NEW DELHI: The government is looking for ways to crack down on private donors who get significant tax breaks for donating money to political parties.
Under current income-tax regulations, companies that donate money to political parties are eligible for a tax exemption for amounts up to 5% of the firm’s average net profit for the previous three years.
But individuals, trusts, partnerships and associations can claim 100% tax exemption for all their donations to political parties, creating a very attractive funnel for money to flow into political parties.
The Union budget, which will be presented in Parliament at the end of this month, is likely to put a cap on the amount of non-company donations that will be eligible for a tax deduction.
“There is a view that donations by both companies and non-companies should get the same treatment. Since the move will require an amendment of the Income-Tax Act, it is expected to be incorporated in the budget,” said a Union finance ministry official, explaining why the plan has been mooted.
It is unclear how the government would arrive at the cap as some of these groups could be not-for-profit organizations.
The loophole stems from the Income-Tax Act of 1961, which provides for a 100% tax deduction on contributions to political parties made by companies under Section 80GGB. The word “contribution” is then defined in Section 293A of the Companies Act of 1956, which stipulates the 5% ceiling for companies. But entities other than companies can claim tax deduction under Section 80GGC of the Income-Tax Act. There is, however, no cap on the amount of contribution on which the tax deduction is available. This is what the finance ministry is seeking to correct in the budget, the officials said.
The move comes as the Election Commission has raised its concerns with the finance ministry over donations to some parties that are registered with it. According to ministry officials, the commission had asked them to examine the returns of several such “unrecognized” parties.
Several of the political parties had received donations on which deductions were claimed by donors between 2003 and 2006. The commission is considering making changes in the Representation of the People Act, 1951, to tighten the norms for unrecognized political parties to register with it.