Thursday, December 5, 2013

Contrary to newspaper reports, no removal of limits to corporate political funding

Certain recent newspaper reports (e.g., Times of India and Indian Express) have created a misleading impression that limits on corporate electoral funding has been removed. It is said that introduction of the concept of electoral trust read with a recent notification of MCA has made this happen. And that now corporate can fund political parties without any limit. One report states "Ahead of the Lok Sabha elections, the UPA government has made it free for business houses to donate without limit to parties or persons for political purposes. All that a corporate now has to do is float a company with a name that has the words "electoral trust" in it."

This is not true.

A little background of electoral trust and related provisions is worth reviewing here. Section 293A of the Companies Act, 1956, (1956 Act) enabled and restricted companies in making of contributions to political parties and for certain incidental matters. It, however, limited such contribution to 5% of its average annual profits calculated in the prescribed manner. Section 182 of the 2013 Act, which has replaced Section 293A, has increased this limit to 7.50%.

The concept of Electoral Trust was introduced through Section 2(22AAA) and related provisions of the Income-tax Act, 1961. Companies could make such contributions to Electoral Trust and such Trust would pool all such contributions and, in turn, contribute to political parties. A Scheme was notified under the Income-tax Act, 1961 on 31st January 2013. It, inter alia, required that the Trust should be a company registered under Section 25 of the 1956 Act.

Section 13B of the Income-tax Act, 1961 requires that the Trust should distribute 95% of the aggregate donations received by it during the previous year.

However, since the provisions of Section 293A apply also to Section 25 companies, such Trust would have faced the limits therein, despite the fact that they are intended to be non-profit making companies. Thus, there was an apparent anomaly between Section 293A and the scheme of Electoral Trust.

To remove this anomaly, the Central Government, under the notification referred to earlier, has exempted such Trusts from the provisions of Section 293A(2). This exemption, thus, merely enables the Trust to carry out what it has been conceived to do, i.e., be a channel for contributing to political parties.

Thus, it is submitted that the reports in newspapers are misguided and based on an incorrect interpretation of the law. The caption to such reports stating that the government has, just before the forthcoming elections, removed limits on corporates to contribute to political parties is provocative but baseless.

3 comments:

RA said...

But doesn't this now mean that a company has no restriction on how much it can donate to an electoral trust, which in turn can give all the donations received to a political party?

If I want to donate more than 7.5% of my avg net profits, I can donate let's say 15% of my avg net profits to an electoral trust registered as a section 25 company, which can then donate the entire amount to a political party of my choice (assuming I also control the electoral trust).

CA Jayant Thakur said...

@RA

No, the company remains under restriction of percentage of profits. The Electoral Trust only is not subject to such restrictions, for obvious reasons since its purpose is to collect and distribute the contributions.

balaji naidu said...

I agree with Mr. Jayant Thakurs point, as MCA vide notification dated 7th November 2013 has only exempted Electoral Trusts which are registered under section 25 of the companies Act 1956.

All other companies are required to comply with the provisions of section 182 in toto. there is exemption granted either on the ceiling of 7.5% of average net profits of preceding 3 years or period of 3 years existence.
Some of the media carried it differently.
The exemption is only available to Electoral trust which is notified by CBDT as per Electoral trust scheme and which is registered as section 25 company.
CS Balaji