Income Tax Department Cracks Down on Dubious Political Donations: What Donors Must Know?

The Income Tax Department is tightening the scrutiny on individuals and entities claiming tax deductions for political donations. Over Thousands of donors who contributed Rs.5 lakh or above to lesser-known political parties during FY 2020-21 are now under the Income tax scanner. Here’s a breakdown of the investigation, its implications, and how taxpayers can protect themselves.

Why the Scrutiny from the Tax Department?

The Income Tax Department suspects a money laundering racket where donors allegedly routed black money through political parties. The modus operandi:

• Donors send checks to obscure political parties.
• The amount returned by parties in cash after deducting 1-3% as commission.
• Tax deductions claimed by Donors under Section 80GGC (for individuals) or 80GGB (for companies), effectively lowering taxable income.

More than 9,000 individuals claimed tax deductions under Section 80GGC for donations ≥ Rs.5 lakh in FY 2020-21. However, many recipient parties lacked basic credibility; some didn’t even contest elections in donors’ constituencies.

Key Questions Asked by the Income Tax Department

Tax notices demand detailed explanations, including:

1. Who contacted you from the political party? Name the person.

2. Did the party contest elections in your constituency?

3. What due diligence did you perform before donating?

4. How did you connect with the electoral trust/party?

5. Submission of bank statements (FY21), audited financials (2019-22), and PAN/registration details of recipient parties.

Failure to justify donations could lead to:

• Rejection of tax deductions.
• Heavy penalties and income additions (treating the donated amount as undisclosed cash income).

Expert Advice: How to Respond?

1. Genuine Donors: Retain proof (acknowledgement receipts, party’s tax exemption certificate, bank transaction records).

2. Doubtful Claims: File updated tax returns by March 2025 to withdraw deductions, pay due taxes, and avoid penalties.

3. Due Diligence: Verify if the party contested elections in your area. Unregistered parties with no electoral activity are red flags.

4. Tax experts warn: “If the donation isn’t genuine, taxpayers risk double trouble—losing deductions and facing income additions for undisclosed cash.”

They also add, “This isn’t just about FY 2020-21. The department may probe donations in other years too.”

Bigger Picture

The Tax Department’s move aims to crub the misuse of political funding channels for tax evasion. While donations to political parties are tax-free, the law mandates transparency. Donors must ensure:

• Parties are registered and issue receipts.
• Contributions align with genuine support, not tax-saving motives.

Takeaway

Political donations are legal, but using them as a tool for tax fraud invites severe consequences. Taxpayers must:

• Revisit past deductions claimed under Sections 80GGC/80GGB.
• Act before March 2025 to rectify discrepancies.
• Prioritize compliance over short-term tax savings.

Stay informed. Stay compliant.a