Electoral bonds vs Electoral Trusts- How are they different? What are their key features? Electoral bonds and electoral trusts represent two mechanisms in India designed to provide a level of transparency and regulation to the financing of political parties and electoral activities. Read here to learn more.
Before the controversial Electoral Bonds Scheme was introduced in 2018, an Electoral Trusts Scheme was introduced by the UPA government in 2013.
While both serve the purpose of funnelling funds to political parties, they operate under different rules and structures.
Understanding these mechanisms is crucial for grasping how political financing works in India and the efforts to make political funding more transparent and accountable.
Electoral Bonds
Introduced by the Government of India in 2018, electoral bonds are a financial instrument that individuals and companies can buy from specified branches of the State Bank of India (SBI) and donate to a political party of their choice.
- These bonds are meant to be a more transparent alternative to cash donations, which have been criticized for their lack of traceability and potential for misuse.
Key Features:
- Anonymity: The identities of the donors and the recipients (political parties) are kept anonymous, a feature that has been both praised for protecting donor privacy and criticized for the potential lack of transparency.
- Bank Transactions: The transactions are made through the banking system, which adds a layer of scrutiny and record-keeping.
- Use Limitation: Political parties can only encash these bonds through a designated bank account with the Election Commission of India (ECI). The party must be registered and must have secured at least 1% of the votes in the most recent general election or Assembly election to be eligible to receive funds through electoral bonds.
In a landmark unanimous judgment, the Supreme Court in February 2024 struck down the electoral bonds scheme as unconstitutional and manifestly arbitrary.
- The court pointed out the blanket anonymity it provides to political donors, as well as critical legal amendments allowing rich corporations to make unlimited political donations.
- A five-judge Bench headed by Chief Justice of India D.Y. Chandrachud held that the Union government’s scheme, and preceding amendments made to the Representation of the People Act, the Companies Act, and the Income Tax Act, violated the voters’ right to information about political funding under Article 19(1)(a) of the Constitution.
Electoral Trusts
Electoral trusts are not-for-profit companies established for the sole purpose of distributing contributions to political parties.
- Introduced in 2013 by the Central Board of Direct Taxes (CBDT), these trusts are part of an effort to bring more transparency to political funding.
- Unlike electoral bonds, which are a financial instrument, electoral trusts operate as intermediary entities that collect funds from various sources and then distribute these funds to political parties.
Key Features:
- Transparency and Disclosure: Electoral trusts are required to disclose their contributions to the Election Commission of India, making the source of funds and the recipients (political parties) public information. This requirement is seen as a step towards greater transparency in political funding.
- Tax Benefits: Donations made through electoral trusts allow donors to receive tax deductions, providing an incentive for using this channel for political donations.
- Regulation: Electoral trusts are regulated under the Companies Act, 1956 and are subject to scrutiny by the Income Tax Department (Income Tax Act, 1961 and Income Tax Rules, 1962) and the Election Commission of India, ensuring a level of oversight.
Contributions to Electoral Trusts
They may receive contributions from:
- An individual who is a citizen of India
- A company registered in India
- A firm or Hindu undivided family or an Association of persons or a body of individuals, resident in India.
They shall not accept contributions from:
- An individual who is not a citizen of India or from any foreign entity whether incorporated or not;
- Any other electoral trust registered under the scheme.
- No contribution shall be received in cash
It is also provided that the permanent account number of the contributor who is a resident and the passport number in the case of a citizen of India, who is not a resident, would be taken by the electoral rusts at the time of receiving any contribution.
Mechanism for Distribution of Funds
- For administrative expenses, the Electoral Trusts are permitted to set aside a maximum of 5% of the total funds collected during a financial year.
- The remaining 95% of the total income of the Trusts is required to be distributed to eligible political parties.
- Parties registered under the Representation of the People Act, 1951 are eligible to receive the contributions.
- Electoral trusts are required to keep and maintain books of account including details of receipts, distribution and list of donors and receivers.
Electoral bonds vs Electoral Trusts
Electoral bonds |
Electoral trusts |
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Transparency |
Electoral bonds maintain the anonymity of donors, raising concerns about the potential for undisclosed corporate influence on politics.
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Electoral trusts offer more transparency in terms of the source of funds and the recipient parties, as their disclosures are public. |
Regulatory oversight |
Electoral bonds are primarily regulated by the Reserve Bank of India (RBI) and the State Bank of India (SBI), in addition to the Election Commission’s guidelines. |
Electoral trusts are regulated under the Companies Act and overseen by the Election Commission and the Income Tax Department.
|
Purpose |
Electoral bonds aim to encourage donations to political parties through a banking channel, offering anonymity to donors. |
Electoral trusts serve to aggregate donations from various sources and distribute them to political parties, with a focus on transparency and accountability. |
Why in the news?
Following the directive from the Supreme Court, the State Bank of India (SBI) released all details of the electoral bond scheme, except donors’ bank account numbers and their Know Your Customer (KYC) details to the Election Commission (EC), which has now published it on its website.
- In February 2024, the apex court deemed the ‘Electoral Bonds Scheme, 2018’ unconstitutional, stating that it violated voters’ right to information about political funding and facilitated a quid pro quo culture.
- The Supreme Court bench suggested reverting to an existing electoral trust mechanism that allows for pooling of sums of money from different entities and leaves it upon the trust’s management to decide where the money goes, thus putting some distance between the political organisation and the donor.
- The bench held that the objective of curbing black money in electoral financing can be achieved through electoral trusts.
Conclusion
Both electoral bonds and electoral trusts represent steps towards regulating and making political funding more systematic in India.
However, the debate continues regarding their effectiveness in achieving transparency, reducing the influence of undisclosed money in politics, and ensuring a level playing field for all political entities.
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-Article by Swathi Satish
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