Electoral Trust Companies (ETCs) are meant to introduce an element of transparency in the funding of political parties and thus tax exemption for contributions received by ETCs has also been built in.

If an ETC distributes at least 95% of the voluntary contributions (received by it during a year together with the brought forward surplus of earlier years), to political parties, it is entitled to tax exemption for that year. It is also required to meet certain other procedural conditions.

However, ETCs set up after July 31, 2013 are likely to miss the tax exemption boat for voluntary contributions received by them during the 2013-14 fiscal. These ETCs would have not met the deadline of July 31, 2013 for seeking approval from the Central Board of Direct Taxes ( CBDT). For such ETCs, only the voluntary contributions received by them in the coming fiscal starting April, 1, 2014, will be eligible for tax exemption.

ETCs have to comply with two sets of regulations. They have to be set up and registered as non-profits under the Companies Act. Second, they have to obtain CBDT's approval to qualify under the Electoral Trusts Scheme and thus be eligible for tax exemption.

CBDT's notification issued on January 31, 2013 requires ETCs to make an application for approval on or before July 31 of the relevant tax year. "This condition has created ambiguity for ETCs set up after July 31, 2013. Thus, it is likely that the voluntary contributions received by such trusts from the date of inception till March 31, 2014 will not be eligible for tax exemption," said a tax consultant.

Of the six ETCs registered so far with the ministry of corporate affairs, only one, Samaj Electoral Trust, was set up before July 31, 2013. Interestingly, most of these trusts have been registered under generic names without any reference to the business group. However, given the commonality of address provided with that of the corporate entities, sources illustrate that corporate groups have backed various electoral corporate trusts such as Janit Trust (Sterlite), Samaj Trust ( K K Birla) and Satya Trust (Bharti).

"Funds are collected in the run-up to elections, and general polls are likely in May 2014. For ETCs set up in the latter half of 2013, it will be a whammy if voluntary contributions received by an ETC from the date of its inception don't qualify for tax exemption even if the ETC has met all other conditions — such as distributing 95% of these contributions collected to political parties," says a corporate director.

From the company law perspective, ETCs are required to disclose details of the amount released to various political parties together with the name of such a political party.