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Business News/ Opinion / Of political donations and expenses
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Of political donations and expenses

Donations made by a donor to a political party cannot be claimed as an expenditure

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

With election campaigning now in full swing, most political parties are now in fund raising mode. Donations could be in various forms—a pure and simple donation, a contribution for a political dinner or an advertisement in a souvenir published by a political party.

What is the tax treatment of donations to political parties, in the hands of the donor and in the hands of the receiving political party? Politicians also spend substantial amounts on their poll campaigns, can they claim a tax deduction for such expenditure?

As far as poll campaign expenditure is concerned, clearly it is not an expense incurred by the politician for earning an income (at least in theory, though maybe not in practice!). Therefore no tax deduction can be claimed for such expenditure.

As far as donations made by a donor to a political party are concerned, such a donation cannot be claimed as an expenditure even if the donor is carrying on a business and the donation is actuated by business considerations.

A businessman cannot claim that he has given an advertisement in a souvenir published by a political party for promoting his business and should therefore be allowed a deduction, as there is an express bar on claiming such expenditure as a business deduction.

However, the entire amount of donation is deductible under section 80GGC from the taxable income of the donor. A donor in the highest tax bracket would therefore save 33.99% of the donation that she makes to a political party or to an electoral trust. Unlike a donation to a charitable trust, where in most cases there is a limit of 10% of the gross total income to the extent of which donations qualify for a deduction, there is no such limit for deduction for donations to a political party. There is nothing to prevent a person from reducing her income to below the taxable limit by donating the income in excess of the taxable limit to a political party, which would not be possible for donations to most charitable trusts.

What is the taxability of such donations received by political parties? Is it taxable as their income? There is an express provision in the Income-tax Act exempting such donations received by registered political parties, along with property income and other income, including interest.

Such exemption is subject to three conditions—the party has to keep books of account and other documents which would enable computation of the income, for every donation of more than 10,000, the party has to keep records of the names and addresses of the donors, and the books of account of the party have to be audited by a chartered accountant. Further, no deduction is available for donations paid in cash.

It is a well known fact that most political parties have not been regular in filing their audited accounts with the tax authorities. Fortunately, the election commission has now required the parties to file their audited accounts with it by 31 October this year. However, since the income tax exemption is a conditional one, non-filing of audited accounts with the tax authorities should result in loss of income tax exemption, which does not seem to have happened in the case of any party so far.

The requirement of maintenance of a register for donations exceeding 10,000 serves no purpose. In fact, genuine donors, who want a deduction, would pay by cheque. Since most political donations are shown as received in cash, it is simple to reflect these as donations of 10,000 or less, and be exempt from the requirement of disclosing the names of the donors. Does this not encourage the entry of black money into party coffers? Is this not a major loophole?

For charitable trusts, there is a provision that all anonymous donations are to be taxed at a rate of 30% and are not entitled to exemption. The name and address of every donor is required to be maintained, irrespective of the amount of donation. This provision was inserted to check money laundering by introducing black money into charitable trusts and thereafter claiming exemption. Should there not be a similar provision for donations received by political parties?

It is perhaps time to rethink the manner of taxation of political parties, just as there has been rethinking on the exemption given to charitable trusts, where the exemption requirements have been made more stringent over the past decade. The question is: will our politicians have the will to change the law to their own detriment? Probably this will not happen until they are forced to do so, either by the election commission or by the courts.

Gautam Nayak is a chartered accountant.

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Published: 26 Mar 2014, 06:20 PM IST
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