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Interesting facts about political funding in India

Every citizen of our country knows about the importance and influence of politics in India but at the same time, one should know how these parties are getting funded and other basic & interesting details.

1) Legal provisions:

As per Section 29B of “The Representation of the People Act, 1951”, Every political party may accept any amount of contribution voluntarily offered to it by any person or company other than a Government company.

** So first of all we need to understand that getting political contributions by political parties is not illegal. But our law imposes some legalities like No cash donations exceeding Rs.2,000 to be accepted, respective political parties should file an Income tax return by getting their books of accounts audited,…etc.

2) The emergence of new methods of getting funds

Accepting voluntary donations directly from Individuals, Corporates..etc by the political party are examples of basic traditional methods. But it may lead to rivalry among donors and unfunded parties. So, One should know what’s new happened in the recent decade.

i) Introduction of Electoral Bonds:

An electoral bond is a bearer financial instrument like a Promissory Note, issued by scheduled commercial banks like SBI upon authorization from the Central Government to intending donors for making donations to political parties only against cheques and digital payments. The donor doesn’t have to disclose his/her identity while purchasing the bonds.

** Any person can purchase the electoral bond from the scheduled bank and provide the same to the intended political party. Now that political party shall submit the bond to the scheduled bank within 15 days for crediting the contribution amount in their Authorized bank account.

ii) Formation of Electoral trusts:

An Electoral Trust is a non-profit organization established for orderly receipts of the voluntary contributions from any person for distributing the same to political parties, registered under section 29A of the Representation of People Act, 1951. So, here the Obligation of this electoral trust is to donate the 95% of Aggregate donations in the current financial year, which it had received, to the intended political parties.

**Any person can donate to electoral trust including body corporates. In this, what we need to understand is mainly, About people who are incorporating these electoral trusts and how these funds are apportioned among the existing political parties. To know facts about these, one should read the Articles, which were already prepared by the media people. Please find below few of those links here for your reference;

3) Income tax benefits:

i) For Donors including corporates:

Deductions u/s 80GGC (For Individuals) and 80GGB ( For Indian Companies): 100% of donation allowed as a deduction under Income-tax Act,1961.

**In my opinion, Rational One will opt for the option of giving political funds to get political benefits instead of paying tax @ 30%.

ii) For Registered Political parties:

Section 13A has given a complete exemption to political parties from paying income tax on its income from house property, voluntary contributions received, income from other sources, and capital gains.

** No tax liability will arise to political parties if it follows these basic conditions.

  • Maintain books and accounts sufficient for AO to arrive at its income.

  • Get books audited by a Chartered Accountant.

  • Maintain records of each contribution of more than Rs. 20,000.

  • Furnish a report of donations in excess of Rs. 20,000 to the election commission before the due date of return filing.

  • Should not receive any donation more than Rs. 2,000 in cash.

In my view, Political parties created a new legitimate route of getting funds, which is against the wrong notion of the common citizens of India, calling it illegal.

iii) Registered Electoral trusts:

Section 13B has given a complete exemption to political parties from paying income tax, if it distributes 95% of the aggregate donations received and previous year surplus (if any) to political parties registered u/s 29A of the “The Representation of the People Act, 1951”.

4) Other Interesting points:

i) Removal of Max limit (7.5% Cap):

As per Section 182 of Companies Act,2013, At max, a company can donate 7.5% of average net profits made during three simultaneous preceding financial years as political contributions and the same shall be disclosed in the profit and loss account.

*But in Finance Act,2017, The government has removed the cap of 7.5% on corporate contributions to the political parties and also removed the obligation to report such contributions in the company’s profit and loss account.

** It indicates, A company can legally contribute all of its profits as political contributions. It itself exposed the rare deadly combo of Corporates and political parties.

ii) Amending the foreign source definition:

In Finance Act,2016, the government passed a key amendment to the Foreign Contribution Regulation Act, 2010 by allowing foreign companies to fund political parties in India, by amending the definition of foreign source.

*Foreign source includes, A company in which more than 50% of the nominal value of its share capital is held by, foreign persons including foreign government.

** In my opinion, Government amended the same retrospectively to shield the political parties by removing scrutinies too. One should consider all these things as one of the important factors for drastic improvement in the Indian stock market in recent years.

Please find below few of those links here for your reference;

Refer to Chapter-II, part XIII in the attached Finance act’2016 document for your reference.

Please feel free to get in touch if you have any doubts or need clarifications.

We wish you luck for your business. Happy Working!


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