYC norms and by making payment from a bank account either using a cheque or electronically. It will not carry the name of payee. Electoral Bonds would have a life of only 15 days during which it can be used for making donation only to the political parties registered under section 29A of the Representation of the Peoples Act, 1951 and which secured not less than one per cent of the votes polled in the last general election to the House of the People or a Legislative Assembly.

Source: Arthapedia

Benefits of electoral bonds/Why the need for electoral bonds?

 The conventional system of political funding is to rely on donations.  These donations, big or small, come from a range of sources from political workers, sympathisers, small business people and even large industrialists.  The conventional practice of funding the political system was to take donations in cash and undertake these expenditures in cash.  The sources are anonymous or pseudonymous.  The quantum of money was never disclosed.  The present system ensures unclean money coming from unidentifiable sources.  It is a wholly non-transparent system.  

Source: PIB

Why is money needed by political parties?

India is the largest democracy in the world. Elections and political parties are a fundamental feature of Parliamentary democracy.  Elections cost money.  The round the year functioning of the political parties involves a large expenditure.  Parties run offices throughout the country.  Staff salaries, travelling expenses, establishment cost are regular expenditures of political parties.  There has not been a single year where election either for the Parliament or State Assemblies have not been held.  Besides expenditure of individual candidates, political parties have to spend money on election campaigns, publicity, tours, travels and election related establishments.  These expenditures run into hundreds of crores.  Yet there has not been a transparent funding mechanism of the political system. 

Source: PIB

How is the electoral bonds scheme different from the earlier method:

Donations made online or through cheques remain an ideal method of donating to political parties.  However, these have not become very popular in India since they involve disclosure of donor’s identity.  However, the electoral bond scheme envisages total clean money and substantial transparency coming into the system of political funding.  A donor can purchase electoral bonds from a specified bank only by a banking instrument.  He would have to disclose in his accounts the amount of political bonds that he has purchased.  The life of the bond would be only 15 days.  A bond can only be encashed in a pre-declared account of a political party.  Every political party in its returns will have to disclose the amount of donations it has received through electoral bonds to the Election Commission.  The entire transactions would be through banking instruments.  As against a total non-transparency in the present system of cash donations where the donor, the donee, the quantum of donations and the nature of expenditure are all undisclosed, some element of transparency would be introduced in as much as all donors declare in their accounts the amount of bonds that they have purchased and all parties declare the quantum of bonds that they have received.  How much each donor has distributed to a political party would be known only to the donor.  This is necessary because once this disclosure is made, past experience has shown, donors would not find the scheme attractive and would go back to the less-desirable option of donating by cash.  In fact the choice has now to be consciously made between the existing system of substantial cash donations which involves total unclean money and is non-transparent and the new scheme which gives the option to the donors to donate through entirely a transparent method of cheque, online transaction or through electoral bonds.  While all three methods involve clean money, the first two are totally transparent and the electoral bonds scheme is a substantial improvement in transparency over the present system of no-transparency.

Source: PIB

On the issue of taxation:

Section 29C of the Representation of People’s Act, 1951 says that every political party which receives funding should prepare a report on contributions above Rs. 20,000 from individuals and companies and submit the same to the Election Commission before the income tax returns are filed. If any party fails to do this, it will not get tax exemption for that year under the Income Tax Act.

Similarly, section 13A of the Income Tax Act 1961 provides for exemption of all voluntary contributions received by a political party from payment of income tax. But such exemption is conditional on the recipient party maintaining such books of accounts and other documents as would enable the officers of the I-T department to properly deduce the income received by it and also maintaining a record of such contributions and the names and addresses of donors as well as amounts above Rs. 20,000. 

The Finance Act, 2017 amended both these Acts and exempted electoral bonds from the purview of section 29 C of the RP Act 1951 as well as section 13 A of the IT Act 1961. This means the income received by way of electoral bonds is not required to be disclosed in the report which goes to the Election Commission. Further, political parties are not required to maintain any record of the same or the names and addresses of donors of these bonds which may be a hindrance to the scrutiny of political parties by the Election Commission.

Source: The Hindu Business Line

Other methods of donating to political parties:
A donor could enjoy a tax deduction by donating in cheque.  Donors were also free to donate moneys online to political parties.  A cash donation to a political party could not exceed an amount of Rs.2000/-.

Some problems with the scheme:

• The programme removes an existing condition that had prohibited companies from donating anything more than 7.5% of their average net-profit over the previous three years. This now means that even loss-making entities can make unlimited contributions.
• The requirement that a corporation ought to have been in existence for at least three years before it could make donations — a system that was meant to stop shell concerns from being created with a view purely to syphoning money into politics — has also been removed.
• The Election Commission will not be allowed to have a record of the electoral bonds received by a political party. This may lead to evasion of scrutiny. Mr. O.P. Rawat, the ex – Chief Election Commissioner,observed that – “There are many grey areas in this because when there is no ceiling on party expenditure and the EC (Election Commission) cannot monitor it, how can you be sure that what is coming in is not black money as there is a secrecy of the donor”.