Political Parties and the Income Tax Act: The Missing Half of Section 13A….by KBS Sidhu

Why Cash Discipline on Receipts Must Extend to Expenditure

India’s political finance law has spent the better part of a decade tightening the tap on one side of the political party’s ledger while leaving the drain wide open on the other.

Section 13A of the Income Tax Act, 1961 — the provision that grants registered political parties complete exemption from income tax — denies that exemption the moment a party accepts ₹2,000 or more from a single donor in cash.

Combined with Section 29C of the Representation of the People Act, 1951, which requires public disclosure of every contribution of ₹20,000 and above, the law constructs an elaborate, if imperfect, architecture around how money enters a party’s account. On how money leaves it, the law says almost nothing.

This asymmetry is not a technicality. It is the precise mechanism by which unaccounted cash continues to circulate in the hands of political functionaries notwithstanding nearly a decade of reform rhetoric since the Finance Act, 2017.

The Receipt-Side Discipline, and Its Limits

The logic of Section 13A(d) is straightforward: a donation route that cannot be traced to a named, PAN-verified donor is a route for laundering. Cash above ₹2,000 fails that test, so income from it forfeits the exemption.

The Election Commission’s parallel requirement — public disclosure above ₹20,000 — was meant to close the loop further. In practice, both thresholds have been comprehensively gamed.

Parties routinely report “nil” or negligible disclosed contributions while showing the bulk of their income as donations below ₹20,000, voluntary contributions, or coupon sales — categories the law does not require them to itemise by donor.

The Association for Democratic Reforms has documented this pattern for years; one national party has reportedly declared no donations above ₹20,000 for seventeen consecutive years.

A petition currently before the Supreme Court challenges the ₹2,000 cash threshold itself as an “opaque loophole,” pointing out that with UPI transactions in India crossing ₹24 lakh crore in a single month, no rational justification survives for permitting any cash contribution route at all.

That challenge is well taken. But even if the Court tightens the receipt side further — even if cash donations were banned outright tomorrow — the reform would address only half the problem. A party that receives every rupee through cheque, RTGS, or electoral trust remains free, once that money sits in its bank account, to withdraw it and spend it in cash with no comparable threshold, no comparable disclosure, and no comparable consequence.

Why Cash Expenditure Should Also Be Reined In

This is not merely an oversight; it is structurally built into the architecture of the Representation of the People Act. Section 77, which prescribes expenditure limits, applies only to candidates, not to parties. Explanation 1 to Section 77(1) — after the Supreme Court’s 1975 ruling in Kanwar Lal Gupta v. Amar Nath Chawla sought to count party spending towards a candidate’s ceiling, and Parliament promptly amended the law to undo that ruling — now expressly excludes from a candidate’s expenditure account any sum spent by the party on general campaigning, star campaigners, leaders’ travel, or party propaganda, so long as no specific candidate is named.

The result, as the Association for Democratic Reforms noted in its March 2026 assessment of India’s political finance framework, is that party-level spending — precisely the head under which the largest sums move — escapes both the ceiling and the disclosure regime that apply to candidates.

The ECI itself seized illicit electoral inducements worth ₹8,889 crore between March and May 2024 alone, a figure that gestures at the scale of what moves outside any accounted channel.

Here is the asymmetry stated plainly. The law says: if a rupee enters a party’s account as cash above ₹2,000, the party loses its tax exemption on that rupee. The law says nothing at all about what happens if that same rupee — having entered cleanly through a cheque — leaves the account as a cash payment to a vendor, a local strongman, or a candidate’s “election machinery.” There is no expenditure-side ₹2,000 rule. There is no expenditure-side 13A consequence. The exemption, once earned on the receipt side, survives untouched regardless of how recklessly or opaquely the money is subsequently disbursed.

The General Law Already Exists — It Is Simply Not Applied

What makes this gap especially indefensible is that Parliament has already legislated the relevant principle elsewhere in the very same Income Tax Act, and has simply declined to extend it to political parties.

Section 40A(3) disallows, for ordinary taxpayers and businesses, any expenditure exceeding ₹10,000 paid otherwise than by account payee cheque, draft, or electronic mode, treating such payment as if it were never incurred for purposes of computing taxable income.

Every business in India lives under this discipline. A political party that pays a printer, a transporter, or a “coordinator” ₹50,000 in cash for election-related work faces, in principle, exactly the same disallowance logic — yet because party income is exempt under Section 13A to begin with, the disallowance has no teeth.

There is nothing to disallow from, since there is no taxable income in the first place. The general anti-cash provision of the Income Tax Act is rendered toothless by the very exemption that the receipt-side cash rule is meant to protect.

This is the structural flaw an op-ed must name directly: Section 13A polices what comes in, but the exemption it grants simultaneously neutralises the one provision — Section 40A(3) — that would otherwise police what goes out.

What Symmetry Would Require

The remedy is not exotic; it is simply consistency. Two changes, taken together, would close the loop.

First, Section 13A should be amended to make the exemption conditional not merely on the source of funds but on the mode of expenditure. Just as a donation of ₹2,000 or more must be non-cash to preserve exempt status, any single item of party expenditure above a comparably modest threshold — ₹10,000, aligned with the existing Section 40A(3) ceiling, would be a defensible figure — should be required to be paid through traceable instruments.

A party found to have incurred cash expenditure above that threshold should forfeit exemption on an amount equivalent to the offending expenditure, exactly as it currently forfeits exemption on cash receipts above ₹2,000. The symmetry is not a stylistic preference; it is the only way to make the receipt-side rule meaningful, since unaccounted cash that cannot enter the front door simply exits through the back and re-enters as informal expenditure with no consequence at all.

Second, Section 40A(3) should be given real application to political parties through their audited accounts, rather than being rendered moot by blanket exemption. The Comptroller and Auditor General-empanelled auditors who currently certify party accounts for 13A purposes should be statutorily required to specifically flag and quantify cash expenditure above the threshold, with that quantum treated as a direct deduction from exempt income — not a mere disclosure note buried in schedules nobody reads.

Neither change requires inventing new law. Both already exist, separately, for receipts and for ordinary taxpayers respectively. What is missing is the act of joining them.

The Stakes

Political parties are not ordinary taxpayers, and the case for taxing them was never really the point of Section 13A. The point was always disclosure and deterrence — using the threat of losing a valuable exemption to compel parties toward traceable finance.

That logic is self-evidently undermined if it operates on only one side of the account. Unaccounted cash that enters a party’s coffers in small, undisclosed denominations below ₹20,000, and unaccounted cash that leaves those coffers for the same purposes it always has — to buy silence, votes, or convenience — are not two different problems. They are the same problem, viewed from two ends of the same ledger.

The Election Commission has the audited accounts. The Income Tax Department has the statutory hook in Section 40A(3) sitting unused. What is absent is the political and administrative will to read Section 13A as a complete discipline rather than a half-finished one. Until expenditure is held to the same cash standard as income, the ₹2,000 receipt threshold will remain what successive ADR assessments have called it: a door that is locked on one side and left open on the other.

June 21, 2026