Why and How Political Parties Get Income Tax Exemption?

Recently, the Income Tax Department has raised a substantial demand of ₹3,567 crore against the Indian National Congress, stemming from reassessment proceedings for various financial years. It was alleged that there were certain breaches of conditions, such as the receipt of cash donations exceeding ₹2,000 per transaction and delays in filing requisite under the Income Tax Act, 1961.

The case was transferred from the Delhi High Court to the Supreme Court. The government has assured that no coercive action will be taken until after the elections, reflecting the sensitive timing of this issue.

The question whether Income tax exemption be embezzled by political parties is always a trepidation to the folks. After the recent incident, it put a lot of pressure on the validity of democratic value and credibility of these parties.

The Future of Tax and Finance: Upskill with Us

Political parties receive income tax exemptions for several key reasons, which are generally aimed at supporting democratic processes and ensuring the financial viability of these organizations. Ensuring transparency in donations is foremost to avail exemption.

Income tax Applicable for Political parties

Income tax is generally not applicable to political parties under normal circumstances, as they enjoy exemptions under specific provisions of the law in many countries. In India, political parties are exempt from paying income tax on their income, provided certain conditions are met. It is crucial that they must adhere to stringent conditions in order to maintain transparency and compliance. Non-compliance can somehow lead to taxation of their income.

A new avenue for funding for political parties had embarked through the introduction of Electoral Bonds(2018), offering donors anonymity while the income from these bonds remains tax-exempt. The limit for cash donations to political parties was reduced to ₹2,000 to curb black money usage.

The Future of Tax and Finance: Upskill with Us

The following types of income may be taxed:

• Donations above ₹20,000 where the donor details are not disclosed. 
•  Income from non-exempt sources such as  businesses, investments, or other non-political activities is subject to tax. 
• Failure to meet the conditions for exemption (e.g., failure to file returns or disclose donations), the exemption may be revoked. 

Tax Exemptions Available to Political Parties in India

To avail of the tax exemption, political parties must maintain books of accounts, including details of income and expenditure, to ensure transparency. It was important to submit their annual income tax returns by the specified deadline. Inorder to maintain transparency in donations, its vital to keep a record of donations received above ₹20,000, specifying the donor's identity (name, address, and PAN if applicable). Donations received in cash above ₹2,000 are not eligible for exemption (as per amendments under the Finance Act, 2017).

The Future of Tax and Finance: Upskill with Us

To get exemption from tax, it is important to be registered as a political party under Section 29A of the Representation of the People Act, 1951. While claiming tax exemption, the income should primarily come from voluntary contributions, membership fees, or other legitimate means related to political activities. 

Why Tax not Payable by Political Parties

It is always a vexed question that ‘why the political parties are exempted from tax liability’. The political parties are essential for the functioning of a democracy, representing citizens' interests, enabling debate, and shaping policies. So the legislatures pronounced not to impose tax liability on these organs. Tax exemptions help them focus on their democratic roles without excessive financial burdens.

Encouragement of political participation is vital for the development of a country. Through the exemptions the parties can raise funds and operate, thereby promoting active political engagement and representation.

The Future of Tax and Finance: Upskill with Us

Being a non profit entity, the political parties mainly focus on serving democratic and public interests. By linking tax exemptions to disclosure norms, governments can incentivize parties to maintain transparency in their funding sources and expenditure. It is noteworthy that these exemptions in tax assist in reducing the financial strain on political parties, and thereby allowing them to focus on their core activities, such as campaigning, public outreach, and policy development.

Laws and Provisions Applicable to taxation of political parties in India

The taxation of political parties in India is primarily governed by the Income Tax Act, 1961, with specific exemptions and provisions designed to facilitate their operations while ensuring accountability and transparency in financial matters.

• Exemption from Taxation under section 13A of the Income Tax Act: Section 13A of the act provides certain exemption from leviability of income tax to political party, provided it complies with specific conditions. The political parties must maintain proper records of income and expenditure and the books should reflect all voluntary contributions exceeding ₹20,000.

The accounts of the political party must be audited by a Chartered Accountant ( CA) promptly. Filing of ITR is essential under Section 139(4B) of the act. Contributions exceeding ₹20,000 must be disclosed, including the name and address of the donor. Contributions received through electoral bonds are exempt from disclosure of donor details.

The Future of Tax and Finance: Upskill with Us

• Prohibition of Anonymous Donations: Cash donations exceeding ₹2,000 are not allowed. As per the amendments under the Finance Act, 2017, contributions must be made through cheques, drafts, electronic means, or electoral bonds.

• Exemption under Section 10(23B): Registered political parties are exempt from paying tax under Section 10(23B) of the Income Tax Act, provided they comply with the conditions specified under Section 13A.

•  Electoral Bonds Scheme: In 2018, electoral bonds were introduced to allow individuals and entities to donate to political parties without revealing donor details publicly. Donations made through electoral bonds are not taxable for political parties and are exempt from donor disclosure under Section 13A.

• Taxation of Non-Exempt Income: Any income that does not fall under the exempt categories of Section 13A, such as income from business or trade, is taxable at the applicable rates.

The Future of Tax and Finance: Upskill with Us

• Penalties for Non-Compliance:  Failure to meet the conditions mentioned under Section 13A will trun the exempt income as taxable. Penalties may apply under provisions of the Income Tax Act for non-filing or misreporting.

• Applicability of Goods and Services Tax (GST): Political parties are generally not subject to GST for their core activities (e.g., political campaigning or voluntary contributions). However, income from commercial activities (e.g., renting out property, selling merchandise) may attract GST.

• Foreign Contribution (Regulation) Act, 2010 (FCRA): As per the act, political parties are prohibited from accepting foreign contributions unless permitted under the law. Violations may lead to penalties or cancellation of registration.

Conclusion

The taxation framework for political parties in India aims to balance operational freedom with financial accountability. While political parties benefit from notable tax exemptions, strict compliance is essential to avoid tax demands. Increasing focus on transparency and accountability in political funding ensures to hold the credibility of parties and its moral values.