Electoral bonds: What SC verdict means for taxes

SBI has also been directed to disclose details of each electoral bond encashed by political parties.
SBI has also been directed to disclose details of each electoral bond encashed by political parties.

Summary

  • The apex court directed that the issuing bank, SBI, shall herewith stop the issuance of electoral bonds and submit complete details.

On 15 February, the Constitutional bench of the Supreme Court unanimously struck down the electoral bond scheme, holding it as unconstitutional, and in violation of the Right to Information provided in Article 19 of the Constitution of India. The scheme was notified in 2018 and enabled Indian companies and individuals to make contributions to any registered political party in India by way of an electoral bond, without any monetary threshold. The bonds, issued in the nature of promissory note which is a bearer banking instrument, did not carry the name of the buyer and were issued in denominations of 1,000, 10,000, 1 lakh, 10 lakh and 1 crore.

The apex court directed that the issuing bank, State Bank of India (SBI), shall herewith stop the issuance of electoral bonds and submit complete details—name of the purchaser and the denomination of the electoral bond. The SBI has also been directed to submit to the Election Commission of India (ECI) the details of political parties which have received contributions through electoral bonds since April 2019 till date. SBI has also been directed to disclose details of each electoral bond encashed by political parties. The Supreme Court has further directed SBI to submit the above information to the ECI by 6 March. The ECI has been directed to publish the information on its official website within one week, by 13 March.

As per the Income Tax Act, any Indian company or person, contributing to any registered political party in India through an electoral bond is eligible to claim the deduction of equivalent amount from its taxable income, under sections 80GGB and 80GGC, respectively. The Electoral Bond Scheme provided that the electoral bonds shall be available for purchase for a period of 10 days on a quarterly basis, in the months of January, April, July, and October and an additional period of 30 days in the year of general elections. The scheme also provided that such electoral bonds are valid for encashment by the concerned political party only for 15 days from the date of issue and no payment will be made to a political party if the bond is deposited after the expiry of 15 days. So, for FY 2023-24, the electoral bonds purchased in the specified months of April, July, October 2023 and in January 2024, would have already been encashed by the respective political parties, as the validity period of 15 days has already expired for all these four specified months.

The Supreme Court judgment directed that the electoral bonds which are within the validity period of 15 days but those that have not been encashed by the political party yet shall be returned by the political party or the purchaser depending on who is in possession of the bond to the issuing bank. The issuing bank, upon the return of the valid bond, shall refund the amount to the purchaser’s account.

This implies that the SC judgement, prima-facie, will not impact the deduction claimed by Indian companies, and individuals, u/s 80GGB and 80GGC, respectively, for FY 2023-24 and relevant to AY2024-25, in respect of the electoral bonds already purchased by them in the current FY2023-24. This is because the said donations via electoral bonds have not been directed to be refunded as the same would have already been encashed by the respective political parties, on the expiry of the 15 days validity period. Also, no direction has been given in the SC judgement suggesting scrapping of deduction u/s 80GGB or 80GGC.

The amendment in the Income Tax Act, granting relaxation to the political parties from maintaining and keeping complete records of contributions exceeding 20,000, received through electoral bonds, has now been struck down as unconstitutional, thus the political parties will be required to maintain complete records of electoral bond contributions received by them in the year 2023-24, in order to claim the income tax exemption in respect of such contributions.

Mayank Mohanka is the founder of TaxAaram India and a partner at S.M. Mohanka & Associates.

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