Why is it in the news?

• The Supreme Court recently put a hold on delivering its judgment regarding the challenge to the central government’s Electoral Bonds Scheme.
• It’s worth noting that before the introduction of the Electoral Bonds (EB) Scheme in 2018, there was another electoral funding mechanism called the Electoral Trusts (ET) Scheme, which came into existence in 2013.

 Electoral Trusts (ET) Scheme

• The Electoral Trusts Scheme, 2013, was notified by the Central Board of Direct Taxes (CBDT).
• It involves trusts set up by companies with the sole objective of distributing contributions received from other companies and individuals to political parties.
• Only companies registered under Section 25 of the Companies Act, 1956, can apply for approval as an Electoral Trust. Electoral trusts must apply for renewal every three financial years.
• The provisions related to electoral trusts are governed by the Income-tax Act, 1961, and Income-tax Rules, 1962.
• Contributions to Electoral Trusts: Electoral trusts may receive contributions from Indian citizens, Indian companies, firms, Hindu undivided families, associations of persons, or bodies of individuals resident in India. They are prohibited from accepting contributions from non-Indian citizens or foreign entities, including other electoral trusts.
• Distribution of Funds: Electoral trusts can allocate a maximum of 5% of the total funds collected during a financial year for administrative expenses. The remaining 95% of the income must be distributed to eligible political parties registered under the Representation of the People Act, 1951. Electoral trusts are required to maintain detailed records of receipts, distribution, and lists of donors and receivers.
• Audit of Accounts: Each electoral trust must have its accounts audited by an accountant and submit the audit report to the Commissioner of Income-tax or the Director of Income-tax.

Differences Between ET Scheme and EB Scheme

Transparency and Accountability:

• Electoral Trusts (ETs) maintain transparency with disclosed contributors and beneficiaries, submitting annual contribution reports to the Election Commission of India (ECI).
• In contrast, Electoral Bonds (EBs) introduce anonymity of donors, leading to a lack of transparency in the funding process.

Funding Trends (2013-14 to 2021-22):

• Data spanning nine financial years shows that political funding through both government schemes increased significantly after the introduction of EBs, with the majority of donations coming through the EB scheme.
• Between 2017-18 and 2021-22, political parties received a total of Rs 1,631 crore through ETs, while Rs 9,208 crore was donated through EBs.

Political Party Receipts:

• According to a report by the Association for Democratic Reforms (ADR), one political party received 72% of total donations facilitated by ETs in the year 2021-22 and 57% of funding through EBs from 2013-14 to 2021-22.
• More than 55% of the funding for political parties came through EBs.