Tax Treatment of Political Parties and Electoral Trusts in India

Understanding Tax Treatment of Political Parties and Electoral Trusts in India

Section 13A of the Income Tax Act governs the taxation of political parties in India, granting exemptions for specific types of income. Political parties are exempt from including income from house property, other sources, or capital gains, as well as voluntary contributions, in their total income, provided they meet certain criteria.

Conditions for Exemption under Section 13A

To qualify for these exemptions, political parties must adhere to the following conditions:

1. Books of Account: The political party must maintain accurate books of account and supporting documents to facilitate the Assessing Officer in determining the income.

2. Record of Contributions: It is essential to keep a detailed record of each voluntary contribution exceeding Rs. 20,000, including the names and addresses of contributors.

3. Audit Requirement: The accounts of the political party must be audited by an accountant as defined in the Explanation to sub-section 2 of section 288.

4. Annual Reporting: The treasurer or an authorized representative of the political party must prepare a report each financial year for contributions received over Rs. 20,000 and submit this report to the Election Commission by the income tax return due date.

Voluntary Contributions Received by Electoral Trusts: Section 13B

Electoral trusts also benefit from exemptions under Section 13B, which states that any voluntary contribution received by an electoral trust is excluded from its total income for the Previous Year if:

• Distribution of Donations: The electoral trust must distribute at least 95% of its total donations received during the Previous Year, along with any carried forward surplus, to registered political parties as per section 29A of the Representation of the People Act, 1951.
• Compliance with Regulations: The electoral trust must operate in accordance with rules established by the Central Government.

Important Note: To claim exemptions for contributions exceeding Rs. 20,000, a political party must maintain accurate records and details of contributors. This requirement aims to ensure transparency in fundraising activities, as highlighted in the case of Common Cause vs. Vol. 222 ITR 260 (SC). Exemptions will not be granted for contributions from anonymous sources.

Filing Return of Income for Political Parties: Section 139(4B)

1. Requirement to File: A political party must file a return of income if it has taxable income before claiming exemptions under Section 13A.

2. Condition for Exemption: The exemption under Section 13A is contingent upon the submission of a comprehensive return of total income within the timeframe specified in section 139(1).

3. CEO's Responsibility: The chief executive officer must provide a return of the party's income for the relevant Assessment Year if total income for the Previous Year exceeds the basic exemption limit prior to claiming Section 13A exemptions.

Conclusion

Sections 13A and 13B of the Income Tax Act are crucial for regulating tax liabilities of political parties and electoral trusts in India. By establishing exemptions for specific income types and imposing accountability measures, these provisions aim to enhance transparency in political funding. Political parties and electoral trusts must diligently comply with these regulations to uphold tax law requirements and promote democratic integrity.