Economics of Funding Political Parties

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Economics of Funding Political Parties

The Nepali private sector has missed a very important issue in the list of suggestions they presented recently to the political leadership to incorporate in the new constitution. This missed point is about the funding of political parties and their campaigns. 

It is well established by various researches that greater the financial transparency of the political parties, lower is the level of corruption in the entire society. And corruption is undoubtedly the greatest hurdle in the growth of ethical business. Also well-established is the fact that in Nepal, the political parties are the greatest sources of corruption – not only big corruption such as policy capture and crony businesses, but also extortions veiled as donation drives for political campaigns. 

Naturally, the businesses are the main source of party funding as we still don’t have the practice of state funding of political parties. But the money that the businesses provide to the political parties is not and cannot be recorded in the books on either end – the payers and receivers. A lot of such money is collected as extortions. This way, the businesses end up paying taxes also on the money they pay to the political parties. Or, they are forced to earn some extra money that they don’t show in their books. Such money is earned by under/over invoicing, un-invoiced sales etc. This vicious cycle is the result of all sorts of unwanted activities in society, ranging from the flesh trade and Ponzi schemes to transport syndicates and black marketing. This is the reason why society views both the business and political elite as being hand-in-glove in exploiting the common people. 

Therefore, any genuine businessman would like to have clean political parties and it was expected that the apex chambers would include this point in their list of suggestions for the new constitution. 

The document circulated by the Constituent Assembly as a revised draft ‘new constitution’ has a separate chapter on political parties and it has details about how they should be formed and operated. But this draft is totally silent, as is the existing interim constitution and its predecessor, on how the finances of the political parties are to be managed. This loophole must be plugged. 

The political parties should be allowed to raise funds from any source they like but it must be made mandatory to get their books (with all the detailed schedules of sources and uses of funds) audited and presented not only to the general public and the Election Commission, but also to the Tax Office. No anonymous donations should be allowed. The donation up to a fixed amount made to a political party should be made tax-free for the donors. This way the donors will record in their books of accounts the money they pay to the parties and the tax authorities can cross-check it against the books of the parties. 

To make it productive for tax purposes, a nominal tax rate (1% or even less) should be fixed on the party’s profit (surplus) and the parties should be required to follow a tax deduction at source when they make any payment. This will propagate a culture of transparency across the political parties and businesses and thereby across society. With such a system, the parties will automatically stop accepting funds from dubious sources. It is advisable also to institute a system of state funding to the political parties on the basis of the popular votes they secure in the latest general election. 

But will the business leadership raise this issue and will the political leadership listen? If they don't, that means they don’t really want a fair business atmosphere in the country. 

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