Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

CHANDA DO… TAX BACHAO!

Election funding can reap some smart tax saving with 100% tax deduction for donations to political parties!

  • Political donations entitled to 100% tax deduction in computing taxable income.
  • Effective tax saving possible from 30.9% to 32.445% of the amount of donation.
  • No monetary limit for political donations by non-corporate tax payers.
  • Corporate donations restricted to 5% of average profits under Company Law.

     M/s. Shah & Sons, a partnership firm has estimated taxable income of Rs. 1.50 crores in F.Y. 2012-13. It decides to give a contribution of Rs. 50 lakhs to a political party of its choice on the occasion of the 2012 Gujarat assembly elections. Since the firm will be eligible to write off the entire contribution for tax purposes, it will resultantly save a decent Rs.15,45,000 by way of income-tax at the rate of 30.9% of the amount of donation. If the donor in this case was a company, the tax saving at the applicable tax rate of 32.445% would work out even higher at Rs.16,22,250.

     It was’nt the same ten years ago you may exclaim! That’s true! 2002 Gujarat elections were contested when donations to political parties were not patronized. However, on 30th July, 2003, the the Lok Sabha passed ‘Election and Other Related Laws (Amendment) Act,’ whereby the ‘Representation of the People’s  Act, 1951’ was amended to statutorily provide that every political party may accept any amount of donation (except from a foreign source) voluntarily offered to it by any person or company, other than a Government company. New Sections 29 B and 29 C inserted in the Act made relevant legislative provisions in this regard. The donations received by political parties in excess of Rs.20,000 are, however, required to be annually reported by the Treasurer of the party both to the Election Commission, as well as to the Income-tax Authorities.

     Alongwith the above, two new Sections 80GGB and 80GGC came to be inserted in the Income-tax Act with effect from 30th September, 2003, providing for 100% deduction of contribution to any registered political party from the taxable income of Indian Companies or any other persons (other than a Local Authority or any artificial juridical person wholly or partly funded by the Government).

     It also needs to be borne in mind that provisions of Section 13 A of the Income-tax Act, already exempt the income and contributions received by a political party, subject to fulfillment of certain procedural formalities.

     Thus, while a political party would enjoy total exemption in respect of the contributions received, anyone giving such contribution would also enjoy full deduction and consequential tax saving. No monetary ceiling or limit has been provided under the Income-tax Act in respect of the quantum of contribution or the extent of deduction that can be availed in this regard.

     However, Section 293-A of the Companies Act does lay down a ceiling of 5% of the average net profits of the Company during the immediately three preceding financial years, as the maximum amount of such contribution a Company can make during the year. No such restriction would obviously apply in case of an Individual, HUF, Partnership Firm or AOP.

     It is indeed ironical that while contributions to charities doing laudable work for the welfare of the society enjoy tax deduction of only 50% and that too within the ceiling limit of 10% of the taxable income, political contributions have been bestowed upon the bonanza of 100% deduction without any monetary ceiling. Well that is why they say ‘No wonder, politics gets the top priority!’

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