The truth behind political parties being exempt from tax scrutiny for deposit of old notes

First check out the following headlines of various media outlets:

All the above news articles scream in their headlines that the Income Tax Department will not scrutinise the deposit of old Rs 500 notes and Rs 1000 notes by political parties.

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Obviously, from reading just the headline, it appears that firstly, this is a new law brought into force, and secondly, that this is a gaping loophole. The headlines suggest as if political parties have a sacrosanct position under Income Tax and are hence exempt from “scrutiny”.

If so, can these media houses explain the following:

Just last year, Political parties like AAP, Congress and many others were “scrutinised” by the very same Income Tax department! The 2015 story in the Economic Times goes on to say (emphasis ours):

“According to CBDT, the taxman has taken action after suspicion that a number of bogus or ‘entry operator’ companies were converting illegal cash into legitimate money in the national capital by donating black money to parties after similar instances were detected by its sleuths in Kolkata. The notices which have been issued in Delhi include AAP and Congress for receiving donations worth Rs 2 crore and Rs 10 lakh, respectively.”

So in early 2015 itself, political parties were under the scanner for being suspected conduits to convert illegitimate money, but if we believe media reports, they suddenly became exempt from any scrutiny in late 2016? They can now safely become a conduit to convert black money into white?

The truth lies in the details. As explained in our previous article, the only exemptions afforded to the political parties are that they are exempt from Income Tax (as they are not allowed to undertake commercial activities), and that donations below 20,000 rupees are not required to be reported to the Election Commission of India. Both these rules are not new and have been existing in the statutes for many years now.

As far as accepting the old 500 and 2000 rupees notes are concerned, the government made it clear that parties are not allowed to deposit those notes that came to them as donations after November 8 – the day when the demonetisation was announced.

Hence, trying to portray them as a new rule introduced by the current government is utter lie, as the following headline does:

At no place does the Income Tax Act proclaim political parties to be exempt from tax scrutiny. Political parties are required to maintain books of accounts, file income tax returns, be open to scrutiny (as was seen in the 2015 case), and even be ready for searches and raids.

In fact, whenever an assessee returns tax-free or exempt income, his case is more likely to be taken by the IT officers, than say an assessee who is subject to normal tax rates, because the person enjoying the exemption can misuse it.

As we had explained in another article, any sort of jugglery to convert old notes eventually leads the person to a bank. And once you deposit such notes in the bank, it is very easy for the Tax department to scrutinise the person’s data.

In case of political parties, surely they can try to launder money, but as soon as they deposit the money in the bank, they leave a trail. From thereon, it is a simple case of adding two plus two. A party which shows a sudden spike in donations and deposits is most likely to be indulging in some nefarious activities. This can be detected by some of the most rudimentary analytical tools.

So will a political party actually take such a risk? The consequences can be lethal. Even a news report (leave alone conviction by any authority) can do irreparable damage to the party’s public image. A conviction can jeopardise the whole party and their recognition can be cancelled by the ECI.

And funding of political parties has always been a hot-topic for scrutiny by not only Income Tax Departments, but also by courts. Just recently both Congress and BJP were seen battling a Delhi High Court verdict holding them prima facie guilty of violating the law on foreign funding. Although the term “foreign funding” sounds ominous, in the instant case, both the parties had only accepted donations from subsidiary companies of the Vedanta group (owned by Anil Aggarwal). Due to technical reasons, these subsidiaries were found to be “foreign companies” by the Court, and hence the parties were in a soup.

In such a situation, where political parties across the spectrum have always been facing heat over their donations, either from the Income Tax Department or from the Courts, it is highly misleading when news reports’ headlines scream that they will be exempt from tax scrutiny. A few reports did mention the truth in the main body, but the headlines are enough to fool anyone.

Having said so, tax reforms in the sphere of political parties are long overdue. The rule that donations below 20,000 rupees are not required to be reported to ECI needs to be scrapped as soon as possible. Parties should be made to declare granular data of each donation received by them. The fight against black money must be extended to all.


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