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Finance Bill 2017: Why tax exemption for political parties?

In a country where the Finance Minister is accused of money laundering [What did Ishaq Dar ‘confess’ to during the Hudaibiya Paper Mills reference in 2002, Dawn, April 20, 2017] and Special Assistant to Prime Minister on Revenue is allegedly claiming refuge under the Protection of Economic Reforms Act, 1992 for remittance of Rs 700 million from undisclosed [Policymakers also benefit from foreign remittances, The News, September 4, 2015], it is not surprising that their friends sitting in Federal Board of Revenue (FBR) craftily, suggest a blanket tax exemptions for political parties while denying the same to other non-profit organisations [NPOs]. This is not only a sheer mockery of law but an abhorrent attitude-an open defiance of democratic values and respect for rule of law.

The Finance Bill 2017 proposes harsh amendments against NPOs. If these are passed by the Parliament (which having majority, PML-N will easily manage), the NPOs will have to restrict administrative expenses to 15% of total receipts, and will be subjected to 10% tax for money received/available but not spent during the tax year. How is it possible to spend all the money when many donations are received during the last days of closing of accounts and there is need to set apart money for capital outlays eg improving infrastructure etc? The so-called wizards sitting in FBR cannot even comprehend ground realities!

It is pertinent to mention that NPOs were exempt prior to tax year 2014 when under the new section 100C of the Income Tax Ordinance, 2001 this exemption was converted into 100% tax credit on fulfillment of certain conditions. Interestingly, all political parties [about 337 are registered with Election Commission of Pakistan (ECP)] failed to file returns as required under the law. When the tax officer issued a notice to the ruling PML-N, the Finance Minister asked his brilliant (sic) team at FBR to block this move. The more loyal than king duo at FBR, infamous for drafting laws, readily obliged him and in the Finance Bill 2017, it is proposed by way of clause (143), Part I, Second Schedule to the Income Tax Ordinance, 2001 that exemption will be available to “any income derived by a political party registered under the Political Parties Order, 2002 with the Election Commission of Pakistan”.

The proposed law is in blatant violation of Articles 4 and 25 of the Constitution of Pakistan. It is shocking that a different treatment is given to other NPOs under section 100C of the Income Tax Ordinance, 2001. Rule 4 of the Political Parties Rules, 2002 says that “every political party shall maintain its accounts in the manner set-out in Form-I indicating its income and expenditure, sources of funds, assets and liabilities and shall, within sixty days from the close of each financial year (July-June), submit to ECP a consolidated statement of accounts of the party audited by a Chartered Accountant, accompanied by a certificate, duly signed by the Party Leader to the effect that no funds from any source prohibited under the Order were received by the party and that the statement contains an accurate financial position of the party.”

Our political parties seldom prepare accounts reflecting their actual affairs. They openly defy Rule 4 of the Political Parties Rules, 2002. The purpose of this Rule is to enable voters, political workers and civil society to know about transparency in financial matters of political parties, but ECP is least bothered to enforce it. Now with complete and unqualified tax exemption proposed, there will be no effective mechanism to scrutinise their financial affairs.

It is a matter of record that political parties in Pakistan have not been filing tax returns and we wrote about this non-compliance in 2014 [Democratisation of political parties, Business Recorder, November 14, 2014]. FBR until recently did not issue notices for this default. A brave officer in Islamabad did this and it irritated the ruling party. Instead of complying with the law, the Finance Minister has presented a proposal for blanket exemption in the Finance Bill 2017.

In India, there is a mandatory provision of law [section 13A of Income Tax Act, 1961] requiring political parties to file returns. The Chief Election Commissioner of India invariably asks the Indian Central Board of Direct Taxes (CBDT) to scrutinise accounts submitted by political parties. In the same manner, the Central Information Commission of India directs Income Tax Department to disclose in public interest, details of donors mentioned by political parties in their tax returns. With this information in public domain, the Commission ensures transparency in the funding of both small and big parties, besides block the flow of black money in the electoral process. In Pakistan, neither ECP nor FBR has ever bothered to consider this vital matter.

All the members of National Assembly and senators, irrespective of political affiliation, should resist blanket exemption for political parties. They should ask for making filing of tax returns mandatory for all registered political parties, as is the case in all democracies.

The declarations filed by political parties should be scrutinised and made public with any citizen having the right to question their veracity. Donations received by parties should qualify for tax credits, Political parties are considered NGOs all over the world, working for public good. In Pakistan, we have not yet promoted the idea that political parties should be exemplary non-profit organisations fully committed to furthering the cause of public consciousness and welfare on all matters related to governance. This idea is important from many angles. Once people associate themselves with a particular party having clear objectives and aims, they also extend financial support for their achievement, thus eliminating the influence of undesirable ‘financiers-people with money power taking control of parties for personal gains. Meaningful participation of masses in democracy and electoral process can only be ensured if they have the right to question their leaders about use of their money. By making it mandatory for political parties to file tax returns and offer accounts for public scrutiny, we can make them responsible and accountable before voters.

(The writers, tax lawyers and partners in HUZAIMA, IKRAM & Ijaz, are Visiting Faculty at Lahore University of Management Sciences)

Huzaima Bukhari and Dr Ikramul Haq, "Finance Bill 2017: Why tax exemption for political parties?," Business Recorder. 2017-06-02.
Keywords: Economics , Central Board of Direct Taxes , Election commission , Economic Reforms Act , Finance Minister , Prime Minister , Political parties , Pakistan , FBR , NGOs