New Delhi: The finance ministry, through the Central Board of Direct Taxes (CBDT), has defended exemptions granted to political parties under the Income Tax Act 1961 on the grounds that “democratic institutions form the very basis of polity in India and it was deemed necessary that political parties be treated differentially so that impetus is given to organised political activity.”

The ministry’s response came in the form of a reply to an appeal before the Central Information Commission (CIC) filed on August 17 by RTI activist Subhash Chandra Agrawal, who contended that the exemptions granted to political parties should be withdrawn.

He said many of these parties existed “only to whiten black money” and only about 50 of them were recognised as state or national level political parties, while about 400 contested Lok Sabha elections in the year 2014.

While demanding the abolition of tax exemptions for political parties and NGOs, Agrawal stated that “presently there is two-way loss to the exchequer in respect of contributions, donations et cetera [that are] made to political parties and certain non government organisations (NGOs). There is income-tax exemption not only on contributions or donations received by these bodies, but even donors and contributors also get income-tax exemption.”

He also said that since political parties are not ready to accept the CIC verdict which made them accountable to the public under the RTI, there is no sense in granting any indirect-funding through income-tax exemption to political parties and those contributing to them and that these exemptions should be totally abolished.

He also demanded the abolition of this exemption for NGOs, citing the high number of such organisations in India – one for every 400 citizens – and added that “most NGOs are mainly business-shops of certain individuals managing them, most of whom are family-members of those having worked in government or legislature.” Therefore, Agarwal demanded that “not only all government-funding to NGOs including from funds at discretion of parliamentarians and state-legislators should be altogether banned”, the provision of income-tax exemption for ‘donations’ made to and received by them should also be abolished.

This way, Agrawal contended, the government will have additional funds for “development-purposes in larger public interest which in fact is [a] much-much better way to serve [the] public rather than through NGOs, charitable institutions, political parties etc.”

In its response, the CBDT said Sections 13A, 80GGB and 80GGC find a place in the Income Tax Act in recognition of the role played by organised political parties in the democratic set-up of the country and to provide further necessary incentives to promote the activities of such political parties as are recognised by the Representation of People Act, 1951.

It further said that “political parties require funds in order to carry out a variety of activities including contesting of elections, organising meetings and rallies, publishing literature among others. Also these activities are both of a regular nature, such as organising of rallies and bringing out publications, and also periodic with respect to certain matters such as conducting elections. Accordingly political parties have been granted certain exemptions and deductions to that they are able to utilise maximum funds for the public purpose of political activity.”

The CBDT also noted that “there are reasonable restrictions on the political parties in terms of the funds available with them”. It said, “any activity of a commercial nature has been discouraged in as much as no exemption has been allowed to income from business and profession. Exemption has only been granted in the case of contributions received and incomes of an incidental nature such as ‘income from house property’ or ‘income from other sources’ or ‘capital gains’.

Further, the letter to the appellant stated that “provisos to Sections 80GGB and 80GGC of the Act explicitly state that no deduction shall be allowed under these sections in respect of any sum contributed by way of cash”.

The CBDT thus said that the provisions in the three sections “strive to maintain a balance between encouraging political activity and regulating the activities of the political parties in the interest[ion] of the growth of democracy in India”.

It also said that the suggestion to abolish the exemption for political parties as well as NGOs, both for donors and recipients, is “not feasible”.

Responding to the ministry’s stand, Agrawal said despite the CIC verdict on May 2, the CBDT “has failed to provide a consolidated point-wise response to other points of [the] RTI petition”. He said while it has justified the “dual-edged sword of tax-exemptions for contributions made to [or] received by political parties”, it has failed to take note of a large number of mushrooming registered political parties, whose number has now swelled to about 2000.

Agrawal said the political parties were rich enough to run without tax exemptions and since they have not complied with the full directive from the bench that was released on June 3, 2016 – and which asked the parties to come under the purview of the RTI Act – the benefit of income tax exemptions to them should be withdrawn. “Most of [the] funding to political parties is misused for non-productive campaign methods and for [the] unholy system of making [and] unmaking of governments,” he insisted.

Similarly, he said the “other often-misused tax exemptions like for charity [or] donation under Section 80G of Income Tax” also need to be abolished to effectively curb the flow of black money.

Agrawal also contended that the CBDT did not answer most of the questions pertaining to the issue he had filed in his appeal. Subsequently, CIC issued an order on May 2, 2016 directing the chief public information officer of CBDT to provide the appellant with a “point-wise reply in a consolidated manner” to all his queries.

The RTI activist had sought, among other things, information on the “estimated total revenue loss (year-wise) for [the] last five years for each of the categories getting such income tax exemption”, the total number of all political parties registered with the Election Commission and those which have never contested any election, whether all political parties were getting income tax exemptions on funding or donations; and finally, the year-wise burden on the exchequer over the last five years – due to exemptions granted to such donations. Similarly the appeal demanded information on funding NGOs, tax exemptions to them and losses to exchequer because of these.

The CBDT remained silent on all counts.