Income Of Political Parties : Taxable Or Exempt?

Jayesh Dadia, Chartered Accountant

(A) BACKGROUND : At present, political parties registered with the Election Commission of India are exempt from paying income tax, subject to certain conditions provided in Section 13A of the Income Tax Act. Under that section, voluntary contribution/donation received by the political parties even in cash was permissible and exempt. The only condition was to file details of names and addresses of the persons who have made contributions in excess of Rs20,000 with the Election Commission. The existing provisions were, therefore, misused by all political parties and,in view of exemptions, unaccounted and black money was pumped in. Also, most of the political parties were not filing their return of income within the stipulated time but were still enjoying exemption. 

Lots of hue and cry was raised in social media after demonetisation and the government was forced to amend the existing provisions. Views have been expressed that all the black money was converted into white by way of donations from unknown persons. In the light of this perception, the Modi government has brought amendment to reduce conversion. 

Under the amended provisions, filing of return within due date is mandatory and there can be no receipt of donation in excess of Rs2,000 in cash. Failure on the part of political parties to comply with such requirements would result in loss of exemption. 

(B) ELIGIBILITY : All political parties registered under section 29A of the Representation of the Peoples Act, 1951, are eligible for exemption under section 13A of the Income Tax Act. Thus, any party which is not registered with the Election Commission, would not enjoy this exemption. 

(C) WHICH INCOME EXEMPT : Income under the head income from ‘House Property’, ‘Income from Other Sources’,‘Capital Gain’ and income by way of voluntary contribution received by the political parties are eligible for exemption. In other words, business income of political parties, if earned, is taxable. The major source of income of any political party is in the form of donations and contributions received from individuals and corporates, coupon sales and interest on investment made out of surplus fund. All these incomes enjoy exemption. 

(D) CONDITIONS FOR EXEMPTION OF INCOME : 

(a) Maintenance of books of accounts and other documents mandatory
(b) Maintenance of records with names and address of the donors from whom donations in excess of Rs20,000 received.
(c) Accounts need to be audited by independent Chartered Accountants
(d) No donation of Rs2,000 or more shall be received in cash
(e) Compulsory filing of their return of income, as provided in Section 139(4B) on or before due date of filing the income tax return.
(f) Submitting a report to the Election Commission under section 29C(3) of the Representation of Peoples Act, 1951 

Thus, if any of the condition is not satisfied, the political party shall lose its exemption under section 13A of the Income Tax Act. 

(E) DEDUCTION IN THE HANDS OF DONOR: Indian companies are entitled for full deduction in their tax returns of the contributions given to any political party, provided the contribution is not by way of cash under section 80GGB of the Income Tax Act..

Similarly, non-corporate entities will also be entitled for deduction while computing their income, provided the donation is not by way of cash under section 80GGC of the Income Tax Act. 

(F) WHETHER POLITICAL PARTIES ARE SUBJECT TO SCRUTINY OF INCOME TAX: Yes – all the political parties are subject to scrutiny provisions of the Income Tax Act. The Assessing Officer having jurisdiction over a particular political party can issue notice calling for certain information and records for his verification and examination. All the relevant provisions of the Act relating to scrutiny assessment are also applicable to the political parties. 

(G) DEMONETIZATION EFFECT Any political party which has deposited old Rs500 and Rs1000 notes in their accounts would still enjoy exemption, provided donation taken are below Rs20,000 per individual and properly documented. 

(H) CONCLUSION : Under the amended provisions of the Income Tax Act, political parties enjoy exemption if all the conditions prescribed above are fulfilled. If any condition is not fulfilled, then it loses the exemption and the entire income is taxable under the provision of the Income Tax Act. With the cap of Rs2,000 for cash donation, misuse of exemption provisions would reduce substantially. The compulsory filing of return before the due date would also make the accounts of political parties more transparent. A new scheme of issuing Electoral Bonds would also reduce misuse and utilisation of black money by the political parties.