Insights into Editorial: Supreme Court rejects plea to make it mandatory for parties to declare source of funds
The Supreme Court of India has rejected a plea to make it mandatory for parties to declare source of funds. With this political parties will continue to enjoy income tax exemption for the funds they collect. The court has observed that there is no illegality in the exception made to keep parties out of the tax net.
- The decision puts to rest the debate over whether the exemption was an unfair privilege granted to political parties. The apex court said the matter was one of executive determination and parties needed money to propagate their beliefs.
Background:
A petition was filed in the Supreme Court challenging the constitutional validity of Section 13A of the Income Tax Act which grants exemption to political parties.
Section 13A of the IT Act says any income of a registered political party which is chargeable under the head “income” from house property or from other sources 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.
Why are funds to political parties not taxed?
- As per current rules, political parties in India are barred from undertaking any commercial activity and thus they are not deemed to be engaged in acts that make them liable to pay any income tax.
- Also, CBDT says exemption is provided in recognition of the role played by organised political parties in the democratic set-up of the country and to provide further necessary incentives to promote the activities of such political parties as are recognised by the Representation of People Act, 1951.
- Political parties also require funds in order to carry out a variety of activities including contesting of elections, organising meetings and rallies, publishing literature among others. Also these activities are both of a regular nature, such as organising of rallies and bringing out publications, and also periodic with respect to certain matters such as conducting elections. Accordingly political parties have been granted certain exemptions and deductions to that they are able to utilise maximum funds for the public purpose of political activity.
What are the main concerns now?
- Donations below 20,000 rupees, currently, are not required to be reported to the ECI but they have to be reported in the ITR. Political parties are essentially not required to disclose details of those donating below 20,000 rupees. This exemption is being misused by political parties. Simple study of IT returns of any political party will show that maximum donations to them are from such ‘unknown’ sources.
- With this exemption parties can take money and show them as donations below 20,000 rupees and try to convert it into white money for a ‘cut’.
- Section 80GGB is a new insertion in the Income-tax Act, 1961. This enables Indian companies to get full deduction in their income-tax assessments for contributions made to political parties. Interestingly, there is no ceiling fixed on the amount of such contribution. Section 80GGC gives similar deduction for non-company taxpayers. This has also raised concerns among others.
- Presently, there are 1,848 registered political parties and some parties misuse the law to hold unaccounted money.
What needs to be done to increase the transparency?
- Tax exemption limit should be reviewed. The government should consider lowering the current limit of Rs 20,000 for anonymous donations.
- Parties that have been inactive and are suspected to be using their status largely to launder unaccounted and illegal money should be de-registered.
- The Income tax details of parties should be made public. This will need an amendment to the Representation of Peoples act and the IT act.
- Unrecognized political parties can be brought under the tax net. There are now close to 2,000 political parties in India and there is no reason why a de-recognised party should get this benefit, at a time when there is concern at the proliferation of parties and votes getting split because of non-serious contenders being in the contest.
- The mother-of-all-reforms is to clean up political funding. Every political party should disclose its spending and sources of financing those expenses. These claims can be contested by other parties and watchdog bodies, with the Election Commission making the final verification.
Conclusion:
Poll funding has been a source of funnelling black money and cleaning up the poll process is necessary. Looking at the number of parties in India, it is easy to suspect that some of them have been floated by national or state parties to park their income from dubious sources, because such parties are not subject to the Election Commission’s scrutiny.
The strange paradox of democracy is that while it is a tool to create an equitable society, its props, of which political parties are the main, sometimes give rise to opposite forces. So it is strong institutions such as the Election Commission that can provide a cushion against the forces than can subvert democracy. Legitimate political funding holds the key to stemming the generation of black money.
