Income Tax Department Cracks Down on Dubious Political Donations

The Income Tax (IT) department has launched a major crackdown on suspicious political donations, issuing hundreds of notices to individuals who contributed over ₹5 lakh to lesser-known political parties in the financial year 2020-21. The move comes after tax officials uncovered a large-scale tax evasion and money laundering scheme linked to fraudulent tax deductions under Section 80GGC.

Fake Donations, Cash Refunds & Tax Evasion

Investigations revealed that approximately 9,000 individuals had donated ₹5 lakh or more in FY 2020-21, claiming 100% tax deductions under the Income Tax Act. However, tax officials found that many of these donors received their donations back in cash, effectively making it a money laundering operation.

"Donors issued cheques to political parties but got the same amount returned in cash, with a commission of 1-3% charged for the transaction," a senior tax official stated.

Notices & Penalties for Taxpayers Involved

To curb such fraudulent claims, the IT department has sent summons and notices to individuals and corporates involved. The investigation wing has warned that taxpayers who voluntarily comply can file an updated return under Section 139(8A) and pay additional taxes up to 70%.

Failure to do so may result in a 200% penalty on tax evaded, with further legal consequences.

Widening Crackdown on Political Donations

This is not the first instance of scrutiny over political funding. In February 2023, the IT department had sent over 5,000 notices to donors of nearly 20 unrecognized political parties for contributions made in FY 2020-21 and FY 2021-22. Many individuals had to file updated returns and pay penalties after their tax deductions were flagged as fraudulent.

Additionally, CBDT's amendments to ITR-7-the income tax form used by political parties and charitable trusts-have led to the detection of mismatched donations, many of which are disproportionate to declared incomes.

The Need for Stricter Political Funding Regulations

Under current tax laws, there is no upper limit on donations to registered political parties, which has made the system vulnerable to misuse. This latest crackdown highlights the urgent need for stricter monitoring of political contributions to prevent tax evasion and money laundering.