The Indian Revenue Authority has tightened its scrutiny of large political contributions, especially those of more than Rs 5 lakh, during the fiscal year 2020-21. It is fueled by apprehensions regarding tax evasion, money laundering, and abuse of tax exemption on political contributions. Thousands of individuals are in the government’s spotlight, with an aim to bring more transparency into political finance and tax rule application.
Increased Vigilance Over Large Donations
More than 9,000 taxpayers who have taken Section 80GGC tax deductions on donations of Rs 5 lakh and above have been sent detailed questionnaires by the tax authorities. These questionnaires aim to cross-verify such donations and find out whether these donations were part of any move to evade tax payment. The tax authorities are apprehensive that certain individuals may have abused the deduction facility by fudging figures in donations or engineering bogus transactions.
TDS on Political contributions in India are tax deductible, and that implies that individuals and companies donating to political parties registered with the Election Commission can avail themselves of a tax deduction in taxable income. Failure to have a strong tracking system, however, has facilitated the misuse of the provisions by some individuals. The Income Tax Department raid in recent times suggests that tighter controls and more transparency in political finance are needed.
Tax Deductions on Political Contributions
Two sections of the Income Tax Act permit political contribution deductions:
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Section 80GGC
Section 80GGC permits donors (not firms and companies) to enjoy a 100% deduction for providing donations to election trusts or parties, subject to the condition that they provide the contributions in non-monetary form like cheques, bank drafts, or Internet payments.
The intention is to promote clean political financing and avoid payments in cash that may result in money laundering.
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Section 80GGB
- This section is for corporate companies and allows them to claim similar deductions in lieu of donations made to political parties.
- Donations by companies in cash to political parties are not permitted to avoid unaccounted funds being retained out of the system.
- While such exemptions are legal, the recent probe conducted by the Income Tax return Filing Department is indicative of large numbers of donors utilizing these schemes allegedly to avoid tax payments and thus deserving higher scrutiny.
Red Flags on Money Laundering
Money laundering is probably the most serious issue with regards to political donations. Circular transactions, where money is given by cheque or bank transfer for tax relief and come back as cash, minus a charge, are believed to have been carried out by the donors.
These funds are a cause of huge concern regarding tax evasion and black money entering the political arena. The government has taken various measures to check this, like the Electoral Bond, but there are still loopholes. This investigation is an effort to plug these loopholes and ensure political contributions are real and transparent.
Lack of Reporting Mechanisms
- One of the main problems with political donations in India is that there are not enough stringent reporting requirements. While donations to charities require both giver and receiver to submit details to taxation authorities, there are fewer procedures for compliance on political donations.
- Charitable trusts are required to keep record books and submit reports to the Income Tax Department and are thus answerable.
- Political parties are not, however, required to make donors’ information available for donations less than Rs 20,000, a measure that makes it easy for donors to break up big sums into smaller parts so as not to raise suspicion.
- The openness is also what makes it possible for political funding to be an effortless means of tax evasion and money laundering. The recent probe calls for political donation reform.
Implications for Donors
The ongoing observation has far-reaching implications for the persons and institutions that have been found guilty of abusing tax deductions on political contributions:
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Reversal of Tax Benefits
If the contribution is proven to be false or exaggerated, the deducted amount will be reversed, resulting in an increased tax charge on the giver.
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Penalties and Fines:
Taxpayers who submitted fraudulent requests for deductions may be penalized in terms of money, i.e., interest on unpaid tax.
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Legal Consequences:
- In extreme cases, donors can be prosecuted under tax law, and in return, can be incarcerated.
- By carrying out this investigation into such large donations, the Income Tax Department wishes to discourage individuals and companies from employing political donations as a way of tax saving.
Conclusion:
The Income Tax Department’s move to probe bulk political contributions reiterates the call for increased compliance and transparency in political funding. Tax deduction of donations is an incentive to contribute, but cannot be utilized for money laundering or tax evasion.
The topmost priority assigned by the government to vet large-donation contributions will ensure that only such genuine contributions are allowed to avail tax benefits. In the future, stricter guidelines, improved reporting mechanisms, and transparency will be essential to the integrity of India’s political finance system.
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