The revenue impact of tax deductions availed by corporates, firms and individuals on account of donations to political parties was an estimated Rs 3,967.54 crore in FY 2022-23, according to projections made by the Finance Ministry in the Union Budget 2024-25.
Tax Concessions on Political Donations
- A tax concession is a reduction in the amount of tax that a particular group or organisation has to pay, or a change in the tax system that benefits them.
- In India, tax concessions on political donations are provided under the Income Tax Act, 1961.
- Section 80GGB, of Income Tax Act, 1961 allows Indian companies to claim deductions for contributions made to political parties or electoral trusts. However, donations made in cash are not eligible for deductions.
- Section 80GGC, of Income Tax Act, 1961 applies to individuals, firms, and other non-corporate entities. Similar to Section 80GGB, it allows deductions for contributions to political parties or electoral trusts, excluding cash donations.
- Deductions apply to donations made via cheques, account transfers, or electoral bonds.
- The Income Tax Act defines a political party as one registered under Section 29A of the Representation of the People Act, 1951.
- Total Tax Concessions: In FY 2022-23, the total tax concessions for donations to political parties amounted to approximately Rs 3,967.54 crore.
- In 2021-22, the tax concessions were Rs 3,516.47 crore, indicating a 13% increase from the previous fiscal year.
- Revenue Impact of These Deductions: Since 2014-15, the total revenue impact of tax concessions on political donations has reached approximately Rs 12,270.19 crore.
- In 2022-23, Rs 2,003.43 crore of the tax concessions came from donations by corporate taxpayers under Section 80GGB.
- Deductions claimed by individuals under Section 80GGC amounted to Rs 1,862.38 crore.
Implications of Surge in Tax Concessions
- Rising Electoral Funding: The increasing tax concessions for political donations highlight a growing trend in electoral financing, suggesting that political parties are relying more heavily on contributions from corporations and individuals.This could potentially alter the balance of power and influence in political decision-making.
- Need for Transparency: With the surge in political donations, there is a pressing need for greater transparency in political financing to ensure accountability and prevent undue influence on the political process.The sharp increase in concessions raises questions about the impact on public finances and the need for potential reforms in political funding policies.
- Revenue Loss: Increased tax concessions can lead to a significant reduction in government revenue. This can affect the government’s ability to fund public services and infrastructure projects.
- Market Distortions: Excessive concessions might create market distortions, favouring certain sectors or companies over others, which can lead to inefficiencies.
- Sustainable Growth: While tax concessions can boost short-term growth, they need to be balanced with long-term fiscal sustainability. Over-reliance on concessions can undermine the tax base and fiscal health.
Regulations on Political Donations in India
- Representation of People Act, 1951: Section 29B in RPA, 1951 allows political parties to accept voluntary contributions from any person or company, except government companies and foreign sources.
- Companies Act, 2013: Section 182 of the Companies Act, 2013 allows Indian companies to contribute any amount to a political party, with conditions such as authorisation by the Board, non-cash payment, and disclosure in the company’s profit and loss (P&L) account.
- Income Tax Act, 1961: Indian companies and individuals are eligible for tax deductions on donations made to political parties or electoral trusts under Section 80GGB and 80GGC.
- Foreign Contributions (Regulations) Act, 2010 (FCRA): The Representation of People Act, 1951 and the FCRA bar political parties from accepting donations from a ‘foreign source’, but Indian companies with foreign investment up to the permitted limits are no longer treated as a ‘foreign source’ and can now make political contributions under the Companies Act, 2013.
- Electoral Bonds Scheme: Introduced in 2018, electoral bonds allow donors to contribute to political parties anonymously. The bonds are purchased via authorised banks and are valid for 15 days.In February 2024, the Supreme Court of India unanimously struck down the Electoral Bond Scheme and associated amendments as unconstitutional, ruling that the scheme violated the right to information.