Income-tax assessment of political parties to be re-looked

Introduction

Political parties in democratic set ups are essential for successful functioning of the Govts. To enable such parties to play their role pragmatically, unmindful of problems concerning their finances, the Income Tax laws of various countries generally exempt the incomes derived by such parties from assets owned, from other sources, from capital gains and from the donations received from payment of income tax. India also follows such wholesome practice.

Section 13A of the I.T. Act, 1961 (Act)

Section 13A of the Act provides that the following categories of income derived by a political party are not included in computing its total income:

(a)  any income, which is chargeable under the heads "income from house property", 'capital gains' and 'income from other sources; and

(b)  any income by way of voluntary contributions.

A political party is not expected to indulge in business activities and hence, business income taxable u/s 28 of the Act has not been mentioned as income exempt from tax.

Meaning of Political Party [PP]

The phrase 'PP' for the purpose of availing of benefit u/s 13A of the Act means an association or body of individual citizens of India registered u/s 29A of the Representation of People Act, 1951, which implies registration with the Election Commission of India also. In other words, those parties, who do not fulfill the abovementioned conditions, cannot claim exemption from tax for any part of their income.

Issues relating to the assessment PPs

The law relating to exemption of income of PPs (supra) raises issues relating to transparency in their functioning, inter-alia, concerning their funding. An important issue in this context relates to limit of Rs.20,000/- mentioned in section 13A to the effect that PPs can claim exemption under the section despite the fact that they have not complied with the conditions mentioned in the section in regard to contributions received upto Rs.20,000/-. Thus, PPs can receive sums upto Rs.20,000/- with no obligation to disclose the identities of the donors. There is no bar for receiving donations upto this limit even from money generated through corruption, illegal activities or as black money. It is irony that those sponsored by such parties and elected as representatives in Parliament and State Assemblies to clean up the corrupt system and unaccounted money from the economy have themselves reached to such august bodies with the help of such tainted money collected by the parties to which they belong. Thus, the limit of Rs.20,000/- in section 13A provides a big lacuna in this provision of the Act and needs to be removed. It is open secret that bulk of donations to PPs comprise of sums of Rs.20,000/- or less. Media reports show that major parties have shown their contributions upto 80 or 85% of total amount to have been received in sums of Rs.20,000/- or less. One major party in UP, showing crores as contributions, has said that it has not received any contribution above Rs.20,000/- and is not required to file any details to the Election Commission.

It is also distressing to note that in most studies and otherwise in common perception, an important cause for generation of black money is said to be contribution to PPs. In early eighties (1984-85), a Committee headed by Dr.Shankar Acharya (with inputs by Dr.Raja Chelliah) under the auspices of IIPFM has said that political contributions have been an important factor for generation of black money. Earlier and later committees, like Wanchoo Committee, A.L. Jha Committee, etc., have also expressed similar views.

The issue then is as to why this state of affairs should continue when almost the entire currency system of the country has been ravaged by demonetization of Rs.500 & Rs.1,000 notes, making the people of the country stand in long queues for drawing limited amounts from their own money in banks and ATMs – in the exercise, some people dying also in the processes for checking black money and corruption. There seems to be no reason why the provision relating to exemption to PPs i.e. section 13A should not be amended to stop such (mal) practice. It may be mentioned that the Election Commission has already expressed its concern to the present section 13A and has suggested to the Govt. that the limit of Rs.20,000/- in section 13A be reduced to Rs.2,000/-. This limit too is likely to be misused by showing major contributions to have been received in sums of Rs.2,000/- only. Hence, in my view, there should be no monetary limit at all. There is no reason why every rupee received by PPs be not accounted for. However, in deference to the view of the Election Commission, the limit of Rs.2,000/- in place of Rs.20,000/- can be retained. This will also enable PPs to disburse small sums in cash. Hence, Rs.2,000/- limit can be tried for some time and can be removed later, if it is also found to be misused.

Suggested Amendment

The change can be effected by the coming Finance Bill, 2017 by replacing the figure of Rs.20,000/- by Rs.2,000/- in proviso (b) to section 13A of the Act. In the present scenario, when there is so much stress on eradication of corruption and black money from the economy by the PM & FM, there should be no problem in making this change in the I.T. Act by the coming Finance Bill, 2017.

Whole electoral system needs to be cleaned

The suggestion regarding Rs.20,000/- limit is merely one suggestion in view of little time available in the context of Finance Bill, 2017. However, the entire electoral system presently in vogue needs to be cleaned and such operation will not be possible merely through the I.T. Act. Actually for this, strong political will is needed. There is no dearth of suggestions. The Electoral Reforms suggestions by expert bodies like Goswami Committee in 1990, Indrajeet Gupta Committee in 1998, Law Commission's Report on electoral law reforms (1999), Election Commission of India's report on proposed Electoral Reforms (2004) and Administrative Reforms Commission's Report (2008) are some of the attempts made to reform the electoral system in the country but all these are geathering dust as no PP has shown any will or grit to make reforms in electoral system in the country. In this context, it is heartening to find that the Shri Narendra Modi, the PM, has shown will and inclination to make poll reforms as a part of his drive to check corruption saying that his party – BJP – will be proactive in disclosing funds received by it and urged to other parties to follow suit. At the BJP executive meeting on 7.1.2017, he is reported to have said [Times of India dt. 8.1.2017 front page report) that "…. a culture of transparency is emerging in the country and politician should use this wisdom to bring in transparency". Hence, in the coming budget, the change suggested in section 13A (supra) needs to be implemented to start with. Other reforms can follow.

Make PP also adhere to cashless transactions

Another matter, which needs immediate consideration in the context of PPs is adherence to cashless transactions. The PM has been a great votary for making country cashless and exhorting everyone to be digital and avoid cash deals. He has been most enthusiastically advocating payments through internet banking, mobile wallets, IMPs, credit/debit cards, aadhar cards, Paytm, etc. When such is the emphasis on electronic payments, there seems to be no reason why PPs should not adhere to such discipline and continue to receive contributions and make payments in cash. These too should adhere to cashless ways for receipts and expenditure. Making exception in their cases would tantamount to discrimination. To put pressure on them, it could be provided in section 13A that cash receipts and disbursements would not be admissible for income tax exemption benefit.