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October 12, 2020

Know all about political donations and deduction under Income Tax

by CA Shivam Jaiswal in Income Tax

Know all about political donations and deduction under Income Tax

Campaign finance, also known as election finance, refers to all funds raised to promote candidates, political parties, or policy initiatives. According to section 29B of Representation of People’s Act, every political party may accept any amount of contribution voluntarily offered to it by any person or company other than a Government company provided that no political party shall be eligible to accept any contribution from any foreign source defined under clause (e) of section 2 of the Foreign Contribution (Regulation) Act, 1976.

As of now, corporate donations, which come in various forms, mainly through individual corporate/businesses contributions and electoral trusts, cover more than the two-third of total funds collected by the political parties. Elections, in general, come with a cost, to state exchequer, political parties and candidates. Election Commission of India spends a lot of money to conduct free and fair elections to safeguard our democracy. To promote political donations, the Income Tax Act provides certain deductions. Let us learn the same in detail in this article.

Deduction under Section 80GGB

What is deduction under Section 80GGB?

Section 80GGB of the Income Tax Act, 1961 provides tax deductions to Indian companies, on making donations to the political parties or an electoral trust who are registered in India. Even advertisements given by companies on a platform owned by a political party is an eligible contribution under Section 80GGB.

What do you mean by a Political party?

  • The political party receiving the donation must be registered under the Section 29A of the Representation of the People Act, 1951.
  • Registration of political parties comes under the rules and regulations of the provisions of Section 29A of the Representation of the People Act, 1951.
  • A party who seeks registration under this Section with the Commission will have to apply to the commission within 30 days, following its date of formation as per the guidelines prescribed by the Election Commission of India.
  • Guidelines provided by Article 324 of the Commission of India and Section 29A of the Representation of the People Act, 1951 are to be referred for this purpose.
  • The applicant party has to publish the proposed name of the party in two local daily newspapers and two national daily newspapers, on two days in the same newspapers, to check for objections, if any.

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What do you mean by an Electoral Trust?

An electoral trust is a non-profit company created under Section 8 of the Companies Act, 2013. An Electoral Trust is a Trust set up by companies with the sole objective to distribute the contributions received by it from other Companies and individuals to the political parties.

What conditions are required to be followed to avail deduction under Section 80GGB?

  • All Indian companies registered under the Companies Act, 2013 can make donations to a registered political party or electoral trust to claim tax deduction under section 80GGB except the following:
  • A Government Company
  • A company which is established only in the last 3 years.
  • To claim tax benefits, donations should not be made in cash. All other modes of donations except cash such as demand draft, cheque, e-payment are all eligible for claiming a tax deduction u/s 80GGB. This is done to ensure that the money being donated for a political party is maintained in records.

Is the any limit to avail deduction under Section 80GGB?

  • There is no provision under the Income Tax Act, 1961 which limits the political contributions made by companies. The Company can claim 100% deduction against the amount donated to a political party under section 80GGB
  • However, according to Section 182 of Companies Act, political donations cannot exceed 7.5% of average net profits for the last 3 years.
  • The company can make contributions to multiple political parties and each of these contributions will be eligible for deductions under Section 80GGB subject to the outer limit of 7.5% of average 3-year net profits.

What shall political donations include?

Political contributions may include the following:

  • A donation, payment or subscription, given by a company on its behalf, to a person, who is involved in any activity, which it affects or is likely to affect any public support for a political party or a political purpose.
  • The amount of expenditure, which might be directly or indirectly incurred, by a company, on any advertisement in any publication, be it a brochure, a tract, a souvenir or a pamphlet, which is published on behalf of a political party.
  • The publication may not be directly associated with a political party but can be for the advantage of a political party, in the form of a contribution made for political purposes.
  • Even advertisements given by companies on a platform owned by a political party is an eligible contribution under Section 80GGB.

What disclosures are required to be made while making a political donation?

  • The company must disclose the name of political party and the amount contributed in its financial statements.
  • However, if the company does not want to disclose the name of the political party, they can contribute via electoral bonds.

Deduction under Section 80GGC

What is deduction under Section 80GGC?

Section 80GGC under the Income Tax Act, 1961 provides tax deduction benefits on donations made by any individual to political parties subject to certain conditions.

What conditions are required to be followed to avail deduction under Section 80GGC?

  • Only individual taxpayers are allowed to claim tax benefits. The deduction cannot be claimed by local authorities, companies and every artificial juridical person which is either wholly or partly funded by the Government.
  • Donations should not be made in cash. An assessee can adopt any mode of payment which is linked through a banking channel like online net banking or demand draft or cheque or debit card etc for availing this deduction.
  • Donations must be made to a registered political party under section 29A of Representation of People Act (RPA), 1951.
  • Donations made to electoral trust also will be eligible for claiming tax deduction under section 80GGC.

Is the any limit to avail deduction under Section 80GGC?

There is no upper limit specified under section 80GGC. Therefore, any amount contributed to a political party by an individual can be claimed as a tax deduction.

Section 80GGB ang Section 80GGC were introduced mainly to achieve transparency in to the electoral funding system and also to reduce corruption. You are free to make donations to political parties of your choice and preference and also claim income tax benefits for the same. The only thing one should keep in mind is that there should be a record maintained and one should comply with all the regulations specified in the Income Tax Act 1961. If the specified set of procedures is not followed, the claim for deduction might be rejected by the Income Tax Department of India.

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