1. How Does the Electoral Bond Scheme Work?
The petitions against electoral bonds are not just about the bonds themselves. The petitions also challenge the changes to our laws on disclosure of political donations in the Representation of People Act 1951, Companies Act 2013, Income Tax Act 1961 and RBI Act 1934. Most of these changes were brought in by the Finance Act 2017.
The electoral bond scheme, therefore, needs to be viewed as a composite of the following elements:
- Can be purchased from selected SBI branches on a quarterly basis. The value of each bond can be Rs 1,000, Rs 10,000, Rs 1 lakh, Rs 10 lakh or Rs 1 crore.
- Any individual or corporation which satisfies certain KYC requirements can buy a bond; their name or other details are not entered on the instrument. The details furnished during KYC are supposed to be confidential, though they can be shared on demand of a competent court or a request by a law enforcement agency.
- Every registered political party which received at least 1 percent of the vote at the previous Lok Sabha elections or state elections gets an account in which the bond amounts can be deposited within 15 days of their issue.
TAX EXEMPTION FOR POLITICAL PARTIES
- Political parties don’t pay tax on “voluntary contributions” to them, provided certain details of such donations are properly maintained by them. Previously, the political parties had to maintain a record of all donations in excess of Rs 20,000, including the name and address of the donor (Section 13A, Income Tax Act).
- However, Finance Act 2017 created an exception to this for donations greater than Rs 20,000 which are made through electoral bonds: not only are these tax exempt, the political parties don’t need to record the details of the donor.
LIMIT ON CASH DONATIONS
- Earlier, cash donations (which could remain anonymous) could be made to political parties in amounts up to Rs 20,000. This has now been reduced to a Rs 2,000 limit.
- Any donations above Rs 2,000 have to be in cheque, bank transfers or electoral bonds.
LIMIT ON CORPORATE DONATIONS
- Previously, there was a cap on the amount of money that a company could donate: 7.5 percent of its average net profits during the previous three financial years (first proviso to Section 182(1) of the Companies Act). This was meant to prevent shell companies from being set up to funnel money into political parties.
- This cap was removed by Finance Act 2017.
DISCLOSURE BY CORPORATE DONORS
- Previously, companies needed to disclose the amount of money donated and the names of the political parties to which they donated money in their profit and loss accounts (Section 182(3) of the Companies Act).
- However, the requirement to disclose the names of the political parties was removed by Finance Act 2017.
DONATIONS BY FOREIGN COMPANIES
- India has strict laws against political parties receiving funding from a “foreign source”. Under the old law in 1976 and the new law in 2010, political parties cannot even accept donations from an Indian company if it is a subsidiary of a foreign company.
- Finance Act 2016 made a retrospective amendment to the 2010 law, which meant the restriction would not apply to such Indian subsidiaries if their share capital is below a specified amount. This limit was conveniently fixed in the relevant FEMA rules to exempt all donations to political parties from such companies till now.
- Finance Act 2018 extended the retrospective protection all the way back to 1976.