In a country where many individuals clutch at straws to hide their receipts and by extension income, the new kid on the block, Aam Aadmi Party (AAP) — which the mainstream parties love to hate for holding a mirror to their faces — must be commended for breaking new ground: accounting for every rupee of political donations received by it.

All other political parties have so far been taking shelter under a system where small donations — not exceeding Rs 20,000 — are not accounted for, or acknowledged by a receipt. There is no reason why small donations cannot be acknowledged.

In fact, anyone making a donation, big or small, must be called upon to quote his PAN (permanent account number), a record of which must be maintained by the political party collecting donations. In any case, without proof of furnishing of PAN while making donations, one should not be allowed any income tax deduction for political donations. The tax department keeps a hawkish eye on high transactions such as purchase of immovable properties upwards of Rs 30 lakh. It should selectively swoop down on political donors, which would be possible only if it has their PAN.

Why this exemption? One wonders why the donor is allowed full deduction when there are restrictions on donations for worthier causes. Donations to religious shrines are hemmed in by two restrictions — donations in excess of 10 per cent of the total income would be ignored and only 50 per cent of such an amount would be allowed as deduction from one’s taxable income. Donations to the National Blood Transfusion Council, on the other hand, qualify for an ungrudging 100 per cent deduction. Donations to political parties can by no stretch of imagination be equated with donation for blood transfusion.

The Central Board of Direct Taxes (CBDT) has expressed disquiet over the mushrooming growth of political parties in the country that, far from participating in the political processes in the country, use their hallowed status as political parties to launder their ill-gotten wealth. Consider a one-man political party of which there is no dearth in this country. The (wo)man owning it would not only use the political party he has floated to launder his own black money but also offer his/her services to his/her charmed circle. Donations made to his/her political party would leave his/her friends free of tax liability. (S)he would then benevolently give a substantial part of the donation back in instalments, given the non-existent scrutiny of political expenses.

The blanket exemption from income tax given to political parties is questionable. To be sure, Section 13A of the Income tax Act confers exemption only on income from house property, capital gains and income from other sources.

But a political party cannot have income under any other head. In the event, it enjoys complete immunity from income tax.

A couple of things can be done straightaway. All voluntary contributions received by way of donations, big or small, must be accounted for, including the details of the donor along with his PAN. Any donation received from anonymous sources must be brought into the tax net. Indeed this is the regime obtaining for charitable trusts — anonymous donations received by charitable trusts are deemed to be their income liable to tax.

Second, the expenses at the hustings must be restricted to the election expenditure limits fixed by the Election Commission. For example, if the EC has fixed the maximum expenditure by a person contesting a Lok Sabha seat at Rs 40 lakh, his party in its tax assessment should not be allowed to get away with anything more than this.

If a political party has contested 300 Lok Sabha seats, the maximum expenditure that can be allowed in its assessment should be Rs 120 crore.

Similarly, the administrative and other routine expenditure of a political party must be pegged as a percentage of its revenue. When expenditures are thus capped, anything emerging as profit must be taxed. That political parties are not-for-profit outfits is self-serving.

There can be incentives for channelising the expenditure in desired directions. Scientific research begets a whopping 200 per cent deduction for corporates. Hence, there are many wannabe research centres in the country.

Enduring assets There is no reason why political parties cannot be incentivised to spend their money more productively than in slogan-mongering and canvassing, guzzling fuel in the process. One way is to confer a, say, 150 per cent deduction for capital expenditure.

If Members of Parliament can be allowed to spend money on local area development up to a whopping Rs 4.5 crore a year, there is no reason why political parties should not be allowed to create enduring assets in various constituencies, such as providing giant halogen lights that deter criminals, digging water tanks, building parks and playgrounds and maintaining them.

All these are enduring assets and could win the enduring goodwill of the people. This is one form of bribery, if at all, which any day is better than offer of freebies.

Electoral trusts also enjoy tax immunity, provided they handover not less than 95 per cent of the donations received during the year to political parties. This is absurd. Electoral trusts should be allowed to conserve cash and donate on the poll eve. What is the point in compelling electoral trusts to donate in 2013 when the general elections are due only in 2014?

The author is a New Delhi-based chartered accountant)

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