Taxation of political parties

Introduction

Lok Sabha Elections are on the way. This may sound a trending topic these days to discuss the various sources of income and relative taxation of such income of political parties. It is interesting to get to know what all income tax benefits do these political parties enjoy and what all conditions they need to fulfill for same.

Definition of Political parties

In India political parties are governed by Representation of the People Act, 1951.

Its section 29A defines as to what constitutes a political party:-

• It must consist only of Indian citizens
• It must call itself a political party set up for the purpose of contesting elections to the Parliament and State Legislatures and for no other purpose.
• It must have at least 100 registered electors as its members.
• An application for registration (along with all supporting documents) is to be submitted to the Secretary of the Election Commission of India in the prescribed format

Sources of Income of Political parties

1. Donations:- It is the major source of income of political parties. Donations may come from various means like:-

• Cash
• Bank or
• Electoral bonds (explained below)

2. Income from House Property:- Including rent earned from various properties owned by such parties.
3. Income from Capital Gains:- Including short and long term gain earned on sale of various properties owned by political parties.
4. Income from other sources:- Including other income earned by such parties say interest income etc.

An important point to note here is that political parties are barred from taking any activity of commercial nature and thereby earning profits. Therefore, political parties cannot have business income.

In some cases , it may happen that political parties have to engage in some venture which may or may not result in profit, but these activities are ancillary to main work of political parties and thus it is not considered as business income, and instead forms part of income from other sources.

Example to above point may be of a canteen opened in the office of political parties, where food is served to members of such party. Income from such service (if paid) is considered as income from other source and not as business income.

What are Electoral Bonds?

• Electoral bond is a bearer instrument like a Promissory Note. It is similar to a bank note that is payable to the bearer on demand and free of interest. It can be purchased by any citizen of India or a body incorporated in India.

• The bonds are issued in multiples of Rs. 1,000, Rs. 10,000, Rs. 1 lakh, Rs. 10 lakh and Rs. 1 crore and are available at specified branches of State Bank of India. They can be bought by the donor with a KYC-compliant account. Donors can donate the bonds to their party of choice which can then be cashed in via the party's verified account within 15 days.

Income Tax Exemption available to Political parties

Section 13A of The Income Tax Act, 1961 provides 100% exemption from paying taxes to political parties for following incomes:-

1. Income from house property
2. Income from other sources
3. Income from Capital gains
4. Any income by way of voluntary contributions

Conditions for Availing Income tax exemption

Section 13A of The Income Tax Act, 1961 states that following conditions need to be satisfied to claim exemption under the act:-

1. Such political party keeps and maintains such books of account and other documents as would enable the Assessing Officer to properly deduce its income therefrom;
2. For each contribution above Rs. 20000 made other than by way of Electoral bonds, the political party

• has to keep and maintain record of each such contribution and
• the name and address of the donor of such contribution.

3. The accounts of such political party have to be audited by a Chartered Accountant holding certificate of practice and satisfying conditions specified under Section 288(2) of the act.
4. Such political party has not received any donation exceeding Rs. 2000 except by way of:-

• Account payee cheque
• Account payee bank draft
• Electronic Clearing System
• Electoral Bond

Return of Income of Political Parties

As per Section 139(4B) of the Income Tax Act, 1961, Political parties have to file their return of income in ITR-7 if the total income in respect of which the political party is assessable (without giving effect to the provisions of section 13A) exceeds the maximum amount which is not chargeable to income-tax.

The section puts responsibility of filing of return of income on the Chief Executive officer or Secretary or any other designation.