The murky world of political party finance

Why in news?

BBC probe found six Gujarat-based RUPPs got ~₹1,700 crore donations, reviving demands for party-finance transparency.

UPSC Relevance

Prelims

• Constitutional provisions , tenth Schedule; RPA 1951 Sections, 29A etc.  

Mains

• GS-II: Salient features of the Representation of People’s Act; Appointment, powers and functions of Constitutional Bodies (ECI); Transparency and Accountability; Statutory and quasi-judicial bodies (CIC).

Observations by former CEC Ashok Lavasa

• Constitutional silence: Political parties find no mention in the Constitution except the Tenth Schedule. Yet enjoy full income-tax exemption – sometimes becoming receptacles of unexplained money. The author calls them “shell political parties”, like shell companies.
• BBC investigation: Six Gujarat-based RUPPs (Aam Janmat Party, Bharatiya National Janata Dal, Garib Kalyan Party etc.) received about ₹1,700 crore in FY 2023-24 – more than the ₹1,480 crore received together by Congress, AAP, BSP, CPI(M) and NPP. But the six fielded just 15 Lok Sabha candidates in 2024.
• ADR report : 223% rise in declared income of RUPPs in FY 2022-23; of 2,764 RUPPs, only 739 filed financial records with the ECI.
• ECI clean-up: Delisted 334 RUPPs on 9 Aug 2025. 
• Scale of political wealth (Venkatesh Nayak, CHRI): 22 parties had ₹18,742.31 crore for the 2024 general election; raised ₹7,416.31 crore during the election; spent ₹3,861.57 crore; still held ₹14,848.46 crore after polls.
• The ECI seems increasingly unable to curb the unfair, and corrupt financial practices that in longer run has ailed the democratic elections too. Former CEC S.Y. Quraishi has called money power the biggest challenge to free and fair elections.

Constitutional and legal framework on finance of political parties

• Art 19(1)(c) – right to form associations; parties exist under it. Reasonable restrictions under Art 19(4).
• Tenth Schedule (52nd Amendment, 1985) – the only place “political party” appears; deals with anti-defection.
• Art 324 – superintendence, direction and control of elections vests in ECI.
• Arts 327, 328 – Parliament and state legislatures make laws on elections.

Statutes

• RPA 1951 – Sec 29B (parties may accept contributions from any person or company except a Government company; no foreign source); Sec 29C (annual report of donations above ₹20,000 to ECI, else no tax exemption); Sec 77 (candidate expenditure; Explanation 1 exempts party spending); Sec 10A (disqualification for failure to lodge accounts); Sec 123(6) (excess expenditure is a corrupt practice).
• Income-tax law – Sec 13A (party income exempt if accounts kept, donors above ₹20,000 recorded, accounts audited, cash donations capped at ₹2,000 since Finance Act 2017, return filed); Secs 80GGB/80GGC (100% deduction for company/individual donors, not in cash). Note: the Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026; these benefits continue under renumbered sections.
• Companies Act 2013 – Sec 182 – company must be at least 3 years old and not a Government company; must disclose donation in P&L. The 7.5% cap removed in 2017 stands revived after the SC struck down the amendment in 2024.
• FCRA 2010 – bars parties from foreign contributions (amended retrospectively in 2016 and 2018).
• Electoral Trusts Scheme 2013 (CBDT) – trusts must pass on at least 95% of receipts to parties and disclose donors.
• Election Symbols Order 1968 – Para 6 (recognition criteria), Para 16A (suspension/withdrawal of recognition).
• ECI Guidelines on Transparency and Accountability in Party Funds (2014) – issued under Art 324; bank transactions, accounts audit, disclosure.

Key judgments

• Common Cause v Union of India (1996) – parties must file income-tax returns and maintain audited accounts; ECI can seek expenditure details under Art 324.
• Union of India v ADR (2002) and PUCL v Union of India (2003) – voters’ right to know about candidates flows from Art 19(1)(a).
• INC (I) v Institute of Social Welfare (2002) – ECI has no general power to deregister parties.
• ADR v Union of India (15 Feb 2024) – 5-judge Constitution Bench unanimously struck down electoral bonds; voters’ right to information under Art 19(1)(a); unlimited corporate funding violates Art 14.

What are the problems in political party finance?

• Legal vacuum – easy to register, almost impossible to remove. Any association can register under Sec 29A with 100 members and a ₹10,000 fee. But in Indian National Congress (I) v Institute of Social Welfare (2002), the SC held the ECI cannot deregister a party except in narrow cases (registration by fraud, party ceasing to follow the Constitution, or declared unlawful). Hence the ECI only “delists”. There is still no comprehensive law on political parties.
• Delisting ≠ Prohibition on finance : T.N. Seshan in 1994 flagged the “adhocism” in parties, and introduced Para 16A (ECI can suspend/withdraw recognition for violating MCC or ECI directions). Registration guidelines require a party to contest within 5 years; a party not contesting for 6 years is taken off the list. Even delisted or unrecognised parties can still receive contributions (Sec 29B RPA) and claim tax exemption (Sec 13A IT Act).
• Shell parties and tax arbitrage. Donors get 100% deduction (Secs 80GGB/80GGC) and parties pay no tax (Sec 13A, Income Tax Act). Chartered accountants told the BBC that donors may take donation certificates to claim tax relief and get most of the money back in cash, minus commission – i.e., round-tripping and money laundering. 
• Opacity of source. Sec 29C requires disclosure only of donations above ₹20,000. ADR has repeatedly found that more than half of national parties’ income comes from “unknown sources”. Donations can be split into smaller amounts to avoid disclosure. 
• Corporate money and quid pro quo. The Finance Act 2017 removed the 7.5% cap on company donations (Companies Act Sec 182) and the need to name the party. Electoral bonds (about ₹16,500 crore sold, 2018–24) allowed anonymous corporate giving. Data disclosed after the 2024 verdict showed donations by firms facing ED/IT action or winning contracts, raising quid pro quo concerns. 
• No ceiling on party spending. Candidates face limits (₹95 lakh for Lok Sabha in larger states), but Explanation 1 to Sec 77 RPA excludes party spending. This overturned Kanwar Lal Gupta v Amar Nath Chawla (1974), which had counted party spending on a candidate. The Centre for Media Studies estimated the 2024 Lok Sabha election cost about ₹1.35 lakh crore – the world’s costliest.
• Weak audit and enforcement. Parties choose their own chartered accountants. The ECI only receives accounts; it cannot verify or penalise. The only penalty for non-filing is loss of the Sec 13A exemption – rarely enforced. Only 739 of 2,764 RUPPs filed records which is less than one third. Accounts meet “the letter of the law, even if its spirit gasps”.
• Parties outside RTI. Central Information Commission, in 2013 declared six national parties “public authorities” under Sec 2(h) of the RTI Act  because they get subsidised land, bungalows, tax exemption, free airtime. Parties objected to it; the matter is pending before the SC.
• Foreign money door. A Delhi HC (2014) ruling found the BJP and Congress had taken donations from Vedanta subsidiaries in breach of FCRA. Parliament then amended the FCRA through the Finance Acts of 2016 and 2018, with retrospective effect, redefining “foreign source”.
• Uneven playing field. Money concentrates with the ruling party. It raises entry barriers for new and smaller parties and weakens the “one person, one vote” ideal. 

Reforms needed 

Global practices

• UK: Electoral Commission regulates donations (only “permissible donors”) and caps national party campaign spending under PPERA 2000.
• USA: Federal Election Commission; disclosure is strong but Citizens United v FEC (2010) allowed unlimited independent corporate spending via Super PACs.
• Brazil: Supreme Court banned corporate donations (2015); public election fund created.

Way forward 

• National Election Fund (proposed by S.Y. Quraishi) – anonymous donations to a common fund, shared among parties by vote share.
• Mandate digital-only donations and real-time online disclosure of all donations.
• Enact a Political Parties (Registration and Regulation) Act combining LC 170th and 255th Report drafts.
• Link tax exemption to real electoral participation (ECI 2016 proposal).
• Bring party finances (not internal deliberations) under RTI.

Practice MCQ 

Q1. Consider the following statements:

1. The term “political party” finds mention in the Constitution of India at three places.

2. Political parties are registered with the Election Commission under Section 29A of the Representation of the People Act, 1951.

3. The Election Commission has statutory power to deregister a registered political party that has not contested elections for six consecutive years.

How many of the above statements are correct?

(a) Only one   (b) Only two   (c) All three   (d) None

Answer and explanation: (a)

Statement 1 is incorrect – The term “political party” finds mention in the Constitution of India in only the tenth schedule.

 Statement 3 is incorrect – the ECI only “delists” such parties; it cannot deregister them except in narrow cases (INC (I) v Institute of Social Welfare, 2002).

Q2. Consider the following statements:

Statement I: Companies can claim a deduction for donations made to registered political parties.

Statement II: Section 29B of the Representation of the People Act, 1951 allows political parties to accept contributions from any company other than a Government company.

Which one of the following is correct in respect of the above statements?

(a) Both Statement I and Statement II are correct and Statement II explains Statement I

(b) Both Statement I and Statement II are correct but Statement II does not explain Statement I

(c) Statement I is correct but Statement II is incorrect

(d) Statement I is incorrect but Statement II is correct

Answer and explanation: (b) 

Both are correct, but statement 2 does not explain Statement 1. The deductions come from separate IT law.

Mains Practice Question 

Q. “Registered Unrecognised Political Parties are increasingly becoming conduits of tax arbitrage rather than vehicles of representation.” Critically examine the legal framework governing political party finance in India and suggest reforms. (15 marks, 250 words)

PYQ: “Discuss the role of the Election Commission of India in the light of the evolution of the Model Code of Conduct.” (GS-II, 2022)

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