Tax incentives like giving a deduction for contributions to political parties produce the same financial strain on the government as direct spending. Reduction in tax liability is as good as collecting the tax and then spending it. Hence, giving direct subsidy is open, simple and easier to administer than reduction in taxes.
Direct expenditure has the merit of being identifiable, while it is not so in the case of expenditure in the form of tax reduction. The accountability and audit of such revenue loss involve complex processes.
Further, such spending of government money in cases of other incentives cannot be quantified and subjected to parliamentary control and revenue.
Special provisions for deductions/reliefs in tax laws are not justified on several grounds. There is consensus amongst tax-policy experts that such benefits have been grossly misused. The unanimous view is that better results can be realised by direct spending.
Tax economists consider spending through incentives, exemptions and deductions as unreasonable because it goes against the concept of neutrality in a tax system, distorting the concept of the ability to pay.
Besides, it would add one more link to a large chain of incentive provisions whose efficacy has been doubted by most economists -- the latest in the line being Dr Vijay Kelkar's committee.
Jaswant Singh, too, in his Budget speech for 2003-04 in para 143 said, "there is need to, eventually, move away from an exemption- and discretion-based system to a different, more current order". If that is the case, then why go in for a new section in the Income-Tax Act for political donations?
Further, giving tax benefits through the Income-Tax law is not a desirable way of giving monetary benefit to political parties because:
Such contributions can be said to have no direct link with the carrying on of the business or profession, and hence, cannot be said to form a legitimate claim for tax reduction.
Permitting such contributions would expose business houses to pressures and threats for contributions by some parties, which can make the working of some of the business units difficult. Non-paying units may suffer if the party to whom donation has been denied, comes to power.
Permission accorded for the giving of contributions by companies vide section 293a since nearly 15 years under the Companies Act, 1956, has not, in any manner, helped in advancing the cause of democracy. Rather, corrupt practices in elections have increased manifold.
Such a move would make it difficult for the independents or small parties to contest the elections.
This would be contrary to democratic functioning. Hence, if government money is to be spent for funding elections, the appropriate course would be direct spending -- not losing unspecified government revenues through the Income-Tax route without even knowing the quantum of such loss and about the recipients and whether such money has been utilised for genuine election purposes.
To say that it would eliminate corruption in elections is fooling oneself. It would be ignoring real life situations where such contributions come from undisclosed incomes. In most cases, neither the payers nor the recipients account for these. The mere giving of a tax benefit will not curb this tendency.
The new law would be a sad chapter in the country's legislative system. The most appropriate course seems to be to leave the issue of claiming deduction for political donations to the individual judgement of the donors based on the business expediency concept as at present and their individual needs.
However, if the government wants to finance the elections, it should do so in a transparent manner by direct spending -- not through the indirect route of tax giveaways.
The writer is former chairman of the Central Board of Direct Taxes