Income Tax on Political Parties

Introduction

Political parties are easily one of the most visible institutions in a democracy. For any ordinary citizen, democracy is equal to a political party. India is the largest democratic Country in the World. It has a large number of national and regional parties. The political parties are the heart and soul of the democratic structure of any country. Political parties play a key role in democracies as they contest elections, form governments and policies and are responsible for providing Government and for the improvement of the lives of the common man.

Meaning of Political Parties

To be a member of a political party implies to be a part of a group of individuals who share a shared ideology and who adhere to a common platform and a common course of action. There is cohesion in terms of behaviour and strategy within the party. It need to be highly structured, and a successful political party is expected to have members who adhere to the rules. According to Maclver, "a political party is an association organized in support of some principles or policies which by constitutional means it endeavours to make the determinant of Government."

Herman Finer defined it as "an organized body with voluntary membership, its concerted energy being employed in the pursuit of political power."

Edmund Burke, it is "a body of men united for promoting by their joint endeavours the national interest upon some particular principle in which they are all agreed."

Characteristics of Political Party

A political party may be defined as an organized collection of people who believe in the same fundamental values and long-term objectives.

It employs constitutional and peaceful methods in seeking control over the Government through elections, and once it is in power, it translates its declared objectives into governmental policies in order to accomplish the goals it has set forth while it is in power. Its goals revolve around gaining political power through collective efforts.

The sections relating to Tax exemption on Political Parties

Section 13A is the Section in the Income Tax Act 1961 that talks about the exemption of income received by the Political parties. Section 13A of the Income Tax Act, 1961 reads as under.

"13A. Any income of a political party which is chargeable under the head "Income from house property" or "Income from other sources" or "Capital gains" or any income by way of voluntary contributions received by a political party from any person shall not be included in the total income of the previous year of such political party :

Provided that -

(a) such political party keeps and maintains such books of account and other documents as would enable the Assessing Officer to properly deduce its income therefrom;

(b) in respect of each such voluntary contribution in excess of twenty thousand rupees, such political party keeps and maintains a record of such contribution and the name and address of the person who has made such contribution; and

(c) the accounts of such political party are audited by an accountant as defined in the Explanation below sub-section (2) of section 288 :

Provided further that if the treasurer of such political party or any other person authorized by that political party in this behalf fails to submit a report under sub-section (3) of Section 29C of the Representation of the People Act, 1951 (43 of 1951) for a financial year, no exemption under this Section shall be available for that political party for such financial year.

Explanation. - For the purposes of this Section, "political party" means a political party registered under section 29A of the Representation of the People Act, 1951 (43 of 1951)."

Plain reading of the above Section explains that any income which is chargeable under the head of "Income from house property" or "Income from other sources" or "Capital gains" or any income by way of voluntary contributions received by any person is not to be added to the total income of the previous year of such political party.

For any political party to avail of the benefits of Section 13A should comply with the following conditions.

1. The Political party should be registered under Section 29A of the Representation of People Act, 1951.
2. The Political party should maintain books of accounts and other documents for the formulation of income.
3. To maintain a record of contributions received above 20000/- rupees that include the name of the donor, his address etc.
4. To get the books of accounts audited by a Chartered Accountant.
5. As per 29C of the Representation of People Act, 1951, the political party has to furnish the list of all the contributions received by them by way of above 20000/- to the Election Commission of India for the relevant financial year to avail benefit of exemption under Section 13A.

Another important point to be noted before the availment of the benefit under Section 13A is that the political party should be registered under Section 29A of the Representation of the People Act, 1951.

What is the Representation of the People Act?

Representation of the People Act, 1951 was enacted to create the legal framework for the conduct of elections, talks about provisions relating to the registration of political parties and also about the voluntary contribution received by the Political party.

The Section pertaining to Political party registration, contributions are

Section 2(f) of the Representation of the People Act, 1951 defined the word "political party" which reads as under.

"Political Party means an association or a body of individual citizens of India registered with the Election Commission as a political party under Section 29A"

Section 29A details the registration with the Election Commission of association and bodies as Political parties.

The prerequisite for the availment of the benefit under Section 13A of the Income Tax, 1961 is the compulsory registration of a political party under Section 29A of the Representation of the People Act, 1951.

Once the political party is registered under Section 29A of the Representation of the People Act, the benefits under Section 13A of the Income Tax Act are available, or else they are not available.

Voluntary contribution from a person, that is to say, any individual, company or HUF are a very important source of income for any political party.

As per the law insider dictionary, voluntary contribution are

"Those contributions given freely, without pressure or coercion."

Section 29B of the Representation of the People Act, 1951 talks about the provision relating to the acceptance of contribution by the Political Party. The Section reads as under.

"29B. Political parties entitled to accept contribution.—Subject to the provisions of the Companies Act, 1956 (1 of 1956), every political party may accept any amount of contribution voluntarily offered to it by any person or company other than a Government company: Provided that no political party shall be eligible to accept any contribution from any foreign source defined under clause (e) of section 2 of the Foreign Contribution (Regulation) Act, 1976 (49 of 1976).

(b) "Government company" means a company within the meaning of section 617; and

(c) "contribution" has the meaning assigned to it under section 293A, of the Companies Act, 1956 (1 of 1956) and includes any donation or subscription offered by any person to a political party;

and (d) "person" has the meaning assigned to it under clause (31) of section 2 of the Income-tax Act, 1961 (43 of 1961), but does not include Government company, local authority and every artificial juridical person wholly or partially funded by the Government."

As per the Section 29B of the Representation of the People Act. The political parties can accept voluntary contributions from any person, either natural or artificial, except a Government Company, local authorities, and any Company either funded partially or wholly by the Government.

The types of donations accepted by Political parties in India are as follows.

1. Direct Funding: Funding by way of any monetary contribution.
2. Indirect Funding: Funding by way of providing free facilities to the political parties.
3. Corporate Funding: Funding by any Company registered under the Company Act.
4. Electoral Trusts: In this type of funding, a NGO is created for orderly receipt of voluntary contributions from any person.
5. Electoral bonds: Bonds are provided by scheduled commercial banks to any person for the purpose of donating to political parties.

Another important prerequisite for availing of exemption on income of political parties under Section 13A of the Income Tax is the preparation of a report in respect of any contribution received by the political parties. If the political parties fail to submit the report to the Election Commission, then the benefit under the Section is not available.

Section 29C of the Representation of the People Act, 1951 reads as under.

"29C. Declaration of donation received by the political parties.—(1) The treasurer of a political party or any other person authorized by the political party in this behalf shall, in each financial year, prepare a report in respect of the following, namely:—

(a) the contribution in excess of twenty thousand rupees received by such political party from any person in that financial year;

(b) the contribution in excess of twenty thousand rupees received by such political party from companies other than Government companies in that financial year.

(2) The report under sub-section (1) shall be in such form as may be prescribed.

(3) The report for a financial year under sub-section (1) shall be submitted by the treasurer of a political party or any other person authorized by the political party in this behalf before the due date for furnishing a return of its income of that financial year under section 139 of the Income-tax Act, 1961 (43 of 1961), to the Election Commission.

(4) Where the treasurer of any political party or any other person authorized by the political party in this behalf fails to submit a report under sub-section (3) then, notwithstanding anything contained in the Income-tax Act, 1961 (43 of 1961), such political party shall not be entitled to any tax relief under that Act.]"

Till now we have talked about the legal aspects for availment of benefit under the Income Tax Act, 1961.

Return

Return: Political parties are required to furnish the information on income in FORM ITR 7. The information to be furnished in return are

1. Balance Sheet.
2. Income and Expenditure Account.
3. Contribution report.

Advantages of giving exemption under Income Tax Act for Political Parties

1. One of the biggest advantages of providing exemption under Income Tax on political parties' income is to encourage the new party to come up. In the setup like in India, when more political parties come up, they provide a balance and a strong opposition.
2. Suppose the political parties are kept under the purview of the Income Tax Act. The main purpose for which the political parties are created will be defeated. If the political parties are made to pay tax on the income received by them, the political parties will not participate in any of the elections and try to hide any income received from them, which is bad for the Country.
3. When the person is donating to any political party, they are given an exemption under the Income Tax Act. In a way, by giving exemption to the person, the person can contribute to well being of any political party he thinks fits and help them to contest elections.
4. Relief from the clutches of the Income Tax Department.
5. The ruling party cannot use the tax mechanism to harass the opposition party.
6. If the money is not taxed, it will be helpful for the political party's campaigns.

Benefits of voluntary contributions

For Corporate or Company

A Company or a Corporate firm can claim tax deductions for the amount donated to any political party. Section 80GGB laid downs the conditions for the same.

Eligibility Criteria

1. The amount contributed should never be in cash if you want to be eligible for tax deductions. When determining eligibility for benefits, donations made via other methods, such as demand draughts, electronic payments, and cheques, are taken into consideration. This is done to guarantee that records of the money that is being provided for a political party are kept.

2. Donations should be provided to a political party that is registered in accordance with Section 29A of the Representation of the People Act, which was passed in 1951. 3. Donations that are provided to electoral trusts are able to qualify for a deduction under Section 80 GGC, as long as the money is given to such trusts.

3. Any individual may accept the contribution, with the exception of members of the local authority or anybody who receives funding, in whole or in part, from the government.

The amount so donated by any Company is 100% tax-deductible under Section 80GGB.

For Individuals

Section 80GGC talks about tax deductions for individuals from voluntary contributions made by them to any political parties.

The amount so donated by any Company is 100% tax-deductible under Section 80GGC.

Conclusion

Therefore, its clear from the above conclusion that political parties play a great role in the democratic structure, and taxing them for the income they earn or would earn will be counterproductive and restrict the entry of new political parties and few parties will try to keep the power within them. Hence, Section 13A in the current form provides for conditions and restrictions on the way how they can claim exemption on income accrued.