T AX L AW P ROJECT

TOPIC:
TAX RELIEF ON FUNDING POLITICAL PARTIES
[WITH

GLOBAL COMPARATIVE ANALYSIS OF TAX RELIEF ON FUNDING

TO POLITICAL PARTIES IN

AUSTRALIA, FRANCE, GERMANY,

UNITED KINGDOM & UNITED STATES]

SUBMITTED BY:

SUBMITTED TO:

Jubair Bhati [L/125] & Anjali Choudhary [L/116]

Ms.Pratima Soni

B.B.A. LL.B. [VII Semester]

School of Law
Raffles University

Assistant Professor
School of Law
Raffles University

TAX LAW PROJECT WORK

TABLE OF CONTENTS
1. ACKNOWLEDGMENT
2. AIMS AND OBJESCTIVES
3. LIST OF CASES
4. LIST OF ABBREVIATIONS
5. ABSTRACT
6. INTRODUCTION.
7. CH-1. FUNDING OF ELECTIONS BY INDIVIDUAL.
8. CH-2. CORPORATE FUNDING OF ELECTIONS.
Electoral Trust
Details required to ensure genuineness of a company
9. CH -3.MANDATORY DISCLOSURE FOR POLITICAL PARTIES TO AVAIL TAX RELIEF.
Additional Disclosure Mandates for Electoral Parties/Candidates to avail tax relief
Current Status
10. CH 4. A GLOBAL PERSPECTIVE ON POLITICAL PARTY FUNDING AND TAX BENEFITS.
Position in Australia
Position in France
Position in Germany
Position in United Kingdom
Position in United States
11. CONCLUSION.
12. BIBLIOGRAPHY.

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ACKNOWLEDGEMENT

I take this opportunity to express our humble gratitude and personal regards to Ms. Pratima
Soni for inspiring me and guiding me during the course of this project work and also for his
cooperation and guidance from time to time during the course of this project work on the
topic.

Date of Submission: November 07, 2016

Jubair Bhati & Anjali Choudhary

Place: Neemrana

Sd/-

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AIMS AND OBJECTIVES

The aim of the project is to present a detailed study on the topic Tax Relief on Funding
Political Parties along with comparative analysis with the legal regime prevalent in
Australia, France, Germany, United Kingdom and Unites States.

RESEARCH PLAN
The researchers have followed the doctrinal method of research.

SCOPE AND LIMITATIONS

In this project the researcher has tried to include different aspects pertaining to the concept of
tax deduction upon donation to political parties by individual as well as the corporation
in different nations.
.
SOURCES OF DATA
The following secondary sources of data have been used for accomplishing this project:

Legal Research Online Portals

Tax Law Commentaries

Case Laws

Books

METHOD OF WRITING AND MODE OF CITATION:

The method of writing followed in the course of this research project is primarily descriptive
and comparative analysis. The researcher has followed Uniform Citation Method throughout
the course of this research project.

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LIST OF CASES

Buckley v. Valeo, 424 U.S. 1 (1976).

Citizens United v. FEC, 558 U.S. 310 (2010).

Colorado Republic Federal Campaign Commission v. FEC, 533 U.S. 431 (2001).

Goetze (India) Ltd v. Commissioner of Income Tax, [2006] 284 ITR 323 (SC).

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LIST OF ABBREVIATIONS

Section

Art.

Article

EC

Election Commission

FCRA

Foreign Contribution
Regulation Act, 1976

FEC

Federal Election
Commission

Id.

Ibid

IT

Income Tax

ITR

Income Tax Reporter

SC

Supreme Court

v.

Versus

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ABSTRACT
This project aims to analyze the various legal provisions of the Income Tax Act, 1961 and the
Companies Act, 2013 which provides for the tax relief to the assessee upon funding to the
political parties. This project especially lay emphasis on the electoral trust scheme
incorporated by the corporations in order to gain tax relief as well as administrational favors
by the political parties.
Further, the research project also elaborate the legal regime for tax benefits to assessee, either
individual or corporations, in the Western European countries. Moreover, the project work
also lays emphasis upon the eligibility of the political parties to gain the tax rebate in the
income received from donations by individual as well as the corporations.
Lastly, the project concludes in suggesting the various steps to be taken in order to improve
the existing flaws in the Indian electoral funding system and the tax concessions associated
with it. Additionally, the project supplies with the various tax concession provisions to be
adopted from other countries to the Indian electoral system and its tax related reliefs.

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INTRODUCTION

Any Sum contributed by an eligible assessee to any political party (registered under
section 29A of Representation of People Act, 1951) or Electoral Trust is eligible for
deduction under Income Tax Act, 1961.1

No deduction is allowable if contribution/Political Donation is made in cash (Applicable

from Assessment Year 2014-15).2
Eligible assessee means Indian Company and any other person (except local authority and
every artificial juridical person wholly or partly funded by government).
Deduction under Sec. 80GGB of the Income Tax Act, 1961 upon contributions made by
Indian Company.
Deduction under Sec. 80GGC of the Income Tax Act, 1961 upon contributions made by
any individual person (except local authority and every artificial juridical person wholly
or partly funded by government).3
Expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract,
pamphlet published by political parties is not allowed but deduction under Sec. 80GGB is
allowed.

As per Sec. 13A of the Income Tax Act, 1961 any income of a political party which is
chargeable under the head Income from house property or Income from other sources
or Capital Gains or any income by way of voluntary contributions received by a
political party from any person shall not be included in the total income of the previous
year of such political party. Provided that(a) such political party keeps and maintains such books of account and other documents
as would enables the Assessing Officer to properly deduce its income there from;
(b) in respect of each such voluntary contribution in excess of twenty thousand rupees,
such political party keeps and maintains a record of such contribution and the name and
address of the person who has made such contribution.4

It must be noticed that the Honble Supreme Court in the case of Goetze (India) Ltd v.
Commissioner of Income Tax5 has held that the tribunal being the appellate authority if
empowered to direct the Assessing Officer to accept the claim of deduction by assessee,

Deductions, Income Tax, available at http://www.incometaxindia.gov.in/Charts%20%20Tables/Deductions.htm

last seen on 28/10/2016.
2
Exemptions and Deductions, Taxmann, available at http://www.taxmann.com/applicationsoftware/pdf/
deductions-exemptions/Direct%20Taxes%20Ready%20Reckoner.pdf last seen on 28/10/2016.
3
Id.
4
DR. VINOD K. SINGHANIA & DR. MONICA SINGHANIA, STUDENTS GUIDE TO INCOME TAX 64 (55th ed. 2016).
5
[2006] 284 ITR 323 (SC).
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even though the same has not been made in the original return nor has been claimed in the
revised return.

CHAPTER 1. FUNDING OF ELECTIONS BY INDIVIDUAL

The whole process of donation to political parties starts with the understanding of the
manner and nature of the donations. There is also another type of donation which is made
to charitable institutions whereby the entity then uses the money for some charitable
purpose. This also has a tax benefit available for the individual who actually gives money
for this purpose.

However, the political donation is separate from this donation because here the money is
given to a political party. The money will not be used for some social good but it will be
used by the political party for the purpose of contesting elections or for its organization or
some other area related to its political activities. This is important as the end use here is
for political purposes, which is different from what one would associate with some other
kinds of donation.

The Finance Act, 2009 introduced a provision to make election funding, by non-corporate
assessee or individuals to political parties, transparent and free of corruption.6

It came in the form of tax benefit that becomes available, when money is donated to a
political party, in the form of a deduction for the individual. This is a deduction which
means that the amount of the donation would be reduced from the taxable income of the
individual and hence the tax calculation would have to be made only on the remaining
amount.7

In this way, it provides a relief so that the final tax burden on the individual is less. The
amount of the deduction is 100 per cent so the full amount of the money that is donated
would be eligible for the deduction unlike several types of donations to charitable
institutions where only 50 per cent of the amount becomes eligible for the benefit.8

The deduction under Sec. 80GGB is permissible to any person, other than Local
Authority and Artificial Juridical Person, wholly or partly funded by Government.9

The Finance (No.2) Act, 2009 (Act 33 of 2009) available at http://indiabudget.nic.in/ub2009-10(I)/fb/act.pdf

last seen on 28/10/2016.
7
The Income Tax Act 1961, 80GGC.
8
DR. N. HARIHARAN, INCOME TAX LAW AND PRACTICE 205 (8th ed. 2014).
9
Namit Oberoi, Reforming Election Funding, NUJS Law Review, 1, 10 (2015), available at
http://nujslawreview.org/wp-content/uploads/2015/02/namit_oberoi.pdf last seen on 29/10/2016.
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The donation as per the provisions of Sec. 80GGB must be exclusively made to Political
parties registered under Sec. 29A of the Representation of the People Act, 1951 or the
Electoral Trust.

Donations made in cash are not allowed for deduction. This exception became applicable
from Assessment Year 2014-15 and onwards. Further, contributions made in kind are also
not allowed for deduction.

The whole amount of contribution is allowed as deduction from the taxable income of an
assessee. Since this deduction falls under Chapter VIA of the Income Tax Act 1961, the
amount of deduction allowed cannot exceed the total taxable income of the assessee.

CHAPTER 2. CORPORATE FUNDING OF ELECTIONS

The Companies Act, 2013 states that the companies donating contributions to the political
parties must be in existence for a minimum period of three years.

Further, the companies can donate only up to 7.5% of its profit in a year and is bound to
disclose the amount in its profit and loss account. This exercise of the power of the
companies can take place only with the approval of the board of directors through a
resolution.10

If a company violates any of the provisions of this section, the company shall be
punishable with fine which may extend to five times the amount so contributed; and every
officer of the company who were involved in such violation shall be punishable with
imprisonment for a term which may extend to six months and shall also be liable to fine
of 5 times the amount contributed.11

Companies contributing any amount to Electoral Trust Companies for contributing to a

political party are not required to make disclosures as required under Sec. 182 of the
Companies Act, 2013. However, the amount contributed to trust need to be mentioned in
accounts of the company. Electoral Trust Companies will be required to disclose all
amounts received by companies and contributed to political party.12

Advertisements, brochures and souvenirs released by or on behalf of political parties, or if

not directly released by a political party or meant for a political purpose but financed

10

The Companies Act 2013, 182.

AVTAR SINGH, COMPANY LAW 289 (16th ed. 2015).
12
Id.
11

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through corporate funding, will be considered as contributions by companies for a

political purpose.13

One of the criticisms leveled against the provision of a resolution is that only a minuscule
number of people can decide how to utilize the funds for political purposes as opposed to
the thousands of shareholders who are the real owners of the company.

One way to counter this criticism to some extent would be to require the resolution to be
passed at the Annual General Meeting (AGM) of the company, rather than merely by the
Board of Directors.
Electoral Trust

The government enacted the Electoral Trusts Scheme, 2013 in order to streamline the
process of funding and to ensure the transparency of corporate funding to the political
parties poll expenses.

According to this scheme, Electoral Trust companies were to be set up and were promised
tax benefits in proportion to the funds they provided to various political outfits.14

The Corporate Affairs Ministry amended its Name Availability Guidelines for the
companies to enable registration of non-profit companies.15 The companies were required
to have the phrase Electoral Trust before their names and get registered, so as to
differentiate them from other companies, as allowed under Sec. 25 of the Companies Act,
1956 under the Electoral Trusts Scheme, 2013.16 The companies were supposed to have
an affidavit to the effect that they would be limited only for the purpose of registration of
companies under the Electoral Trust Scheme of Central Board of Direct Taxes.17

The companies were allowed tax benefits on one condition, i.e. only if they distribute
95% of total contributions received by them in any financial year to the registered
political parties within that year itself.

The Electoral Trust companies were not allowed to accept contributions from foreign
citizens or companies. They need to take the PAN number of all contributors who were
resident Indians and passport number of NRI citizens at the time of receiving the
contribution.

13

See J. Prabash, India: Mounting influence of Money Power in Elections and Crisis of Representation, 1 Asia
Pacific J. Soc. Sci. 98 (2010).
14
LAW COMMISSION OF INDIA, Electoral Reforms, 255th Report, (March, 2015).
15
Name Availability Guidelines 2011, MCA General Circular No. 45/2011 (08/07/2011), available at
http://www.mca.gov.in/Ministry/pdf/Circular_45-2011_08july2011.pdf, last seen on 01/11/2016.
16
Electoral Trust Scheme 2013, CBDT Notification No. 09/2013 (31/01/2013), available at
http://dhc.co.in/uploadedfile/1/2/1/Notification%20on%20the%20Electoral%20Trusts%20Scheme,%202013.pdf
,last seen on 01/11/2016.
17
Id.
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One of the reasons for the growing popularity of electoral trusts is the anonymity offered:
there is no compulsion to disclose to which parties the contributions have been made,
which could be a source of trouble if the party the business house is backing fails to win
elections.18

The funding is applicable to all political parties above a certain representation in

Parliament and legislative assemblies.

The electoral trust administered by the Tata group funds political parties that have at least
a minimum three percent seats in the Lok Sabha.

The objective of the electoral trust is to donate money to political parties in a transparent,
non-discretionary and non-discriminatory manner. The fund is administered by two or
three eminent public figures, usually former Supreme Court or High Court judges or
lawyers.

Other factors considered by the group while disbursing funds among the political parties
include suggestions from its Advisory Board as well as the overall business interests of
the contributing companies in each State. Consequently, this may result in the company
financing one political party in a State and its rival in another.

Electoral trusts could go a step further by funding political parties to conduct various
activities, apart from only winning elections. The lack of commitment to a healthy
functioning of political parties, an essential feature of representative democracy, needs to
be given more consideration. Funds from trusts should help in better management of
political parties as entities as well as require carrying out social reforms and sensitizing
citizens, building strong organizational values and leadership. Considering them merely
as tools for winning elections betrays both the necessity of funding political parties as
well as being part of the process to ensure a transparent and accountable political system.
Details required to ensure genuineness of a company
1. Registration data of the company website: This may provide information relating to
the name of the person who created the website, which may help to further gather
information about the company. The information as to the period since when the
website is in existence and when will it expire, is necessary. If a website is created
only for a short span of time, it may indicate some scam.

18

Samya Chatterjee and Niranjan Sahoo, Corporate Funding of Elections: The Strengths and Flaws, Observer
Research
Foundation
Issue
No.
69
(02/2014),
available
at
http://www.orfonline.org/wp
content/uploads/2014/03/IssueBrief_69.pdf, last seen on 03/11/2016.
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2. Reviews of the company on the internet: Reviews from the public often help to
believe on the genuineness of a company. The more the positive reviews, the more
faith is built on the company.
3. Proper certification and licenses: It is important to ensure that the company has
complied with the regulations of the Companies Act and has the proper certificates
and licenses proving the authenticity of the company.
4. Companys credit report: All the credit report related to the company must be taken
down. In order to ensure the legitimacy of a company, the companys credit score,
their contact details, financial performance as to the profit and loss accounts of the
company, number of directors- their personal & professional information, everything
needs to be recorded.
5. KYC of the corporate entity: KYC (Know Your Customer) is very important as it
provides a detailed information about the company. It seeks copy of the PAN card,
copy of Certificate of incorporation, Memorandum of Association, Articles of
Association, Board resolution, Photo identity proofs of authorized person and
registered address. This totally secures against any fraud from the company.
6. Contact on the given registered address and phone number: The company must
be rechecked as to whether they have given a genuine contact number and address by
calling on that number and confirming it.
7. Discrepancies and lack of professionalism: One should thoroughly go through the
website and see to it that no such discrepancy is found. The kind of information which
it shares shows how coordinated the business is. They must be original and not copied
from elsewhere.19

CHAPTER 3. MANDATORY DISCLOSURE FOR POLITICAL PARTIES TO AVAIL TAX RELIEF

According to law, every political party is entitled to accept contribution offered to it by

any person or company voluntarily, other than a Government company. 20 No political
party is allowed to accept any contribution from any foreign source21 as per the provisions
of the Foreign Contribution (Regulation) Act, 1976.22

19

See KPMG India, Indian Government unveils the scheme of Electoral Trust Scheme, KPMG FLASH NEWS
(February 12, 2013).
20
The Representation of Peoples Act 1951, 29B.
21
The Foreign Contribution (Regulation) Act 1976, 2:Foreign Source includes(i) the government of any foreign country or territory and any agency of such government;
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Further, the political parties are required to declare the details of contributions of more
than Rs. 20,000 and prepare a report for the same in each financial year. 23 Here,
contribution includes contributions from both private persons as well as companies.

It is made mandatory for the political parties to submit to the Election Commission
(hereinafter referred to as EC) of India a list of donations they receive of over Rs. 20,000,
giving names and addresses of the donors.24 If they fail to do so, then such political
parties are disentitled from getting any tax relief under the Income Tax Act, 1961.
Additional Disclosure Mandates for Electoral Parties/Candidates to avail tax relief

The candidates can raise fund from any source, as there is no restriction under the law on
fund-raising by the candidates, nor there is any requirement to maintain and disclose the
names and addresses of the persons from whom they are receiving the fund.

The Parties are required to disclose to the EC, within 75 days of assembly election and 90
days of Loksabha election, the total amount of election expenses incurred by them. But
there is no penal provision, if the parties do not submit the report at all or submit
incomplete or incorrect report.

(ii)any international agency, not being the United Nations or any of its specialized agencies, the World Bank,
International Monetary Fund or such other agency as the Central Government may, by notification in the
Official Gazette, specify in this behalf;
(iii)a foreign company within the meaning of section 591 of the Companies Act, 1956 (1 of 1956), and also
includes(a) a company which is a subsidiary of a foreign company, and
(b) a multi-national corporation within the meaning of this Act;
(iv) a corporation, not being a foreign company, incorporated in a foreign country or territory;
(v) a multi-national corporation within the meaning of this Act;
(vi) a company within the meaning of the Companies Act, 1956 (1 of 1956), if more than one-half of the
nominal value of its share capital is held, either singly or in the aggregate, by one or more of the
following, namely,(a) government of a foreign country or territory,
(b) citizens of a foreign country or territory,
(c) corporations incorporated in a foreign country or territory,
(d) trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in
a foreign country or territory;
(vii) a trade union in any foreign country or territory, whether or not registered in such foreign country or
territory;
(viii) a foreign trust by whatever name called, or a foreign foundation which is either in the nature of trust or is
mainly financed by a foreign country or territory;
(ix) a society, club or other association of individuals formed or registers outside India;
(x) a citizen of a foreign country;
but does not include any foreign institution which has been permitted by the Central Government, by
notification in the Official Gazette, to carry on its activities in India.
22
The Foreign Contribution (Regulation) Act 1976, 4.
23
The Representation of Peoples Act 1951, 29C.
24
Id.
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The EC has issued instruction in its transparency guidelines for the political parties that
such report submitted should be verified by the Chartered accountant of the Party, but
there is no penal provision to ensure this. The EC puts these reports on its website.

The EC has issued instruction in transparency guidelines for the parties that the parties
should file the Annual Audited Accounts with the Commission within seven months from
the end of financial year. Similarly, the Commission has issued guidelines that the parties
should not incur any expenditure in cash, if the amount is more than Rs 20,000/- to a
single person in a day (excluding the transactions in areas not having banking facility). In
the absence of penal provisions, some parties do not comply with the requirements.

As required by the Commission, the Institute of Chartered Accountants has issued

guidelines prescribing accounting and audit standard for the parties. There is no penal
provision for violation of such guidelines.

During the election process, the candidates are required to produce their Day to Day
election expenditure statements three times before the Expenditure Observer of the
Commission for inspection and final accounts with bills and vouchers are required to be
submitted before the DEO, within 30 days of completion of election. If they dont submit
such statement before the DEO, in time and in the manner prescribed, they may be liable
for disqualification by the Commission for a period of three years.25

The commission has issued instruction that each candidate should open a separate bank
account for election expense and incur all expenses from that account by cheque,
excluding small payments below Rs 20,000/-. But there is no penal provision to enforce
this.
Current Status

Under the current legal requirements, political parties are generally not completely
transparent in their finances and thus a huge proportion of their income remains
unaccounted for. There are unknown sources of funding reported by political parties in
their annual disclosure report such as sale of coupons, Aajiwan Sahayog Nidhi, relief
fund,

miscellaneous

income,

voluntary

contributions,

contribution

from

meetings/morchas etc. for which there is no information available in the public domain.26
25

Dr. Anand Prakash & Dr. G.S. Rajpurohit, Indian Democracy paying for Political Funding: A Socio-Legal
Perspective, 2 International J. Allied Prac. 37, 42 (2015), available at http://ijaprr.com/download/1440388521.
pdf, last seen on 03/11/2016.
26
Background Paper on Political Finance and Law Commission Recommendations, Election Commission of
India (23/03/2015), available at http://eci.nic.in/eci_main1/Current/BackgroundPaper23032015.pdf, last seen on
04/11/2016.
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BSP has been an excellent example of such lack of transparency in the political parties
disclosure. Since last 8 years, it has not disclosed even a single name of the donor who
has contributed above Rs. 20,000 to them, though every year its total income has been in
crores.27

This egregious level of opacity in the financial disclosure of political parties

certainly creates a suspicion towards the dubious sources of income which ultimately
effects our electoral process.

There is a grave need for a strict mechanism for ensuring that there is final transparency
and accountability on the part of the political parties. In order to put forward a true picture
of the financial position of the political parties, there must be a standardized procedure
and framework of reports. Institute of Chartered Accounts of India (ICAI) has taken a
step towards this direction on the request of the Election Commission of India (EC).

CHAPTER 4. A GLOBAL PERSPECTIVE ON POLITICAL PARTY FUNDING AND TAX BENEFITS

India is one of the fastest growing economies of the world, and going by the rate of
growth of the last one decade, is touted to become a global superpower in the next
decade. However, this image is tarnished at the international level by the rampant
corruption and policy paralysis that successive governments are accused of suffering
form.

It is thus imperative that we take a holistic view of global best practices in every aspect of
policy making, including political funding and tax benefits thereto.

Position in Australia

The Australian political finance regime is largely open and unregulated. There is no ban
on donations from foreign interests

28

or on corporate donations.29 When it comes to

anonymous donations, there is no blanket ban as such, but there is a specific limit on
donations exceeding $ 5000. 30

There are also no limits prescribed to the limit on the amount which a donor can
contribute to a political party or candidates.31 There are specific bans on vote buying

27

Id.
Anthony Gray and Nicky Jones, To Give and to Receive: The Australian Governments Proposed Electoral
Finance Reform, 2010, available at http://eprints,usq.edu.au/6141/2Gray_Jones_PV.pdf, last seen on 5/11/2016.
29
CAROLINE DUB, POLITICAL DONATIONS BY COMPANIES: A CORPORATE LAW PERSPECTIVE (1st ed. 2007).
30
Funding and Disclosure Guide 2010-2011 for Political Parties, Australian Electoral Commission (2011).
31
Library of Congress (2011), Campaign Finance: Comparative Summary, 2011, available at http://loc.gov/
law/help/ campaignfinance/comparative-summary.php, last seen on 5/11/2016.
28

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32

and state resources being used in favor or against a political party or candidates.33

However, there are no limits on expenditure.

Both parties and individuals have to report regularly on their finances and this
information is to be made public. There is a separate institution-titled the commonwealth
Director of Public Prosecutions, which has a formal role in political finance oversight.
There are sanctions in the form of fines and imprisonment for political finance
infarctions.

Further, individuals are allowed to obtain a tax deduction for making a political donation
to a political party or to an independent if that party or independent is a candidate in a
commonwealth, state or territory election or is, or was, a member of a parliament or
legislative assembly. The maximum deduction is $1,500 and is allowable in the persons
tax return for the financial year in which the donation is made. The gift may be made in
the form of cash or property. In such a case, the deduction allowed is the lesser of the
market value of the property or the amount paid for it.

A donation made to a political party in the course of carrying on a business is not tax
deductible. Prior to 2008, businesses were permitted to make deductible donations but
this was held as against the governments policy. This was made absolutely certain by
only allowing individuals not carrying on a business to make deductible donations
thereby effectively denying companies and trusts from doing so.

The law also denies a tax deduction to a person or their estate from making a donation in
their will. Therefore, a person should make a political donation when alive.

Oddly, the main political parties rarely advertise that a donation to their party may be tax
deductible possibly because the principal donors are unions and businesses neither of
which can claim a tax deduction.

Position in France

In France, public subsidies for parties and candidates were introduced from 1988, and
corporate donations were banned from 1995.

34

There is also a ban on donations from

foreign interests.35 Public subsidies were over 50% of party income in 1998 and 90% of
headquarters income for small parties. There are both contribution limits and spending
limits for both parties and candidates.

32

Commonwealth Electoral Act 1918, Art. 326.

APS Values and Code of Conduct in Practice, Australian Public Service Commission (2009).
34
Transparency of Party Funding (Theme II), GRECO Evaluation Report on France (2009).
35
Code Electoral, Art. 52.8.
33

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Tax deductions are available upto 40% of individual donations and party membership
dues. Parties have freedom and autonomy despite public subsidy but have to disclose all
contributions received.36 The sanctions for political funding infractions are fines,
imprisonment, loss of public funding and loss of elected office. 37

Contributions given by physical persons to one or more candidates for a specific election
are authorized only during the year preceding the election. With regard to contribution
amounts, a distinction is made between contributions below or equal to 150, (referred to
as cash contributions) and contributions of more than 150. Contributions of more than
150 must be paid by check or online, with the donor duly identified. A physical person
duly identified is allowed to contribute up to 4,600.38 Cash contributions cannot exceed
150 per donor. The total amount of cash contributions to a candidate cannot exceed 20
percent of the authorized campaign expenditure amount when such amount is equal to or
more than 15,000.39

Physical persons donations made to political parties or to election campaigns, and

political party membership fees, give rise to a tax credit equal to 66 percent of their
amount, with a limit of 20 percent of the taxpayers taxable income. 40 Proof of the
donation or fee must be provided in order to be allowed the credit. A candidates
contribution to their own campaign does not give rise to a tax deduction.41

No legal entity is allowed to participate in financing a political candidate unless the legal
entity is a political party or a political group. Financing is not allowed in any form
whether direct, e.g., by donating money, or indirect, e.g., by rendering services or
granting favors or advantages to a candidates political campaign by providing services
and products below regular market fees or prices.42

No legal entity is allowed to finance political parties or political groups. Financing is not
allowed in any form whether direct, e.g., by donating money or properties, or indirect,
e.g., by rendering services, providing products below regular market fees or prices, or
granting favors or advantages to political parties, groups, their financial representatives,
or associations.43

36

Code Electoral, Art. 52.12.

Code Electoral, Art. 106.
38
Code Electoral, Art. L.52-8.
39
Id.
40
Code General Des Impots, Art. 200 (Dalloz 2008).
41
Code Electoral, Art. L.52-8.
42
Code Electoral, Art. L11-4.
43
Code Electoral Art. L.52-8.
37

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The intent of Parliament was to cut any link between the economic world and the political
world.

Foreign states or foreign legal entities cannot make direct or indirect donations to a
political candidate.44 No restriction is mentioned regarding foreign physical persons, and
there is no provision regarding the requirement to raise all or the majority of funds within
a candidates home constituency. Political parties also are prohibited from receiving
contributions from foreign states or foreign legal entities.45

Position in Germany

In Germany, tax deductions for small donations and party membership dues have existed
alongside public funding since 1959. Since 1992 tax deductions for corporate donations
have been removed.

Public funding exists on a matching grant basis in which the ceiling for public subsidies is
the income obtained by parties from private sources.46 Public funding is for parties with
no earmarking for elections or other activities. There are no expenditure or contribution
limits and disclosure of donor identities and amounts is limited to big donors. Over time
this system has led to the bulk of party income from private sources coming from
individuals other than corporations.47

The political parties receive governmental funds for all their constitutional functions, and
campaigning is one of these functions. In fact, the parties are supported by the
government on a continuous basis.48 Public funding is granted to all parties that have
obtained 0.5 percent of the vote in the latest national or European election, or one percent
in the latest state election in one of the German states.49 Funding is limited in two ways:
the overall limit for all annually disbursed funds is 133 million Euros, and a party may
not receive more public annual funds than it has earned or otherwise generated during the
year.50

44

Code Electoral Art. L11-4.

Decree 140 of 2007, on Increasing the Ceilings on Campaign Expenditures, J.O. (Feb. 3, 2007).
46
Political Parties Act, 2004.
47
KARL_HEINZ NASSMACHER, THE FUNDING OF PARTY COMPETITION, POLITICAL FINANCE IN 25 DEMOCRACIES,
NOMOS (1st ed. 2009).
48
Parteiengesetz [ParteiG], repromulgated on Jan. 31, 1994, BGBl. I at 149, as last amended by Gesetz, Dec. 22,
2004, BGBl I at 3673, 18, available at www.bundeswahlleiter.de/bundestagswahl2005/downloads/
parteieng.pdf last seen on 5/11/2016.
49
J. IPSEN, PARTEIENGESETZ 195 (1st ed. 2008).
50
ParteiG, 18, para. 5.
45

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There is no limit on the amounts that individuals or corporations may contribute and only
a few restrictions apply.51 Public disclosure of the donor must be made in the annual
financial statement of the party only if his donations exceed 10,000 per year. Private
donations in excess of 50,000 must be disclosed immediately.

Donations from charitable organizations and from trade unions, professional associations,
and industrial or commercial associations are prohibited. The law expresses this
prohibition by stating that these associations may not be used as a conduit for funneling
funds to the parties.

52

Donations from governmental bodies, from aliens outside the

European Union if the donation exceeds 1,000, and anonymous donations in excess of
500 are also prohibited.

In the past fifty years, the tax deductibility of political donations was the subject of many
decisions of the Federal Constitutional Court, and German law was often changed
accordingly. 53

In 1994, the deductibility of corporate political donations was abolished. Currently,

individual donors may deduct from income political party contributions, be they
donations or membership dues, up to an annual amount of 1,500 (3,000 for couples
filing jointly)54, or they may claim an annual tax credit of half the donated amount up to a
maximum credit of 825 (1650 for couples filing jointly).55

Position in United Kingdom

The Political funding regime in the United Kingdom shows a marked difference from the
other European democracies as there is an absence of direct or indirect state subsidies. 56

The regime otherwise is tightly regulated on account of the Political Parties, Elections and
Referendums Act, 2000 (PPERA). Thus, there is a ban on donations from foreign
interests. On the other hand, there is no ban on corporate donations of any kind. Even
anonymous donations are not banned entirely, but are restricted.57

There are expenditure limits for both parties and independent candidates. There are
disclosure norms stipulated for the reporting of campaign financing for both political

51

ParteiG, 20.
ParteiG, 25.
53
J. IPSEN, PARTEIENGESETZ 347 (1st ed. 2008).
54
Einkommensteuergesetz [EStG], repromulgated Oct. 19, 2002, BGBl. I at 4211, 10b.
55
EStG, 34g.
56
Public funding for parties, The Electoral Commission (2011), available at http://www.electoral
commission.org.uk/partyfinance/public_funding, last seen on 4/11/2016.
57
Representation of the People Act, 1983.
52

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parties and candidates. The sanctions imposed for political finance infractions include
fines, imprisonment, forfeiture and deregistration of parties.

There are no limits on the amount of donations that political parties may receive.
However, there are laws that govern who may be a donor, as well as limits, noted above,
on spending by political parties on campaign expenditure. The aim of the law is to
regulate donations to political parties through transparency, as political parties must make
their finances public.58

Political parties may only accept donations above 200 (approximately US$280) from
permissible donors.

59

Permissible donors are defined as: an individual registered on a

UK electoral register; a UK registered political party; a UK registered company; a UK

registered trade union; a UK registered building society; a UK registered limited liability
partnership; a UK registered friendly/building society; or a UK based unincorporated
association.60

Foreign donors, other than registered British electors living abroad, are not considered to
be permissible donors. If a donation is received from a donor that does not fall into these
categories, the political party must return the donation or, if the donor cannot be
identified, return the money to the Electoral Commission.61 If the Electoral Commission
believes that a political party has received donations from a non-permissible source they
may seek forfeiture orders in the courts to recover from political parties the value of
donations. 62

Political donations made by individuals are not tax-deductible in Britain. If a donor makes
money as salary or dividend and then donates it, they have to pay income tax. However,
giving from a company that they control lets the donor avoid paying income tax. The
mechanism enables donors to give more than they otherwise might.

Position in United States

The U.S. system does have limits on contributions but not on expenditure, unlike India.
The Supreme Courts decisions in Buckley v. Valeo 63and more recently, Citizens United
v. FEC64 have firmly laid down the policy framework for political funding. There is a ban

58

PPERA 80-84.
PPERA 54.
60
PPERA 54.
61
PPERA 56-57.
62
PPERA 58.
63
424 U.S. 1 (1976).
64
558U.S. 310 (2010).
59

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on donations from foreign interest65 and on corporate donations to political parties and
candidates. Tax relief is available as an indirect public funding source. 66 Vote buying is
banned67 and limits are placed on the expenditure by political parties and candidates.68

According to the Federal Election Commission, an individual may donate:

a) up to $2,700 per candidate per election;
b) up to $10,000 to state, district and local parties combined each year;
c) up to $100,200 to a national political party, per account, per year.

In addition, individual donations to issues-oriented political action committees (PACs)

are capped at $5,000 per year.

Individuals or Corporations cant deduct contributions made to a political candidate, a

campaign committee, or a newsletter fund. Advertisements in convention bulletins and
admissions to dinners or programs that benefit a political party or political candidate
arent deductible.

65

2 U.S.C. 441e.
26 U.S.C. 527.
67
18 U.S.C. 597.
68
Colorado Republic Federal Campaign Commission v. FEC, 533 U.S. 431 (2001).
66

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CONCLUSION
The above discussion keeps before us various thoughts and multifaceted problem to be
analyzed and sorted out. Consequently, the following points to be considered:

The expenditure ceilings appear to invite evasion. The low expenditure limit tends to
induce dishonesty, a profoundly unhealthy development for any democracy.

The absence of public funding means that parties and candidates must raise and spend
money on their own for each election. This has exacerbated the dependence on black
money and institutionalized corruption.

The lack of any effective system of internal transparency and accountability within parties
reinforces corrupt fund-raising practices.

The limit on corporate funding to parties, even though proposed to be increased, can be
increased even further so as to reduce the reliance on black money.

Finally, party leadership, under the current system has no incentive to raise funds through
grassroot funding.

The solution to these problems lies in taking holistic views of the global best practices when
it comes to political funding mechanisms. Every long standing democracy of the world has
something to offer and inculcate.
The practice of public funding of political parties and tax deductible system prevalent in
Western European democracies should be given careful consideration as a viable way of the
future. Individually, practices from countries such as internal political party regulation from
Germany can be adopted. In terms of disclosure and transparency norms, the U.S. political
funding practices represent a benchmark that is worth emulating. From the U.K. the stellar
practice of taking shareholder approval before making corporate donations can be
incorporated. Additionally, the practice of electoral trusts carried out by the Tata and Birla
conglomerates is an innovation that can be adopted on a larger scale by other corporate
groups. Electoral trusts fund all political parties above a certain level, including independents
and local candidates, which provide a certain degree of transparency to the process. Even
futuristic practices such as creating an electoral fund out of the donations of the net taxpayer
base of a country can be taken into consideration for providing a wholesome remedy to the
loopholes existing in the political funding regime. The transparent funding which should
include to reveal source of donations through a separate election account would remove the
public perception that a quid pro quo through illegal granting or donating business and
political level classes.
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BIBLIOGRAPHY

Books Referred
1. AVTAR SINGH, COMPANY LAW (16th ed. 2015).
2. CAROLINE DUB, POLITICAL DONATIONS BY COMPANIES: A CORPORATE LAW PERSPECTIVE
(1st ed. 2007).
3. CHATURVEDI & PITHISARIA, INCOME TAX LAW (6th ed. 2014).
4. DR. N. HARIHARAN, INCOME TAX LAW AND PRACTICE (8th ed. 2014).
5. DR. VINOD K. SINGHANIA & DR. MONICA SINGHANIA, STUDENTS GUIDE TO INCOME TAX
(55th ed. 2016).
6. J. IPSEN, PARTEIENGESETZ (1st ed. 2008).
7. KARL_HEINZ NASSMACHER, THE FUNDING OF PARTY COMPETITION, POLITICAL FINANCE
IN 25 DEMOCRACIES, NOMOS (1st

ed. 2009).

8. KAUSHIL D. SHAH, TAX CONTROVERSIES UNDER INCOME TAX ACT (3rd ed. 2014).
9. PRADEEP SHAH & RAJESH KADAKIN, TAXMANNS MASTER GUIDE

TO INCOME

TAX ACT

(26th ed. 2016).

10. R.P. GARG & BEENU YADAV, INCOME TAX PRACTICE AND PROCEDURE (2nd ed. 2016).

Dynamic Links Referred

1. www.jstor.org last accessed on October 27, 2016.
2. www.lexisnexis.com last accessed on November 1, 2016.
3. www.manupatra.com last accessed on November 04, 2016.
4. www.scconline.co.in last accessed on November 05, 2016.
5. www.westlawindia.com last accessed on November 06, 2016.

Statutes Referred
1. Code Electoral, 2015.
2. The Companies Act, 2013
3. The Foreign Contribution Regulation Act, 1976
4. The Income Tax Act, 1961
5. The Political Parties, Elections and Referendums Act, 2000.
6. The Representation of People Act, 1951

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