As part of overall efforts to take cash out of election funding, Budget 2013-14 has clamped down on political parties receiving cash contributions.
The Finance Bill 2013-14 proposes that tax deduction will not be available to India Inc for sums contributed by way of cash to a political party or an electoral trust.
Currently, any sum contributed by an Indian company to a political party is eligible for tax deduction. Simply put, the money spent (including cash contribution) by a company was considered as an eligible business expense for income-tax purposes.
If the Finance Bill is enacted into law, companies making cash contributions will not get this tax break.
“This proposal in the Finance Bill is good from the point of view of both better governance and ushering in transparency in election funding,” said G. Ramaswamy, former President of the CA Institute.
He pointed out that such a move would discourage anonymous cash contributions/ donations to political parties and help identify the donor.
Fund flows
The Election Commission will also benefit as it can analyse the flow of funds to the political parties and see whether there is any funding from a foreign source.
Currently, political parties are not allowed to accept any contributions from foreign sources. But the reality is that this norm is not often followed by some political parties.
Aseem Chawla, Partner, MPC Legal, a law firm, said that taking cash out of the system and recent initiatives including electoral trusts, are in line with a maturing democracy and would help usher in transparency in funding of elections.
Several companies, including Sterlite Industries, ITC Ltd, Videocon Industries Ltd, Larsen & Toubro Ltd and Torrent Power, had given donations to political parties between 2003-04 and 2010-11.
Donations and voluntary contributions are one of the major sources of income for most of the political parties.
The Central Board of Direct Taxes had recently come out with an electoral trust scheme that lays down the procedure for grant of approval to an electoral trust. This move is set to make electoral trusts more popular with Corporate India. Once an electoral trust gets the taxman’s approval, donors to such trusts will get 100 per cent tax deduction for their contributions.
But now companies, as donors, will get 100 per cent tax deduction only for non-cash contributions, tax experts pointed out.
Prior to the 2009 move, corporates did not get any tax breaks on contributions made to electoral trusts.
The scheme framed by the Tax Department bars electoral trusts from accepting cash contributions. Moreover, the trusts cannot accept contributions from foreign individuals (who are not a citizen of India) or foreign entities.