Elections and the conduct of the legislature in India is governed under the Representation of the People Act, 1951, which empowers the Election Commission of India (ECI) to form rules for elections and political parties.

As per current rules, political parties in India are barred from undertaking any commercial activity and thus they are not deemed to be engaged in acts that make them liable to pay any income tax. But it doesn’t mean that parties are not under the radar of the tax authorities.

Yesterday, this misleading tweet by news agency Reuters created a lot of confusion on social media (the agency then tweeted a rejoinder to make things clearer):

Political parties can deposit old notes in banks only if they had taken donations in cash up to 20,000 rupees from individuals before Nov. 8 — Reuters India (@ReutersIndia) December 16, 2016

To help you understand things better, here are a list of issues – in FAQs format- that you should know:

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Q1. Were political parties always exempted from paying income tax?

Ans: Yes. Under Section 13A of the IT Act, political parties are exempt from paying Income Tax. But they are required to file their Income Tax Returns (ITR). This is a very old provision.

Q2. So we can know from where their income i.e. their donations are coming from?

Ans: Technically yes, but there is one loophole.

Q3. What is that loophole?

Ans: Donations below 20,000 rupees are not required to be reported to the ECI (Sec 29C, sub-section 3) but they have to be reported in the ITR. Political parties are essentially not required to disclose details of those donating below 20,000 rupees.

Q4. How is it misused?

Ans: Simple study of IT returns of any political party will show that maximum donations to them are from such ‘unknown’ sources.

Q5. Does it mean that Income Tax Department cannot scrutinise political parties?

Ans: Not really. Parties are exempted from income tax, but they still have to: a. maintain books of accounts, b. file returns, c. be open to scrutiny, even raids, etc.

Q6. Have political parties ever been raided or questioned over their source of funds?

Ans: I haven’t come across cases of raids. However, their returns are scrutinised just like any other assesses, and Income Tax department takes note of complaints against them too. As recent as last year, Congress and AAP had received notices from the department. Question here is how far the department will go in pursuing such cases.

Q7. Can I access the ITR of these political parties? If yes, how?

Ans: Although most parties are disputing the ruling, they were deemed to be under the RTI act by the CIC. Thus one could file an RTI and get information like their balance sheet, income statement and even the donors list (information in donors list can be incomplete based on record keeping of the party and because of that aforementioned loophole). However, since the matter is currently disputed and sub-judice, right now you may not get any response.

Q8. Can donation details given in ITR be different number from donation report submitted to the ECI?

Ans: Donations given in ITR is the sum of total donations received (including below the 20k threshold) by the party, while the donations report submitted to the EC are those of above Rs. 20,000, listing the details of the donors, their addresses and their mode of payments; so information contained in both the documents will be different.

Q9. Can a Party convert black money to white?

Ans: Technically, yes. Parties can take money and show them as donations below 20,000 rupees (making backdated entries showing that donations were taken before demonetisation was announced) and try to convert it into white money for a ‘cut’. But do remember that they have to furnish expenditure details to the ECI too, thus there is always a way to catch this scam. Strong political willpower will be needed to nail such parties.

Q10. Do you think Narendra Modi will do it?

Ans: I hope he does! I am sure he knows about this possibility. Wasn’t that the reason he asked all his MPs to submit their bank statements by 31st December? I hope he will check bank statements of not only the BJP but of all political parties.

Q11. Are you sure political parties are indulging in such scam?

Ans: Believe me it’s not that easy. If caught, it can jeopardise the whole party and their recognition can be cancelled by the ECI. Surely a party should think twice before indulging in such deeds.

Q12. What should be the way forward?

Ans: There should be more transparency in political funding. Donations below 20k should have the same rules as applicable to donations above 20k i.e. Name, Address, and PAN details of donors must be recorded, and finally the ITR details should be made public. This will need an amendment to the Representation of Peoples act and the IT act.