Things are set to get smoother for more corporate funds to flow into the coffers of political parties.

The Central Board of Direct Taxes (CBDT) has come out with an ‘Electoral Trust Scheme’, which lays down the procedure for grant of approval to an electoral trust.

With this move, such trusts are set to get more popular with corporate India.

The taxman’s approval is important for electoral trusts to avail themselves of tax exemption on voluntary contributions received by them. Once this is done, donors to such trusts will get 100 per cent tax deduction for their contributions.

However, these tax breaks will be available only when the electoral trusts distribute 95 per cent of their annual contribution to eligible political parties.

To reform the system of funding of political parties, the UPA Government had, in its 2009 Budget, extended tax breaks for ‘electoral trusts’. It was seen as a win-win arrangement as it would encourage creation of such trusts and help corporates avoid getting into an embarrassing situation of supporting only certain political parties.

Prior to the 2009 move, corporates did not get any tax breaks on contributions made to electoral trusts.

NO CASH CONTRIBUTIONS

The scheme now framed by the Tax Department bars electoral trusts from accepting cash contributions. Moreover, the trusts cannot accept contributions from foreign individuals (who is not a citizen of India) or foreign entities.

“The proposed mechanism will not only introduce transparency, but facilitate setting up of electoral trusts considering that such trusts can claim tax exemption as well,” said Aseem Chawla, Partner, MPC Legal, a law firm.

Chawla said debarring cash contribution is a step in the right direction, signalling maturity in democracy, and is reformative.

Amit Maheshwari, Partner, Ashok Maheshwary & Associates, a firm of Chartered Accountants, said that more independent electoral trusts are likely to be set up following the Tax Department’s move to frame this scheme.

He also expected increasing use of electoral trusts by corporates, especially those who don’t want to be seen as having allegiance to any particular political party.