Keeping the veil on: Party funds are not state secret

Parties trade corruption charges but are the least transparent about their own finances despite supreme court directives

jagdeep

Jagdeep Chhokar | September 11, 2012




This is a piece that first appeared in the July 1-15, 2011 issue of the Governance Now magazine. With a recent report from New Delhi-based Association for Democratic Reforms (ADR) nailing corporate largesse as the biggest source of party funds the veil is now off. Read on:

Arguably, the biggest bugbear for political parties, and at the same time one of the most important and necessary pre-conditions that must be satisfied before any meaningful electoral reforms can actually take place on the ground, is financial transparency of political parties. Let us begin with an example of the bugbear that happened in 2007-08.

The income of political parties is totally exempt from income tax under section 13-A of the Income Tax Act. Assuming an overall rate of income tax to be 25 per cent, and given that the income shown in their return by the Congress and BJP in the financial year 2008-09 was Rs.496.88 crore and Rs.220.02 crore, the tax that they did not have to pay works out to Rs.124.22 and Rs.55.005 crore respectively [data from copies of returns of the Congress and BJP received from the income tax authorities under the RTI Act]. The income tax thus “not paid” or “not required to be paid” by just these two political parties, and in just one year, works out to Rs.179.225 crore. How much will it work out to for all the political parties put together and over several years, is left to the readers’ computations.

Assuming that the hundreds of crore of rupees of revenue forgone by the Indian State or “We, the People”, as decided by our elected representatives in the parliament who passed the amendment to the Income Tax Act on our behalf in 1978, it must be in the general public interest, Anumeha, a colleague then working in the Association for Democratic Reforms (ADR), filed an RTI application in February 2007 seeking copies of income tax returns of 19 political parties. As could be expected, the copies were denied. The first appeals to the appellate authorities were then filed, and also rejected, necessitating a second appeal to the Central Information Commission (CIC). The CIC invited the political parties to share their objections to making their IT returns public. A summary of the reasons given by various parties is given in Box 1.

The number of times “competitive, commercial interest” appears among the reasons is worth noting. One would think, naively, that political parties are involved in competitive political activities, but their deep involvement in competitive commercial activities which they are so keen to protect is revealing. Despite the objections of the political parties, the CIC permitted the disclosure of the IT returns. While pronouncing a “speaking” order on April 29, 2008, the CIC made very significant observations about the financing and financial affairs of political parties. The oft-repeated argument that there was no public interest involved was roundly rejected. A flavor of the essence of these observations is given in Box 2.

 

The CIC’s observations in April 2008 were possibly the last significant ones but certainly not the first.  The first time serious attention was paid to this issue was in the Law Commission’s 170th report in 1999. In an attempt to put the issue in its proper perspective, the Law Commission made an incisive observation, “In the very scheme of things and as pointed out by the Supreme Court in its various decisions, the bulk of the funds contributed to political parties would come only from business houses, corporate groups and companies. Such a situation sends a clear message from the political parties to big business houses and to powerful corporations that their future financial well-being will depend upon the extent to which they extend financial support to the political party. Indeed most business houses already know where their interest lies and they make their contributions accordingly to that political party which is likely to advance their interest more. Indeed not sure of knowing which party will come to power, they very often contribute to all the major political parties. Very often these payments are made in black money” (Emphasis added) (Para 4.1.6.1).      

 

The Law Commission proposed the insertion of “Section 78A (Maintenance, audit and publication of accounts by political parties)” in the Representation of the People Act, 1951. The report says, in para 4.2.1, that, “This proposal drew unanimous approval from all at the seminars as well as from several persons, parties and organisations which responded to the Law Commission’s working paper. There was no dissenting voice” (Emphasis added).

The Law Commission continues, “The necessity of such a requirement was indeed emphasised by the Supreme Court in its recent decision in Gajanan Bapat v. Dattaji Meghe (1995 (5) SCC 347) where it observed pertinently as under:

“We wish, however, to point out that though the practice followed by political parties in not maintaining accounts of receipts of the sale of coupons and donations as well as the expenditure incurred in connection with the election of its candidate appears to be a reality but it certainly is not a good practice.  It leaves a lot of scope for spoiling the purity of election by money influence. Even if the traders and businessmen do not desire their names to be published in view of the explanation of the witnesses, nothing prevents the political party and particularly a national party from maintaining its own accounts to show total receipts and expenditure incurred, so that there could be some accountability.  The practice being followed as per the evidence introduces the possibility of receipts of money from the candidate himself or his election agent for being spent for furtherance of his election, without getting directly exposed, thereby defeating the real intention behind Explanation 1 to section 77 of the Act. It is, therefore, appropriate for the legislature or the Election Commission to intervene and prescribe by Rules the requirements of maintaining true and correct account of the receipt and expenditure by the political parties by disclosing the sources of receipts as well.  Unless this is done, the possibility of purity of election being soiled by money influence cannot really be ruled out.  The political parties must disclose as to how much amount was collected by it and from whom and the manner in which it was spent so that the court is in a position to determine “whose money was actually spent” through the hands of the party” (Emphasis added) (Para 4.2.3).

Para 4.2.5 of the report again reiterates, “Even in the responses received by various persons and organisations pursuant to the circulation of the ‘working paper’, there has been no dissenting voice.”

In view of the unanimous support the proposal received, the Law Commission went on to actually give the draft of the new section to be inserted in the Representation of the People Act, 1951. The last subsection of this proposed section, 78(A)(4) directly refers to financial transparency in political parties, when it says, “(4) Any orders passed under sub-sections (2) or (3) shall be directed to be published in the press and other media, for public information.” [The recommendation of the Law Commission for inserting section 78A was not acted upon. Another section was added as section 78A with effect from September 11, 2003, which refers to “Free supply of electoral rolls.”]

The National Commission to Review the Working of the Constitution (NCRWC), 2001, also deliberated on the issue of financial transparency in political parties. While “identifying the Problem Areas”, in Para 4.29, it says, “Having regard to the prevailing political scenario in the country and the hard fact that no electoral reforms can be effective without reforms in the political party system,” two of the several problem area identified to be “of immediate concern” were:

“Problems of party funding - need for a legislation to regulate party funds - distribution and spending of party funds during non-election and election times”, and

“Maintenance of regular accounts by the political parties - auditing and publishing - making audited accounts available for open inspection” (Emphasis added).

While commenting on the need for a law to regulate the functioning of political parties, the NCRWC has said, “The law should make it compulsory for the parties to maintain accounts of the receipt of funds and expenditure in a systematic and regular way.  The form of accounts of receipt and expenditure and declaration about the sources of funds may be prescribed by an independent body of Accounts & Audit experts, created under the proposed Act.  The accounts should also be compulsorily audited by the same independent body, created under the legislation which should also prepare a report on the financial status of the political party which along with the audited accounts should be open and available to public for study and inspection” (Emphasis added) (Para 4.30.4).

The NCRWC has made extensive observations in a special section on the Funding Political Parties (Para 4.35). Relevant portions of these observations are reproduced below so that the full extent of the complexities and also the import of the recommendations can be adequately appreciated.

“The problem of political funding is a complex one and there are no panaceas. Political parties need hefty contributions from companies and from other less desirable sources. The greater the contribution, the greater the risk of dependence, corruption and lack of probity in public life.  The demand for transparency must be conceived as a democratic value in itself, a tool designed to avoid any wrongful influences of money in politics…Consequently, any proposals for reforms concerning political funding should revolve, among other things, around the following four main objectives:

(i) reducing the influence of money by diminishing its impact (by shortening campaigns, establishing ceilings on expenditure and limiting individual contributions);

(ii) improving the use of money by investing it on more productive activities for the sake of democracy, and not just squandering it on propaganda and negative campaigns;

(iii) stopping, or at least curtailing, as much as possible, current levels of influence peddling and political corruption; and

(iv) strengthening public disclosure and transparency mechanisms with respect to both the origin and the use of funds” (Emphasis added) (Para 4.35.1).

“At present, different Acts regulate the flow of funds to political parties both from internal as well as external sources. The Commission recommends that a comprehensive legislation providing for regulation of contributions to the political parties and towards election expenses should be enacted by consolidating such laws.  The new law should aim at bringing transparency into political funding”(Emphasis added) (Para 4.35.2).

“Audited political party accounts like the accounts of a public limited company should be published yearly with full disclosures under predetermined account heads” (Emphasis added) (Para 4.35.4).

The Election Commission first recommended the maintenance of accounts by political parties and audit of these accounts in 1998. It reiterated these in the 2004 Proposed Electoral Reforms. Item 9 of Part I of the Election Commission’s recommendations says,

“The Commission considers that the political parties have a responsibility to maintain proper accounts of their income and expenditure and get them audited by agencies specified by the Commission annually.  While making this proposal in 1998, the Commission had mentioned that there was strong need for transparency in the matter of collection of funds by the political parties and also about the manner in which those funds are expended by them.  Although in an amendment made last year, vide the Election and Other Related Laws (Amendment) Act, 2003, a provision has been made regarding preparation of a report of contributions received by political parties in excess of Rs.20,000/-, this is not sufficient for ensuring transparency and accountability in the financial management of political parties.   Therefore, the political parties must be required to publish their accounts (at least abridged version) annually for information and scrutiny of the general public and all concerned, for which purpose the maintenance of such accounts and their auditing to ensure their accuracy is a pre-requisite. The Commission reiterates these proposals with the modification that the auditing may be done by any firm of auditors approved by the Comptroller and Auditor General. The audited accounts should be available for information of the public” (Emphasis added).

Not to be left behind, the Second Administrative Reforms Commission (ARC) also paid attention to this issue in 2007. Para 2.1.3.5.1 of the fourth report of ARC titled “Ethics in governance” says, “Political parties have a responsibility to maintain proper accounts of their income and expenditure and get them audited annually. The steps taken in the Election and Other Related Laws (Amendment) Act, 2003, following various reports mentioned in para 2.1.3.1.4 will be strengthened if this is made mandatory under law. The Election Commission has reiterated this proposal. This needs to be acted upon early. The audited accounts should be available for information of the public” (Emphasis added).

 

As can be seen from the above, there is complete agreement amongst all commissions that (a) political parties should be required to maintain proper accounts in predetermined account heads, (b) such accounts should be (i) audited by auditors recommended and approved by the Comptroller and Auditor General of India, and (ii) available for the information of the public.

It is with this background that the Election Commission requested the Institute of Chartered Accountants of India (ICAI) to suggest appropriate accounting practices for political parties. It has been reported by the Press Trust of India (PTI) that the ICAI has submitted its 38-page report to the Election Commission on May 27, 2011. Some of the recommendations are reported to be that political parties should follow the accrual basis of accounting wherein they will have to report transactions on a real time basis, they should follow March 31 as uniform financial year and prepare consolidated financial statements incorporating taluka, district, and state-level party branch accounts, and that all of them should follow a common format for reporting their accounts and other financial statements. The report is also reported to have recommended that all parties must get their accounts audited by a firm of chartered accountants out of a panel of approved chartered accountants maintained by the Election Commission, and that the auditors be changed every three years. The recommendations also include publishing of the audited accounts annually and be made available on the website of the party for information and review by the concerned stakeholders and the public at large within six months of the close of the financial year. There are also recommendations for publishing of financial statements in English in leading national newspapers and in the local language in the leading newspaper in the state, and for submission of the audited financial statements to the Election Commission. While the Election Commission is reported to be yet to take a final view on the recommendations, it is hoped that the recommendations will be made mandatory, and the failure to comply with any of the recommendations should lead to automatic de-registration of the party. Sadly, the Election Commission does not yet have the power to de-register political parties and this power also needs to be given to the EC.

 

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