In the wake of demonetisation of high-value currency notes, the Opposition has accused the Union Government and the ruling party at the Centre of destroying the country’s economy. In the forefront of the crusade is the Trinamul Congress followed by the Congress, BSP, SP, NCP, CPI-M, CPI and sundry other sign-board parties. In their agitation against the move, they have levelled several motives, some of them weird and sometimes, ridiculous. The most vociferous of these criticisms have been articulated by Trinamul supporters, led by Mamata Banerjee. The latest salvo relates to the alleged granting of an escape route to the parties in the context of the exemption provisions of the Income Tax Act, 1961. In the frenzy, the point that has been missed is that such provisions apply equally to her own party. It is alleged that the provision has been introduced with an ulterior agenda, though, the same remains unspecified till date. It would be fit and proper to examine the legal provision in some detail to remove the mental cobwebs distorting the thought process of the common man.
Exemption to political parties from the rigours of paying Income Tax has been provided in Section 13A of the Income Tax Act, 1961. Such a provision on exclusion is not new. It has not been enacted with a view to enabling such parties or their members to convert their non-tax paid income, hoarded in currency notes of Rs 500/1000, in the aftermath of demonetisation. The provision has in fact been on the statute book since 1 April 1979 as part of the Taxation Laws (Amendment) Act, 1979. It would be incorrect to state that it has been enacted to help unscrupulous people or political parties to convert their non-tax paid income into legitimate money through this exemption route. Further, as initially enacted, it did not exempt income from capital gains earned by the parties. The exemption was extended to capital gains on sale of capital assets by the parties with retrospective effect from 1 April 1979 by the Finance Act 2003… once again by a coalition government, this time led by the National Democratic Alliance.
Trinamul Congress has taken advantage of this politically beneficial piece of legislation almost ritually, every financial year. The latest example is for the 2015-16 fiscal when the party got exemption for Rs 65,00,002 received as contributions from 12 persons, in excess of Rs 20,000 (earlier, the limit was Rs 10,000 till 11 September 2003). In every case, the largest contributor was its MP, Subhendu Adhikari who paid Rs 1500000 by cheque. (Source: Election Commission website). These exemptions were availed of by the party when the currency notes were legal tender. So it is inappropriate to state that the exemption provisions in Section 13A are discriminatory or are designed to serve the illegitimate interests of people who have been encouraged by the political parties in power to avoid payment of taxes by wrongful conversion of the currency notes.
It is another matter that other parties, which have filed their latest annual returns to the EC, show relatively larger amounts received as contribution and have been exempted from the levy of Income Tax. Such exempted amounts run into hundreds of crores. It is also interesting to note that the Election Commission in its latest reform proposals has suggested that the limit be scaled down to Rs 2000 only.
Even though the recognised and registered political parties u/s 29A of the Representation of the People Act, 1951 enjoy a tax holiday on such receipts, they are not immune from the probing eyes of the Income Tax department. Moreover, the tax authorities can always call the payers to disclose the source from which the contributions emanated or their own financial capability to make such contributions. Take, for example, the contribution of an entity named Satya Trust which donated about Rs 47 crore to the two main parties in FY 2015-16. It may legitimately be called upon to prove the sources of its own receipts. Such exemptions are not allowed across the board. There are conditions attached to claim the same. That the Income Tax Department has not undertaken any such endeavour is another matter. In fact, most of the parties have not been following the law in making the required disclosures.
Another provision permits a political party to receive unlimited donations below Rs 20,000 from anybody without disclosing the donor’s personal data, such as PAN , name and address etc. For example, the Bahujan Samaj Party denied having received any donation exceeding Rs 20,000 from a single entity and yet, received crores of rupees as donation. These receiving parties deliberately split the donations to a level below Rs 20,000 to get away under this loophole. Further, even though donations above Rs 20,000 require the parties to disclose the identification details of the contributors, PAN, addresses and the cheque details, most parties ignore the prescription. Significantly, the Election Commission raises no objection and the parties go scot-free.
There is another loophole. There are more than 1800 “registered political parties”. The Election Commission has “recognised” less than 50 parties as national /state parties. There is thus a distinction between “registered” parties and the “recognised” ones. This is a meaningless and potentially subversive distinction. The Election Commission should be tasked only to give “recognition” to the parties based on well-defined and transparent criteria. There is absolutely no need to register a political party to open an opaque avenue for a group of people or even one person, as has been found of late by the Commission, to abuse the exemption provision of the Income Tax Act. It is encouraging to note that the Commission has woken up after several decades to the danger of this invidious distinction in the context of demonetisation. The latest missive sent by the Commission to the Central Board of Direct Taxes to delist 255 such paper entities is most welcome. But it is imperative to abolish the distinction between the “registered” and “recognised” parties and make only the second category entitled to the exemption benefit.  It is open to question though whether such abolition will curb the menace of money-laundering by the political class.
The country awaits the order of the Supreme Court at its next hearing on 11 January in a PIL petition. One would strongly commend the proposal of the Commission to remove the privilege to allow the receipt of anonymous donations of less than Rs 20,000 and restrict the amount to Rs 2000 only.
It would be pertinent to examine the propriety and economic consequences of the proposal to make elections state-funded. While very few countries in the world have such provisions, its adoption in India would be fraught with serious consequences. It would be virtually impossible to devise a fool-proof, enforceable and transparent systemic framework to make the proposal workable. The chances of unscrupulous political groups taking the state for a ride would be considerable. For instance, what would be the numerical standards on the basis of which such funding would be allowed. For instance, the Trinamul Congress or Bahujan Samaj Party or Nationalist Congress Party do not have any presence in most of the states. How would the share of the total kitty be determined and disbursed? Given the bogey of tax exemption, it could open another floodgate of corruption and money-laundering.