TAX CONCESSIONS ON POLITICAL DONATIONS - ECONOMY

Tax Concessions on Political Donations - ECONOMY

News: Recent financial data shows a notable increase in tax concessions for donations to political parties, with nearly Rs 4,000 crore granted in the fiscal year 2022-23. This rise underscores the growing trend of using tax deductions to support electoral funding and highlights broader shifts in political finance and its impact on fiscal policy.

 

What’s in the news?

Tax Concessions on Political Donations

  • Definition of Tax Concession
    • A tax concession refers to a reduction in tax liabilities or a favorable change in tax regulations that benefits specific groups or organizations.
  • Indian Tax Provisions
    • In India, tax concessions for political donations are governed by the Income Tax Act, 1961.
    • Section 80GGB: Allows Indian companies to receive tax deductions for donations to political parties or electoral trusts, excluding cash donations.
    • Section 80GGC: Applies to individuals, firms, and non-corporate entities, enabling tax deductions for similar contributions, also excluding cash donations.

Deductions are available for donations made through cheques, account transfers, or electoral bonds.

 

Definition of Political Party

    • A political party is defined as one that is registered under Section 29A of the Representation of the People Act, 1951.
  • Recent Statistics
    • For FY 2022-23, tax concessions for political donations totalled approximately Rs 3,967.54 crore.
    • In FY 2021-22, the tax concessions were Rs 3,516.47 crore, reflecting a 13% increase from the previous year.
    • Since FY 2014-15, the cumulative impact of tax concessions on political donations has reached around Rs 12,270.19 crore.
    • In FY 2022-23, Rs 2,003.43 crore of these concessions were attributed to corporate donations under Section 80GGB.
    • Individuals claimed Rs 1,862.38 crore in deductions under Section 80GGC.

 

Implications of Increasing Tax Concessions

  • Trends in Electoral Financing
    • The rise in tax concessions points to a growing dependence on donations from corporations and individuals for political financing.
    • This trend may influence the balance of power and decision-making within politics.
    • Need for Transparency - The increase in political donations underscores the need for enhanced transparency in political financing to ensure accountability and mitigate undue influence.
  • Impact on Public Finances
    • Rising tax concessions could affect government revenue, potentially impacting funding for public services and infrastructure.
    • Excessive tax concessions might lead to market distortions, benefiting specific sectors or companies disproportionately.
    • Long-Term Fiscal Concerns - While tax concessions may promote short-term growth, they need to be managed carefully to avoid compromising long-term fiscal health and sustainability.

 

Regulations on Political Donations in India

    • Acceptance of Donations- Section 29B of the Representation of the People Act, 1951: Permits political parties to accept voluntary contributions from individuals or companies, excluding government entities and foreign sources.
    • Corporate Contributions - Section 182 of the Companies Act, 2013: Authorizes Indian companies to donate to political parties under specific conditions, including:
      • Board approval, Payments made through non-cash methods, Disclosure in the company’s profit and loss account
    • Tax Deductions- Income Tax Act, 1961: Provides tax deductions for donations to political parties or electoral trusts:
      • Section 80GGB: For Indian companies, Section 80GGC: For individuals and non-corporate entities
  • Foreign Contributions
    • Foreign Contributions (Regulations) Act, 2010 (FCRA): Prohibits political parties from accepting donations from foreign sources. However, Indian companies with permissible foreign investment are not classified as foreign sources and can contribute under the Companies Act, 2013.
  • Electoral Bonds Scheme
    • Introduced in 2018, this scheme allows anonymous donations to political parties. Bonds can be purchased from authorized banks and are valid for 15 days.
    • In February 2024, the Supreme Court of India declared the Electoral Bond Scheme and related amendments unconstitutional, citing violations of the right to information.

 

WAY FORWARD

·         Revising Tax Concessions - Reevaluating the framework for tax concessions to ensure they align with fiscal policies and minimize negative impacts on government revenues.

·         Alternative Funding Mechanisms - Setting reasonable limits on tax deductions and exploring other political funding methods to ensure system sustainability.

  • Public Funding for Political Parties

·         Considering government financial support to reduce reliance on private donations and minimize the influence of vested interests. Public funding models vary, with some countries offering funds based on election performance, membership fees, or donations. Examples include “democracy vouchers” in Seattle.

  • Enhanced Transparency

·         Mandating full disclosure of all political donations, including those through electoral bonds. Establishing an independent commission to oversee political finance with robust oversight mechanisms.

 

Source: https://indianexpress.com/article/india/tax-concessions-on-political-donations-cost-exchequer-rs-3967-crore-in-2022-23-9483585/