What tax exemptions do political parties enjoy? | India News

Do political parties enjoy full tax exemption?
Section 13A of the Income Tax Act applies to recognised parties. This has special provisions. Income from house property, “other sources, capital gains or received through voluntary contributions” are exempted from total income. But they must meet prescribed conditions.
What are these conditions?
➤ A party must maintain books of account and other documents to enable the tax department’s assessing officer to properly “deduce its income”.
➤ For each voluntary contribution, other than contributions made through electoral bonds in excess of Rs 20,000 (though this no longer applies), it needs to maintain records of contributions and the name and address of the donor.
➤ Party accounts have to be audited by a CA.
➤ Donations of over Rs 2,000 must be made via account payee cheque,electronic transfer, or electoral bonds (now defunct).
➤ The treasurer or an authorised person should furnish a report of donations of over Rs 20,000 to EC on or before the due date for filing returns.
➤ Parties must file returns for the previous financial year by the prescribed date.
What happens if any of the conditions is not met?
Non-compliance results in the exemption being withdrawn as it is a “beneficial provision”. Along with returns, parties also have to attach certain documents, such as the balance sheet, income and expenditure statement, contribution report, among others.
What happens if tax exemption is denied?
In that case political parties are treated as “association of persons” and are taxed according to the applicable slab.
What is the controversy surrounding Congress?
Congress is dealing with three cases. The first dates back to assessment year 1994-95 (FY1993-94), where the exemption was denied and a tax demand of around Rs 25 crore was raised. During subsequent appeals, the demand came down to around Rs 11 crore and a challenge is currently pending in Supreme Court. With interest, the demand now adds up to Rs 53 crore. Cases of BSP and Janata Party (Subramanian Swamy merged it with BJP in 2013) are also clubbed with this case where a decision is pending since 2016.
What about the Rs 135 crore recovery from Congress?
That is a case related to AY2018-19 (FY2017-18) where the party declared ‘nil’ income after claiming exemption of over Rs 199 crore under Section 13A of IT Act. In July 2021, when an assessment order was passed, exemption was denied and a tax demand of Rs 105 crore was raised. In Oct 2021, Congress filed an appeal before commissioner (appeals) and the stay order was dismissed and the party was asked to deposit 20% of the demand. In Sept 2022, it paid Rs 78 lakh. Exemption was denied on the grounds that the return was filed in February 2019, when the extended deadline ended on December 31, 2018. Besides, there was an alleged cash donation of over Rs 2,000, which was a violation of Section 13A of the I-T Act. Since Congress had failed to pay the required amount, on Jan 9, 2023, a demand of Rs 104 crore was raised. In March 2023, commissioner (appeals) dismissed the appeal, prompting Congress to approach the Income Tax Appellate Tribunal last May. In Oct, another Rs 1.7 crore was paid. In March 2024, the tax department recovered Rs 135 crore from the party’s bank accounts and fixed deposits, prompting a strong protest. Tax authorities have maintained that there is no freeze on any bank account and the party has multiple accounts across the country.
What led to Rs 3,500-crore I-T demand from party?
This was based on reassessment of income of Congress for AY2014-15 to AY2020-21 after the tax department came across alleged “incriminating evidence” during searches in Madhya Pradesh, Andhra Pradesh, Karnataka and Gujarat. Based on chat messages, diary entries, cash seizure and files recovered from computers, the tax department served a notice in March 2023 and the reassessment exercise had to be completed by March 31, 2024. Several notices were also sent but the party is accused of not “providing reply on merits”. Congress filed two writ petitions in Delhi high court, which dismissed them last week, relying on the 300-page note submitted by tax authorities, listing out the details of “incriminating evidence” during searches on alleged aides of former MP chief minister Kamal Nath and Megha Engineering (of electoral bonds fame) in Andhra Pradesh. Based on these, the I-T department had argued that income of Rs 524 crore had escaped assessment. Before the end of last fiscal year, Congress claimed to have received three notices with the tax demand adding up to Rs 3,567 crore.

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