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Wednesday, Jun 26, 2002

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`Tax'ing political donations

C. P. Ramaswami

IT IS proposed that political funding is legalised. To that end a Bill was introduced in Parliament in March. This means that donors (Indian companies or residents) would be exempt from paying income-tax for donations to political parties. Political parties would also not have to pay tax on such donations, so long as they file annual reports with the Election Commission giving details of donations received and of the expenditure incurred therefrom. There are proposals to amend the Representation of People Act, the Companies Act and the Income-tax Act. These amendments have been introduced through the `Election and Other Related Laws (Amendment) Bill, 2002'.

Representation of People Act

In terms of the proposed Section 29B of the RP Act, any political party registered with the Election Commission can accept donations from any person or a company. So who cannot donate?

Those specifically prohibited from making donations are government companies; local authorities and every artificial juridical person wholly or partly funded by the government; any foreign government or its agency; any international agency; foreign companies; MNCs; corporations incorporated in a foreign country or territory; foreign trade unions; foreign trusts; any association, society or club registered outside India; foreign citizens; and, an Indian company with more than 50 per cent shares held by any of the foreign sources listed above (the UN, World Bank, IMF, ADB, etc, are not prohibited).

Obligations of political parties

The proposed Section 29C of the RP Act imposes certain obligations on political parties and these are:

The treasurer of every political party should file a report for each financial year with the Election Commission, providing details of donations received from companies and others and the expenditure incurred during that year. It should be filed before the end of the relevant financial year. There is no provision for extension of time limit for submission of this report by the treasurer. The treasurer's failure to do so will lead to all incomes (including donations) being taxed. This means that the exemption provided under Section 13A of the I-T Act would not be available for that year to the political party concerned. Besides, the report will specifically certify that each donor is eligible to donate to the political party.

The Bill prescribes that donations received may be spent on constituency campaign expenditure and on general party campaigns. Such expenditure may not be added to the tally of the individual candidate's expenditure (in an election). Thus, the limits laid down for election expenses by individual candidates for Parliament and Assembly elections would not be affected.

The political parties are required to maintain and furnish the names and addresses of the donors to the I-T authorities only if donations exceed Rs 20,000 (the present limit is Rs 10,000).

The Election Commission will get the annual reports of political parties audited by the C&AG or competent auditors. The Government will lay these reports before Parliament.

Amendments to I-T Act

The exemption under the IT Act (Section 13A) will be denied (for any year) to any political party whose treasurer fails to submit the annual report before the end of that given financial year.

Two new sections are proposed to be inserted in the Bill. Section 88D grants tax relief to donations given by Indian companies. In Section 2(26) of the I-T Act an `Indian company' is defined as one registered under the Companies Act, or established under an Act of Parliament or State Legislature or one declared as such by CBDT or one registered under any law of the State or Union Territories.

The company's registered, or principal, office should be situated in India. A reduction in the taxable income will be equal to the donation contributed. Section 293A of the Companies Act, 1956, limits contribution to political parties to 5 per cent of the average net profit determined under specific provisions of Companies Act for the three immediately preceding financial years. Such contributions should be backed by a resolution of the company's board of directors to justify the donation.

The proposed Section 88D reads: "Tax relief in relation to donation given by companies to political parties. In computing the amount of income-tax on the total income of an Indian company with which it is chargeable for any assessment year, there shall be allowed from the amount of income (as computed before allowing the deduction under this section) a deduction of an amount contributed directly or indirectly to any political party or for any political purpose to any person."

Explanation: "For the removal of doubts, it is hereby declared that for the purposes of this section, the word "contribute", with its grammatical variation, has the meaning assigned to it under Section 293A of the Companies Act, 1956 (1 of 1956) and includes the donation accepted by the political parties in pursuance of Section 29B of the Representation of the People Act, 1951 (43 of 1951)."

The contributions may be direct or indirect. Advertisements in souvenirs published by political parties would also be eligible for deduction.

However, the Bill does not propose to delete Section 37(2B) of IT Act which provides that no allowance shall be made with respect to expenditure incurred by an assessee on advertisement in souvenir, brochure, tract, pamphlet, etc, published by a political party.

Section 88E proposes to grant tax relief in relation to donations given by any person to political parties. The proposed Section 88E reads: "Tax relief in relation to donations given by any person to political parties: In computing the amount of income-tax on the total income of the assessee, being any person, except local authority and every artificial juridical person wholly or partially funded by the Government, resident or having place of business, in India, or outside India, with which it is chargeable for any assessment year, there shall be allowed from the amount of income (as computed before allowing the deduction under this section) a deduction of an amount donated to a political party."

Apparently this section is meant for assessees other than Indian companies. The definition of `Person' in Section 2(31) includes an individual, a Hindu undivided family, a company, a firm, an association of persons or body of individuals whether incorporated or not, a local authority and every artificial juridical person not falling within any of the proceeding sub-clauses. The exclusion, "every artificial juridical person wholly or partially funded by the Government", will restrict many entities from making political donations.

According to The Law Lexicon (P. Ramanath Aiyer, Second Edition, 2001, page 767): "The word `fund' may mean actual cash resources of a particular kind (for instance, money in a drawer or a bank), or it may be a mere accountancy expression used to describe a particular category which a person uses in making up his accounts (R. K. Dalmia vs Delhi Administration). According to A Dictionary of Accounting, Oxford Reference, `fund' means "(1) A resource managed on behalf of a client by a financial institution; (2) a separate pool of monetary and other resources used to support designated activities."

All government companies are prohibited from making donations to political parties. Further, every corporate entity, which has borrowed from a public sector bank or financial institution can be called a person `partially funded by the government'. Such entity may be ineligible to make a donation. However, the donee political party may give a certificate of eligibility. When the exemption is claimed under the IT Act for such a donation, the same might be negatived. In such circumstances, the purpose of legalising political funding may not be fully served.

Some suggestions

The proposed amendments to the I-T Act are to be placed in Part A of Chapter VIII dealing with the rebate of I-T. However, the proposed Sections 88D and 88E provide for deduction from total income equal to the amount of donation. It appears incongruous. It would be a better proposition to relocate these provisions under Section 80G of the I-T Act. Provisions of Section 37(2B) of the I-T Act have to be deleted simultaneously to make the proposals workable. The phrase "partially funded by the government" could be provided in the Bill with a view to avoid litigation. It would be better to define the word funding.

Similarly, the definition of `government' may also be provided. This definition is required to identify those who can donate and those who cannot. The General Clauses Acts, 1897, gives an inclusive definition of `government'. Section 3 clause 23 of that Act reads: "Government" or "the Government" shall include both the Central Government and any State Government.

  • The power to treat a donor as an eligible donor may be vested with either the Election Commission or the I-T Department or Chief Electoral Officer of each State, instead of the political party concerned.

  • One more significant suggestion is with regard to donors, who might make donations of up to Rs 20,000. In terms of Section 13A of the I-T Act, the political party receiving such donations is not obliged to maintain names and addresses of donors (presently the limit is Rs 10,000, which is proposed to be enhanced to Rs 20,000). If such donors want to claim exemption under the I-T Act, corroborative particulars may not be available with the political party.

  • Alternatively, the names and addresses of such donors should also be made to appear in the treasurer's report to the Election Commission. The I-T Department can, if necessary, then verify the particulars with the Election Commission.

    While prescribing the format of the report, the Election Commission may like to include such details also to be furnished by political parties. The Bill has been introduced to make the electoral process clean, fair and free from corrupt influences. The suggestions have been made (supra) with a view to making these amendments easily workable and enforceable.

    More electoral reforms must follow for the overall reduction of election expenditure, making the election process democratically transparent and leading to good governance.

    (The author is a member of the IRS.)

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