A lot of hue and cry is being raised in the media and social media on the tax-exempt status of the political parties and the possibility of these parties being used as a money-laundering tool post demonetization. While the outrage is indeed based on some facts (such as tax-exempt status of the political parties registered with the Election Commission), the reports suppress some of the key facts, such as the exemption being a 35-year-old law, and that political parties are subject to a number of other regulations that make it difficult to launder money with impunity.
Exemptions Available to the Political Parties
The political parties, like many other social service organization (e.g., NGOs, clubs (Rotary Club, Lions Club), foundations, educational trusts, trusts running hospitals etc.), are exempt from payment of Income Tax. Section 13A of the Income Tax Act specifies that 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. This exemption is subject to the maintenance of books of accounts and other necessary documents, and audit of the accounts.
The exemption is granted because the political parties do not (are not expected to) work for profit but are engaged in the political activities. In any democracy that has multi-party system, people must have a freedom to organize themselves for conducting political activities within the framework of the constitution. However, this exemption granted to the political parties comes with certain obligations, such as maintaining the books of accounts, audit of accounts, filing of the returns with the Election Commission and the filing of returns with the Income Tax Department. Thus, the political parties are subjected to the scrutiny of their auditors, the Income Tax Department and the Election Commission. Similar privileges and obligations exist for other social service organizations mentioned above. The Right to Information Act was extended to the political parties by the Central Information Commission (CIC) in 2013; however, this extension of the remit is being contested by some of the parties.
Election Commission of India’s Guidelines
The Election Commission of India (ECI) has published guidelines for registration of political parties under Section 29A of the Representation of the People Act, 1951, and Registration of Political Parties (Furnishing of Additional Particulars) Order, 1992. The guidelines provide for a format of the application and the mode of submission of the application. The guidelines specify that (1) the party’s funds are to be utilized for political activities only, (2) the accounts must be maintained on accrual system (against cash basis), (3) the accounts must be annually audited by Auditor on the panel of CAG, and (4) the audited annual accounts must be submitted to the ECI within 6 months of the end of financial year.
Additionally, details of bank account and Permanent Account Number (PAN) of the party must be furnished to the ECI. Affidavits from the office bearers of the main organs of the party in respect of their assets and liabilities must be furnished. The office bearers of the party must furnish a copy of their Income Tax Returns (ITR) filed for the last three years, if they are income tax payees. In case any office bearer is not Income Tax payee he/she has to furnish certified details of his/her monthly income along with source of income. The details of PAN Card must be furnished in respect of office bearers of the party. These provisions are in addition to other provisions such as disclosure of criminal cases against the office bearers, declaration about internal democracy and elections, and adherence to the values embodied in the Constitution of India. Under the ECI Guidelines, the political parties must also submit the details of expenditure incurred on the elections.
Compliance with Guidelines and the Rules
It can thus be seen that the political parties are subject to extensive regulations and monitoring. However, in practice, these rules have been observed more in breach than in practice. Some of the examples below illustrate this point.
- Three recognized national parties have not filed the annual returns for the financial year 2015-16 before the October, 2016 deadline
- Three recognized national parties filed the annual returns with a delay, for the financial year 2014-15
- Three recognized national parties filed statement of election expenditure after the due date, for the General Election to Lok Sabha 2014 & Legislative Assembly of Andhra Pradesh, Arunachal Pradesh, Odissa and Sikkim, 2014
- Three recognized national parties filed statement of election expenditure after the due date, for the General Election to Legislative Assemblies of NCT of Delhi. 2015
- Two recognized national parties filed contribution report after the due date, for the or the financial year 2015-16
- Four recognized national parties have delayed filing of Annual Audit Reports, for the or the financial year 2015-16
- Three recognized national parties delayed filing of Annual Audit Reports, for the or the financial year 2014-15
The above deviations are noteworthy since there are only 7 recognized national parties. The status of compliance by the approx. 60 state level recognized parties is much worse. The status of compliance by the registered but unrecognized parties (approx. 1800) is unknown.
Thus, the anger of the public towards the non-compliance of the regulations by the political parties and the possibility of misuse of tax-exempt status is understandable. To say that the politicians and political parties face a severe credibility crisis, would probably be an understatement of the century!
Donations from Unknown Sources
The recent outrage around donations to the political parties has its origins in the demonetization decision announced on the 8th November 2016. The reports on the social media and the mainstream media focus on the donations received by the political parties in cash, where the donor details are not collected, for individual donations of less than Rs. 20,000.
The Association of Democratic Reforms’ (ADR) analysis of donations received by the six recognized national parties during the years 2007-08, 2008-09 and 2009-2010 shows that around 89% of the donations reported were for amounts less than Rs. 20,000. Naturally, there is a possibility of black money being diverted for political activities. The possibility of such donations zooming up post-demonetization cannot be ruled out. However, such a possibility exists for other tax-exempt organizations, such as NGOs, religious institutions, educational trusts and trusts running hospitals, as well.
Tightening the Regulations for Political Funding
While certain amount of outrage is understandable, it is difficult to understand why the political parties are being singled out. While there is no need for special treatment of political parties, there is no need to penalize a perfectly legitimate political activity, which is essential for a vibrant democracy. Some of the regulatory changes, however, can be made:
- The amount that can be accepted by a political party in cash should be reduced from the current Rs. 20,000 per contribution. The ECI has proposed Rs 2000 limit for cash donations; however even this limit can be circumvented by splitting the amount and issuing separate receipts.
- The Name, Address and PAN or Aadhar details of the contributor must be made mandatory for each contribution, regardless of the amount involved. With over 93% Indian adults having Aadhar identification, this should not pose an issue.
- The political parties must deposit the contributions received in a bank account maintained with a scheduled bank within one week of the receipt. This will make it easier for the tax officials to identify any suspicious activities.
- The parties must file the returns of contributions with ECI electronically every week, and the ECI should publish these on its website. Currently donations less than Rs 20,000 are not required to be reported to the ECI. This leaves a scope for manipulation. Hence all donations, whether received in cash or otherwise, or for whatever amount, must be reported to the EC.
- It is possible that the party receives a contribution but has inadequate details of the contributor. In such case, it should be mandatory for the party to those as ‘suspense’ contributions, and resolve within one month, or refund it in entirety.
- There is no reason for secrecy around a legitimate social activity. The ECI should make it mandatory to publish accounts every quarter, rather than the annual reports.
- The ECI should weed out the parties which have not fought elections, or have continuously failed in winning seats in 3 consecutive elections. The Commission has already proposed that exemption of Income Tax should only be extended to political parties that contest elections and win seats in Lok Sabha or assembly polls.
With Demonetization, the Modi government has shown a lot of courage in tackling the menace of black money. The government should go further and plug the loopholes in political funding.