Major Crackdown on Suspicious Political Donations by Income Tax Department

The Income Tax (IT) department has launched a substantial crackdown on suspicious political donations, issuing hundreds of notices to individuals who contributed over ₹5 lakh to lesser-known political parties in the financial year 2020-21. This initiative follows the discovery of a large-scale tax evasion and money laundering scheme associated with fraudulent tax deductions under Section 80GGC.

Fake Donations, Cash Refunds & Tax Evasion

Investigations revealed that approximately 9,000 individuals donated ₹5 lakh or more in FY 2020-21, claiming 100% tax deductions under the Income Tax Act. However, tax officials found that many of these donors received their donations back in cash, effectively transforming the process into a money laundering operation. A senior tax official stated, “Donors issued cheques to political parties but got the same amount returned in cash, with a commission of 1-3% charged for the transaction.

Notices & Penalties for Taxpayers Involved

In a bid to curb such fraudulent claims, the IT department has sent summons and notices to individuals and corporations involved. The investigation wing has warned that taxpayers who voluntarily comply can file an updated return under Section 139(8A) and pay additional taxes of up to 70%. Failing to do so may result in a hefty 200% penalty on the evaded tax, along with further legal consequences.

Widening Crackdown on Political Donations

This is not the first time political funding has come under scrutiny. In February 2023, the IT department sent over 5,000 notices to donors of nearly 20 unrecognized political parties for contributions made in FY 2020-21 and FY 2021-22. Many individuals had to file updated returns and pay penalties after their tax deductions were flagged as fraudulent. Furthermore, amendments to ITR-7—the income tax form used by political parties and charitable trusts—by the Central Board of Direct Taxes (CBDT) have led to the detection of mismatched donations, numerous of which are disproportionate to declared incomes.

The Need for Stricter Political Funding Regulations

Under current tax laws, there is no upper limit on donations to registered political parties, rendering the system susceptible to misuse. This latest crackdown underscores the urgent need for stricter monitoring of political contributions to prevent tax evasion and money laundering.