Unlimited Funding and 100% Income Tax Exemption: Know Political Parties’ Tax Contribution to India

Indeed, political parties have been receiving Unlimited funds, a term that implies ‘boundless’. The introduction of Electoral bonds six years ago facilitated this influx of "unlimited funds" into political coffers. Contrary to expectations, these sums are not subject to income tax, representing a significant exemption. The tax contribution of these political parties could be even ‘0’ / ‘Zero’.

100% Income Tax Exemption to Political Parties - Section 13A

Section 13A of the Income Tax Act, 1961, is the provision that absolves political parties from any income tax obligations. This section grants full tax exemption to recognized political entities on their income from house property, income from other sources, capital gains and voluntary contributions received from any person subject to conditions.

Mere nominal existence as a party is insufficient; to qualify for this exemption, the party must be formally registered under Section 29A of the Representation of the People Act (RPA), 1951. All the political parties are governed under the RPA. They are barred from doing any commercial activity to earn profits. However, they can take the contributions or donations from the public, the membership fees, coupons..etc.

There are certain prerequisites for availing tax exemption under Section 13A:

1.  Registration under Section 29A of the RPA.
2. Ensure maintenance of necessary books of account and documents for the AO  to determine income; compliance with Section 44AA is not obligatory, only essential records for income assessment suffice.
3. Record contributions exceeding Rs 20,000 with contributor's details, unless made through electoral bonds.
4. Submission of audited books of account by a chartered accountant.
5. Receipt of donations not exceeding Rs 2,000 except through account payee cheque, demand draft, ECS, bank account, or electoral bond.
6. Submit a report on donations over Rs 20,000 to the Election Commission of India before the ITR due date, as per Section 29C of the RPA.

ITR Filed by Political Parties

A political party is obligated to file an income tax return if its income (before exemption under Section 13A) Under Section 139(4B) of the Income Tax Act, surpasses the basic exemption threshold. Political parties are subject to the same tax rates as individual residents. The ITR form used by the political parties is ITR-7.

Electoral Bonds / Donations to Political Parties

Introduced in 2017, the Electoral Bonds scheme enables corporate entities or individuals to anonymously contribute funds to political parties on a voluntary basis. These bonds are exclusively encashed by eligible political parties through designated bank accounts with authorised banks. The State Bank of India has been designated to issue and redeem Electoral Bonds through its 29 authorised branches.

Upon deposit, Electoral Bonds are promptly credited to the account of the eligible political party. These bonds are available for purchase in denominations of 1,000, 10,000, 1,00,000, 10,00,000, and `1,00,00,000 from specified branches of the State Bank of India.

On 15 February 2024, the Supreme Court of India, led by Chief Justice DY Chandrachud, in a unanimous decision, declared the electoral bonds scheme unconstitutional, along with associated amendments to the Representation of People Act, Companies Act, and Income Tax Act.

Threshold Limit for Donations

The threshold stands at Rs. 20,000, as mandated by the Election Commission for political parties to disclose direct contributions exceeding this amount in their annual reports. However, donors often split their contributions into smaller cash sums below this threshold, evading disclosure altogether.

This loophole constitutes the primary avenue for political funding. As per a report by ADR, regional political parties amassed around Rs 108 crore in the fiscal year 2015-16 through donations surpassing the Rs 20,000 threshold. The individuals and corporations made their donations below the threshold limit in order to escape from disclosing identity.

Supreme Court decision w.r.t. Electoral Bonds

On April 12, 2019, a bench led by Chief Justice Ranjan Gogoi directed political parties to submit donation details in sealed covers to the ECI. Despite no stay on the scheme, the Court recognized the need for thorough deliberation. Subsequent petitions were filed in November 2019 and October 2020, and ADR sought a stay in early 2021. The Court refused, dismissing concerns of foreign influence.

On October 16, 2023, the case was referred to a five-judge Constitution Bench of CJI D Y Chandrachud, Justice B R Gavai, J B Pardiwala and Justice Sanjeev Khanna highlighting its significance. Over three days in October 2023, arguments were heard, with petitioners claiming increased corruption due to the scheme, while the Union defended donor privacy. The Constitution Bench reserved judgment on November 2, 2023.

On February 15, 2024, the Court unanimously struck down the Electoral Bonds Scheme, citing violation of voters' right to information. SBI was instructed to provide bond purchase details to the ECI, to be published within a week.

Foreign Funds to Political Parties

The political parties are prohibited from accepting foreign funds. The BJP government in its Finance Bill 2016, amended the FCRA to enable easier acceptance of such funds. Recently, the Lok Sabha passed a bill without any debate, exempting political parties from scrutiny of foreign funds received since 1976.

The passage of this bill in the Lok Sabha was met with chaotic protests from opposition parties. Alongside this, 21 amendments to the Finance Bill 2018 were approved, one of which amended the Foreign Contribution (Regulation) Act, 2010, prohibiting overseas corporations from funding political parties.

Since 2014, the government has cut off the NGOs FCRA licences, doubting the foreign fundings. On the other hand, the government amended the FCRA exempting the parties from the scrutiny of foreign funds since 1976.  This is a double standard approach of the government. Parliament received a response indicating that between 2016 and 2020, over 6,600 NGO licences were revoked.

Answers of Minister of State in the Ministry of Home Affairs w.r.t. Foreign funds in 2014 before Lok Sabha

With regards to the question on whether the Government has ordered an inquiry into the alleged donations received by some political parties in violation of the Foreign Contributions Regulation Act (FCRA), 1976,  if so, the details thereof and the present status of the inquiry, the Minister Mullapally Ramachandran replied that :

“In pursuance of WP(C) No. 131 of 2013 (Association of Democratic Reforms & another VS. Union of India), Government examined the issues raised regarding donations received by Political Parties by calling reports from concerned Ministries etc.

As per Section 3 of Foreign Contribution (Regulation) Act, 2010, which came into force on 01/05/2011, Political Parties are prohibited from receiving foreign contribution.

As a routine matter, the Government does not monitor accounts of political parties from FCRA angle. However, banks have a responsibility to ensure that funds are not transferred in violation of Foreign Contribution (Regulation) Act.

Further, political parties come under purview of Representation of People Act, 1951. As per Section 29 B of the Act, every political party may accept any amount of contribution voluntarily offered to it by any person or company other than a Government Company provided that no political party shall be eligible to accept any contribution from any foreign source defined under clause (e) of Section 2 of the Foreign Contribution (Regulation) Act, 1976 [now clause (j) of Section 2 of the Foreign Contribution (Regulation) Act, 2010]”

Tax Contribution to Country by Political Parties

In simple terms, there is no income tax contribution by the political parties to the nation, though they have to file their individual ITR which may or may not fit into the income tax slabs. The parties are getting unlimited funds year by year which is only crores. However, all those funds were exempted from income tax.

Donors or contributors can claim income tax deductions under Section 80GGB. There's no cap on the deductible amount. Qualifying firms can deduct any sum contributed to a registered political party from their taxes. Additionally, donations made by corporations are fully tax-deductible under Section 80GGB of the Income Tax Act. Thus, no income tax on parties for receiving funds but tax deduction for the donors. Then, what is for the country?

Laws often contain numerous loopholes, which can sometimes lead to situations where you find yourself addressing issues akin to fixing waterproofing on a roof.

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