Political parties, including the ruling BJP and opposition Congress will be the biggest beneficiaries of the Narendra Modi government's 8 November move to ban Rs500 and Rs1,000 notes as these could now flow to their coffers, without the taxman intervening.
The Election Commission has now sought a ban on anonymous donations of over Rs2,000 to political parties and has urged the central government to direct political parties to declare these under Section 29C of The Representation of the People Act, 1951.
However, the Narendra Modi government feels otherwise and has, in fact, allowed these parties, including the ruling BJP and opposition Congress, to receive up to Rs20,000 in donations, even in old demonetised currency, and deposit these in their accounts, provided these are properly documented.
Political parties need to declare such donations under Section 29C of The Representation of the People Act, 1951, although there is no constitutional or statutory prohibition on political parties' receiving anonymous donations.
At present, political parties limit declarations to donations above Rs20,000. The EC has suggested an amendment to the Act, as part of the proposed electoral reforms, which states, "anonymous contributions above or equal to the amount of Rs 2,000 should be prohibited".
Political parties in India pay taxes only on incomes under the heads 'salaries and income from business or profession'.
Revenue secretary Hasmukh Adhia also said the central government has no plans to remove the tax exemption available to political parties at present and they were free to deposit old Rs500 and Rs1,000 notes in their bank accounts. These deposits should not exceed Rs20,000, should be in cash and should be documented.
The Commission has also proposed that exemption of Income Tax should only be extended to political parties that contest elections and win seats in Lok Sabha or assembly polls.
Section 13A of the Income-tax Act, 1961 confers tax exemption to political parties for income from house property, income by way of voluntary contributions, income from capital gains and income from other sources.