Electoral Bonds scheme
- ByPravleen Kaur --
- 29 Nov 2024 --
- 0 Comments
This article deals with the electoral bonds scheme introduced by the government that was recently junked by the Supreme Court. In 2017, some amendments to existing provisions of certain laws was made through the Finance Act 2017. These amendments had their due implications as their purpose was to remove any impediments that might arise in the functioning of this scheme of contributions to political parties. This article deals with all these amendments and their implications. The main body is divided into four parts, handling four such Acts to which amendments were made by the Finance Act, namely, Reserve Bank of India 1 Act, Representations of People 2 ’s Act, Income Tax 3 Act and
The Companies Act.
INTRODUCTION:
The petitioners have instituted proceedings under Article 32 of the Constitution before the supreme court, challenging the constitutional validity of the Electoral Bond Scheme which introduced anonymous financial contributions to political parties. The petitioners have also challenged the provisions of the Finance Act 2017 which, among other things, amended the provisions of the Reserve Bank of India Act 1934 4 , the Representation of the People Act 1951 5 , the Income Tax Act 1961 6 , and the Companies Act 2013 7 .The finance Act of 2017 worked for amending provisions of the mentioned acts so that there remain no impediments against the scheme and it runs smoothly.
DEALING WITH THE AMENDMENTS AND THEIR IMPLICATIONS.
AMENDMENTS MADE TO THE RBI ACT AND ITS IMPLICATIONS:
1. Section 31 of the RBI Act stipulates that only the RBI or the Central Government authorized by the RBI Act shall draw, accept, make, or issue any bill of exchange or promissory note for payment of money to the bearer of the note or bond when the time of redemption arises. That is, when the principal amount is repaid by the issuer to the bond holder on maturity date. However, the only redemption the companies can hope to get is some quid pro quo through government policies and certain income tax exemption.
2. The Finance Act amended the RBI Act by including Section 31(3) which permits the Central Government to authorize any scheduled bank to issue electoral bonds. Scheduled banks are those banks which are listed under schedule II of the RBI Act and are considered more financially stable compared to non-scheduled banks. They are more closely
regulated by the RBI.
The RBI, at the instance of submission of draft of the electoral bonds scheme by the finance
ministry, stated it’s apprehensions that:
a) permitting a commercial bank to issue bonds would “have an adverse impact on public perception about the Scheme, as also the credibility of India’s financial system in general and the central bank in particular.” Since these bonds could be used as currency and issuance of currency is a monopolistic function of a central authority.
That’s the sole reason why section 31 of the RBI ACT bars any other institution other than the RBI from issuing bearer bonds.
b) Issuance of electoral bonds in the scrips will run the risk of money laundering since the consideration for transfer of scrips from the original subscriber to a transferee will be paid in cash. This will not leave any trail of transactions. While this would provide anonymity to the contributor, it will also provide anonymity to several others in the chain of transfer; also, since the contributors would be unknown, the condition of the contributor not being a government company would go unchecked.
c) Issuance of electoral bonds in the scrip form could also expose it to the risk of forgery and cross-border counterfeiting besides offering a convenient vehicle for abuse by “aggregators”; and
d) The electoral bond may not only be seen as facilitating money laundering but could also be projected (albeit wrongly) as enabling it.
The Finance Ministry responded to the observations of RBI and stated that:
a. RBI has not understood the core purpose of electoral bonds which is to keep the identity of the donor secret while at the same time ensuring that the donation is only made from tax paid money; and
b. The fear that electoral bonds might be used as currency is unfounded because there is a time limit for redeeming the bonds
AMENDMENTS MADE TO THE RPA ACT AND ITS IMPLICATIONS:
Before the amendment made to the Representation of people’s Act in 2017 due to amendments in the Finance Act, the political parties were required to show their contributions as such would be considered as the party’s income. This requirement was welcomed as it would mean that the parties are exempted from paying taxes to such income via the provisions of the Income Tax Act.
1) The Election and Other Related Laws (Amendment) Act 2003 amended the provisions of the RPA. Section 29C of the RP Act was introduced for requiring each political party to declare the details of the contributions received. The treasurer of a political party or any other person authorized by the political party must in each financial year prepare a report in respect of the contributions in excess of twenty thousand rupees received by the party from a person or company other than Government companies in that financial year. The report prepared must be submitted
to the Election Commission before the due date for furnishing a return of income of that financial year under the IT Act. A political party which fails to submit the report shall not be entitled to any tax relief as provided under the IT Act. 9
2) The provision was amended by the Finance Act 2017 to include a proviso by which the political party was not required to disclose details of contributions received by electoral bonds. the Election Commission of India wrote to the Ministry of Law and Justice that: “It is evident from the Amendment which has been made, that any donation received by a political party through 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. Moreover, in a situation where contributions received through Electoral Bonds is not reported, on perusal of the Contribution reports of the political parties, it cannot be ascertained whether the political party has taken any donation in violation of provisions under Section 29B of the Representation of the People Act 1951 which prohibits the political parties from donations from Government Companies and Foreign sources.”
AMENDMENTS MADE TO THE INCOME TAX ACT AND ITS IMPLICATIONS:
The Finance Act 2017 made the following amendments to Section 13A of the IT Act:
a. The political party was not required to maintain a record of contributions if the contribution was received by electoral bonds; 10 however, the previous amendment to the income tax act, called The Taxation Laws (Amendment) Act 1978 included Section 13A to the IT Act. The political party was required to keep and maintain books of account
and other documents which would enable the Assessing Officer to properly deduce its income 11 As seen, through the amendments made to section 13A of the Income Tax Act through the amendments in Finance Act in 2017, the political parties were no longer required to maintain the records of the contributions made to them through electoral bonds.
AMENDMENTS MADE TO THE COMPANIES ACT AND IT’S IMPLICATIONS:
The Finance Act 2017 made three changes to Section 182 of the Companies Act:
a. The first proviso to Section 182(1) which prescribed a cap on corporate funding was omitted; in an earlier amendment to the act in 2013 provided for a cap on contributions made by a company to 7.5% of the average net profits during the
preceding three years. So in effect, the omission of this cap meant unlimited funding to political parties was permissible.
b. Section 182(3) was amended to only require a disclosure of the total amount contributed to political parties by a company in a financial year and excluded the requirement to disclose the particulars of the amount contributed to each political party; whereas in the previous amendment of 2013 to the act, Sub-section (3) of Section 182 mandates every company to disclose in its profit and loss account any amount contributed by it to any political party during the financial year with the name of the political party to which the contribution was made.
The RBI had it’s apprehensions about such non-disclosure since it would impact the principles of the Prevention of Money Laundering Act 13 2002; The RBI flagged the possibility of shell companies misusing bearer bonds for money
laundering transactions.
Shell companies are those companies which do not have any active business operations and are mostly made for the purpose of escaping liability from law enforcement agencies or for the purpose of money laundering.
Referring to the deletion of the provision in the Companies Act requiring companies to disclose particulars of the amount contributed to specific political parties, the ECI recommended that companies contributing to political parties must declare party-wise contributions in the profit and loss account to maintain transparency in the financial funding of political parties. Further, the ECI also expressed its apprehension to the deletion of the first proviso to Section 182(1) by which the cap on corporate donations was removed. The ECI recommended that the earlier provision prescribing a cap on corporate funding be reintroduced because:
a. Unlimited corporate funding would increase the use of black money for political funding through shell companies; and
b. Capped corporate funding ensured that only profitable companies with a proven track record could donate to political parties.
CONCLUSION:
All the amendments to the above-mentioned acts worked for making it easier for donations to flow from contributors to the political parties. The centre-stated motive of the electoral bond scheme was to curb black money. They stated the reason for implementing the scheme was that contributor’s identity be protected and such contributions be duly taxed. The scheme’s provisions and amendments made to certain laws in effect were questioned by the RBI and
the Election Commission of India 14 The finance Act 2017 amended the certain provisions to the RBI Act to give scheduled banks the power to issue bonds. However, the RBI stated it’s concerns over this amendment as it
considered issuance of such bonds as currency and issuing currency among other things, is monopolistically RBI’S function.
The Finance Act 2017 amended the Representations of the People’s Act 15 and Income Tax Act 16 to give effect that details of contributions received by the political parties needs not to be revealed anymore for the purpose of right to information and for tax exemptions. The Finance Act 2017 amended the provisions of the Companies Act and removed the cap to contributions made by the companies and the requirement of disclosure of such contributions.
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