EC efforts to curb the use of black money in elections

This piece of article was shared with me by my friend Hiral Nandu who is a Chartered Accountant and works for a CA firm in Taxation consultancy.

Political parties to go corporate as Election Commission plan new rules to curb use of black money

In an effort to curb the use of black money in the electoral process, the Election Commission now plans to ask political parties to conduct their finances in a corporate fashion by getting their accounts audited and publishing their audited finance sheets annually. The EC has received a host of such recommendations from the country’s auditing regulator — the Institute of Chartered Accountants of India (ICAI) – and will notify the official guidelines to political parties and financial enforcement agencies like the Income Tax department and the Enforcement Directorate (ED) soon.

“The EC will deliberate upon and take up the final recommendations submitted by the ICAI on May 27 and notify all the stakeholders in this regard. The final recommendations by the ICAI will help in making the electoral process free from use of illegal money power,” an official involved in the drafting of the report said.

The recommendations by the top accounting body in the country come in the backdrop of the EC creating an Election Expenditure Monitoring cell within its establishment last year, which has been vital in the conduct of polls in Bihar last year and five other states recently.

The new cell, with the help of the I-T department, seized and intercepted huge sums of cash in poll-bound states and subsequent action by tax authorities led to the realisation of huge hidden tax.

The ICAI, in its final report, has recommended that “all political parties registered with the Election Commission of India may be mandated to apply accrual basis of accounting (reporting transactions on a real-time basis).”

“Every political party to follow March 31 as uniform financial year and consolidated financial statements be prepared incorporating the accounts of taluka, district and state-level party branch accounts,” the ICAI recommendations suggested, adding that all political parties should follow “a common format for presentation of its general purpose financial statements.”

“It is recommended that political parties must be mandated to get their accounts audited by a firm of Chartered Accountants, as appointed by the Election Commission of India.

The auditors should be appointed by rotation every three years,” the 38-page recommendation report of the ICAI said.

It also recommended that political parties must be mandated to “publish their audited accounts annually, which shall be available for the information and review by the concerned stakeholders and the general public at large within six months of the end of the financial year, on the parties’ website.

“Annual financial statements be also published in English in leading national newspaper and in local language in the leading newspaper of the state,” it said.

All registered political parties must be mandated to file the audited financial statements with the EC, the recommendations said, adding that the PAN number of the contributors of funds to the political party may be sought.

Laws relating to donations to political parties

I wonder if there are laws in our country to identify the donations received by the political parties.

This piece of informative input is received from one of my friend Nishit Zaveri who is a Chartered Accountant and a Senior Asscociate at a Big4 firm.

Under the Income-tax Act, donations (to anyone) is not allowable under Section 37(1) of the Income-tax Act, 1961 (the Act) as it is not for the wholly and exclusively for the purpose of the business. However, there are some case laws where the taxpayer could prove the nexus between the donation and the business purpose. Thus, if the taxpayer can prove the nexus, such donation exp. can be allowed. Apparently, no taxpayer will claim donation to political party as an allowable exp. (as nexus and benefit from such donation cannot be proved before Assessing Officer…J J)

Further, the Act specifically disallows any expenditure incurred by assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party by virtue of Section 37(2B) of the Act. Thus, even if such advt. exp. is for the purpose of business still it will not be allowed.

However, the donations are eligible for deduction (50% or 100%) u/s 80G/80GGB/80GGC of the Act (if the trust or political party is approved and registered etc….). Thus, even if it is not allowed while computing profits still the taxpayers gets the benefit under the Act. So if the taxpayer wants to claim deduction on donations made to political party it will have to disclose the information in its return of income. Since the return of income is not a public document the same will not have any problem with respect to association with any party.

Further, the political parties can receive any amount in cash as donation. However, if it does not maintain a record of such contribution and the name and address of the person who has made such contribution, the income received in excess of INR 20,000 in cash will be taxable.

PS Also the companies Act has a limit for donations to political parties but that is only applicable to companiesProvisions of Section 293A of the companies Act restricts a limit of donation to political party to 5% of the profits with some other conditions.