Made huge profit selling your property & want to avoid paying tax? Form a political party
May, 10th 2014
Made a huge profit selling your property and wondering how to avoid paying tax? Form a political party and "donate" your sale proceeds to it. And if you were worried the taxman will come knocking, just relax, it is perfectly legit. You and your party can claim 100% tax exemption too. "Many political parties are fronts for income tax fraud," says former chief election commissioner N Gopalaswami . That explains the burgeoning political party registrations. There are about 1,600 political parties in India, but only 100-150 actually contest elections. According to the Election Commission website, on March 10 there were six national parties, 23 state-level parties and 1,593 registered and unrecognised parties. On March 21, the Commission registered 24 more parties.
Then in five days, 10 more were listed — including a Rashtriya Aam Party (Aam being the flavour of the season). According to a back-of-theenvelope estimate by Gopalaswami, three new parties are registered every week. Election Commissioner HS Brahma confirms the trend. During a Confederation of Indian Industry meet in March, he said 90% of the parties registered with the Commission are created to evade tax. According to him, the party founders use the money thus channelled to buy jewellery, houses and plots, among other things.
"Sections 80GGGB and 80GGGC of the Income Tax Act give you 100% tax deduction for contributions made to a political party or an electoral trust," says Vivek Mallya, partner at Bangalore-based auditing firm Bhat, Mallya & Associates. Till 2014, even cash contributions were non-taxable . Parties are exempt from taxes under Section 13 of the Act. Is there a limit to the amount that can be contributed? None, says Mallya . While contributions made under Section 80G of the I-T Act have a limit up to 10%, the sky is literally the limit for what you can give to a party. If I-T officials suspect foul play, they cannot do much. "Their hands are tied until the General Anti-Avoidance Rules are in place," says Mallya. Until 2016, Sections 95 to 97 of the I-T Act, which deal with this, do not apply. Former CEC Gopalaswami remembers a party once registered with "Mathru Bhakti" in its name.
"I told my officials, Lakshmi (the goddess of wealth) is also a matha. So the party is formed to worship her." There was a party that claimed to have spent the same money for three consecutive years and the Election Commission launched an inquiry. "The party office was a single room, one chair and a table," Gopalaswami remembers. An I-T inquiry found that the money had been used to buy jewellery and shares. Commission officials say that it is difficult for it to investigate the veracity of every registered party. A quick check in Bangalore revealed a party that operates from an apartment and was formed "about six to seven years ago" according to its founder, who requested anonymity . "I do not run it anymore," said the party "founder".
"I wanted to close it down after two years, but one Mr Reddy said he wanted it, because he found some investors," he said. "So, I transferred it to him." Reddy, he says, runs it from Mysore and he is not sure from where. Another operates from a lawyer's office. It is essentially a one-man party and claims to be contesting this time from 16 constituencies. But the party's candidates were not listed as candidates even in a single constituency. Tax saving is not the only reason parties are formed. There are some which are registered under names that sound very similar to prominent candidates. Many of these are registered to split votes and some of them pull out when serious candidates pay them enough. Says senior BJP leader Suresh Kumar : "This time in Chikmagalur there were four Shobhas (namesake of BJP candidate Shobha Karandlaje ) and I myself faced this when I contested. Some of these parties emerge only during elections and are willing to withdraw for a fee.
Their standard line is 'We want to support you, but we have already spent so much money so could you compensate that?'" . The "fee" ranges from Rs 5 lakh to Rs 40 lakh, according to Kumar. "Fortunately , over time, we know their credentials and their capacity for damage ," he says. But doesn't the Election Commission have the power to de-register such parties? Apparently not. In 1998, the Commission asked for powers to regulate and de-register parties . It reiterated the demand in 2004 and 2006. In 2006, it demanded that only parties contesting elections be given tax breaks. None of the requests have been granted so far.