Money power I: expenditure limits and party finance

Detail

1. The problem: what "money power" means

• Money power in elections means using large amounts of money, often unaccounted, to win votes. It includes cash, gifts, liquor and drugs given to voters, and spending far above the legal limit.
• What it does to democracy:
• Ticket choice: parties prefer rich candidates who can pay for their own campaigns.
• Vote-buying: voters are given cash or goods just before polling.

• Donor influence: big donors may expect favourable policies once the party is in power.

• NCERT Class 8 shows bundles of ₹500 notes found in a candidate's car (Fig. 5.20). NCERT Class 9 asks students to spot money power as an unfair election practice.

• Seizures in the 2024 Lok Sabha election:
• The ECI said 2024 was on track for the highest seizures of inducements in 75 years of Lok Sabha elections [5].
• By 18 May 2024, enforcement agencies had seized goods worth ₹8,889 crore [4]. (NCERT: about ₹8,889 crore, reported by April 2024.)
• Drugs made up ₹3,958 crore of this, about 45% of all seizures [4].

2. Limits on candidates' spending

• Election expenditure limit means the most a candidate may spend on their own campaign. The limit is set under s.77 of the Representation of the People Act (RPA) 1951, read with Rule 90 of the Conduct of Elections Rules, 1961.
• The 2022 change: Government notification S.O. 72(E) of 6 January 2022 raised the limits [3][2].

House	Larger states	Smaller states and some UTs	Earlier limit
Lok Sabha	₹95 lakh	₹75 lakh	₹70 lakh (set in 2014) [2]
State Assembly	₹40 lakh	₹28 lakh	—

• For the Lok Sabha, the lower ₹75 lakh limit applies to Arunachal Pradesh, Goa and Sikkim [2].
• History of revisions: the last major revision was in 2014. The limits were raised by another 10% in 2020 [2].
• Why the limits were raised in 2022:
• Political parties asked for it.
• The number of electors grew from 834 million (2014) to 936 million (2021), a rise of 12.23% [2].
• The Cost Inflation Index (a government measure of rising prices) also went up [2].

3. Accounts, penalties and enforcement

• Filing accounts: every candidate must file an account of election expenses with the District Election Officer within 30 days of the result (s.78 RPA).
• Not filing is penalised:

• If a candidate does not file the account, or does not file it properly, the ECI can disqualify them for three years (s.10A RPA).

• Spending above the limit is a corrupt practice:

• Overspending is a corrupt practice (a serious election wrong listed in law) under s.123(6) RPA.

• It can be raised in an election petition (a case filed in the High Court to challenge an election), and the election can be set aside.

• Enforcement tools:

• Expenditure observers are senior officers sent by the ECI to watch spending.
• Flying squads are mobile teams that check for cash, liquor and gifts.
• Shadow observation registers are the ECI's own record of a candidate's spending, which is compared with the candidate's account.

• The ECI has a Compendium of Instructions on Election Expenditure Monitoring that brings all these rules together [6].

• Ashok Shankarrao Chavan v. Madhavrao Kinhalkar (Supreme Court, 2014): the Court held that the ECI can check whether a candidate's account is true and correct, not just whether it was filed on time. The case grew out of "paid news" (paid advertising made to look like news).

4. The loopholes: party and star-campaigner spending

• Party spending has no cap. The limit applies only to the candidate.
• Kanwar Lal Gupta v. Amar Nath Chawla (1974):
• The Supreme Court held that money a party spent for a candidate should count towards that candidate's limit.
• Parliament then added Explanation 1 to s.77 (1974–75). It said party and supporter spending does not count towards the candidate's limit.

• So the effect of the judgment was reversed.

• Star campaigner: a party leader named by the party to campaign for its candidates.

• Recognised parties may name up to 40 star campaigners. Registered unrecognised parties may name up to 20.
• Their travel costs are not added to the candidate's account.
• If a star campaigner shares the stage with a candidate, the rally costs can still be shared with that candidate.

5. Rules on party income

• Section 29B RPA: a party may take money from any person or company, except a government company or a foreign source.
• Section 29C RPA:
• Every year, the party's treasurer must report all donations of more than ₹20,000 to the ECI.
• This report is made in Form 24A and lists each donor's name and address.

• Donations of ₹20,000 or less did not have to be reported, so donors in that range could stay anonymous (unnamed).

• Section 13A of the Income-tax Act 1961: a party's income (house property, other sources, capital gains and voluntary donations) is tax-free if the party:

• keeps proper books of account,
• gets them audited (checked by a chartered accountant),
• files its income-tax return, and

• files its s.29C report [8].

• Income-tax Act 2025 (in force from 1 April 2026):

• The income listed in Schedule VIII is not counted in the total income of a political party or an electoral trust, if the conditions in that Schedule are met [9].

• The conditions are the same kind as before: audited accounts and limits on cash donations [9]. (NCERT: re-enacted in the 2025 Act; the exact section number should be checked against the Act.)

• Cash donation limit:

• The Finance Act 2017 stopped parties from taking cash donations of more than ₹2,000 from one source.

• Larger amounts must come by cheque, bank transfer or another banking route.

• Tax deductions for donors:

• s.80GGB: companies can deduct (subtract from taxable income) what they give to parties.
• s.80GGC: individuals and other donors can do the same.

• No deduction is allowed for donations paid in cash [10].

• Income from "unknown sources": Association for Democratic Reforms (ADR) reports show that a large share of national parties' income comes from donations under ₹20,000 with no donor named. Check ADR's latest figure for the current share.

6. Corporate donations

• Section 182 of the Companies Act 2013 sets the rules for company donations to parties:
• The company must be at least three years old.
• It may give up to 7.5% of its average net profit of the last three financial years.
• It must disclose the amount and the party's name in its profit and loss account.
• The donation must be approved by a resolution of the board of directors.

• Government companies cannot donate.

• The 2017 change and the 2024 judgment:

• The Finance Act 2017 removed the 7.5% cap and the duty to name the party. This was done to support electoral bonds.
• In Association for Democratic Reforms v. Union of India (15 February 2024), the Supreme Court struck down these changes along with the electoral bond scheme.

7. Foreign funding

• Foreign funding of parties is banned by the Foreign Contribution (Regulation) Act (FCRA) 2010. The earlier FCRA 1976 also banned it.
• ADR v. Union of India (Delhi High Court, March 2014):
• The court found that the BJP and INC had taken money from Vedanta subsidiaries. Under the law then in force, these counted as "foreign sources".

• The court asked the government to act against both parties.

• Retrospective cure:

• "Retrospective" means a law change that also applies to the past.
• The Finance Act 2016 changed the definition of "foreign source" in FCRA 2010, with effect from 2010.
• The Finance Act 2018 made a similar change to FCRA 1976, with effect from 1976.
• Under the new definition, an Indian company with foreign shareholding within the FDI limits is not a foreign source. This protected the past donations.

8. Electoral trusts

• Electoral trust: a non-profit company set up only to collect donations and pass them on to registered political parties.
• Legal form:
• Electoral trusts were set up as not-for-profit companies under s.25 of the Companies Act 1956 [7].

• Today they are registered under s.8 of the Companies Act 2013 [11].

• Electoral Trusts Scheme: notified by the CBDT (Central Board of Direct Taxes) on 31 January 2013.

• Key duties:
• Each tax year, the trust must give at least 95% of the donations it received, plus any surplus from earlier years, to parties registered under s.29A RPA [9].
• This must be done before 31 March of that tax year [7].
• It must send the tax department a certified list of contributors and a list of parties that received money, along with its audit report [7].

• If it follows these rules, the donations it receives are tax-free [9].

• Under the new tax law: electoral trusts are covered by Schedule VIII (Table, Sl. No. 2) of the Income-tax Act 2025 and must work under Rule 289 of the new Income-tax Rules [11].

• Public reports: the ECI publishes each electoral trust's annual contribution report online, along with the CBDT's list of electoral trusts [7].
• After 2024: with electoral bonds struck down, electoral trusts are the main lawful route for large company donations. The trust is a go-between, so voters cannot easily match a particular donor to a particular party. Check the latest contribution reports for current trends.

Prelims Hooks

• s.77 RPA + Rule 90 (Conduct of Elections Rules, 1961) → candidate spending limits; revised by S.O. 72(E), 6 January 2022: Lok Sabha ₹95 lakh / ₹75 lakh, Assembly ₹40 lakh / ₹28 lakh.
• The ₹75 lakh Lok Sabha limit applies to Arunachal Pradesh, Goa and Sikkim. Trap: it is not "all North-Eastern states".
• s.78 → accounts due in 30 days. s.10A → 3-year disqualification for not filing. s.123(6) → overspending is a corrupt practice.
• Kanwar Lal Gupta (1974) counted party spending as the candidate's. Explanation 1 to s.77 reversed it. Trap: there is no cap on party spending.
• Star campaigners: 40 (recognised party) and 20 (registered unrecognised party). Their travel is outside the candidate's limit.
• s.29C RPA → report donations above ₹20,000 in Form 24A. s.29B → no donations from government companies or foreign sources.
• Finance Act 2017 → cash donation cap of ₹2,000 per source. s.80GGB = company donors; s.80GGC = individual donors; no deduction for cash.
• s.182 Companies Act 2013 → company at least 3 years old, up to 7.5% of average net profit of 3 years, must disclose; government companies barred.
• Electoral trusts → CBDT scheme of 31 January 2013; pass on at least 95% each year; registered under s.8 Companies Act 2013.
• 2024 Lok Sabha seizures → ₹8,889 crore by 18 May 2024; drugs were the largest share (45%).

Mains Points

• The limit misses most of the spending: the candidate's limit (₹95 lakh) sits next to unlimited party spending and excluded star-campaigner costs. The Explanation 1 to s.77 that reversed Kanwar Lal Gupta makes the limit a formality. Reform ideas:
• cap party spending or add it to candidates' accounts;
• count star-campaigner rallies against candidates;

• public state funding of elections (Indrajit Gupta Committee, 1998; Goswami Committee, 1990).

• Transparency vs donor privacy:

• The ₹20,000 reporting line under s.29C and the ₹2,000 cash cap still leave a large share of party income from "unknown sources".
• The 2024 Supreme Court judgment upheld the voter's right to information (Article 19(1)(a)).

• Electoral trusts disclose donors, but voters cannot easily see which donor funded which party.

• Enforcement gaps:

• Record seizures (₹8,889 crore in 2024) show both better watching and how big the problem is.
• Disqualification under s.10A covers only failure to file; the ECI has no power to audit parties.
• The ECI cannot deregister parties for financial wrongdoing.

• Suggested fixes: a legal duty for parties to file audited accounts with the ECI, and bringing parties under the RTI Act (the CIC said so in 2013, but parties did not comply).

• Retrospective law-making: the 2016 and 2018 FCRA amendments cancelled the effect of a court finding against the two main parties. This raises concerns about the rule of law, about Parliament legislating in its own interest, and about foreign-linked money entering through Indian subsidiaries.