What is Professional Tax? Rates & Compliance

Many salaried employees might be very well aware of the term ‘professional tax’ as it would have been mentioned in the payslips/Form 16 issued to them. But all of them may or may not understand what it is and why is it appearing in their payslips/Form 16 as a deduction from their salary income. Hence, this article is an attempt to provide a better picture of what is ‘Professional tax’ and why is it deducted, and whether is it only the salaried class who is bearing it.

What is Professional tax and who levies it?

The nomenclature ‘Professional tax’ could be one of those terms which do not completely convey the real meaning of the term. Unlike the name suggests, it is just not the tax levied only on professionals.

Professional tax is a tax on all kinds of professions, trades, and employment and levied based on the income of such profession, trade, and employment. It is levied on employees, a person carrying on the business including freelancers, professionals, etc., subject to income exceeding the monetary threshold if any.

As per Article 246 of the Constitution of India, only Parliament has the exclusive power to make laws with respect to the Union List which includes taxes on income. The state has the power to make laws only with respect to the Concurrent and State list.

However, professional tax though is a kind of tax on income levied by the State Government (not all states in the country chose to levy professional tax). The State Government is also empowered to make laws with respect to professional tax though being a tax on income under Article 276 of the Constitution of India which deals with tax on professions, trades, callings, and employment.

It may be noted that professional tax is a deductible amount for the purpose of the Income-tax Act, 1961, and can be deducted from taxable income.

Professional tax rate

Professional tax being levied by the State Government is different in different states. Every state has its own laws and regulations to govern the professional tax of that particular state. However, all the states do follow a slab system based on the income to levy professional tax.

Further, Article 276 of the Constitution which empowers the State Government to levy professional tax also has provided for a maximum cap of Rs 2,500 beyond which professional tax cannot be charged to any person. 

Few illustrative slabs in the country

• Professional tax rate slabs in Karnataka

• Professional tax rate slabs in Andhra Pradesh

Who is responsible for collecting and pay professional tax?

Professional tax is collected by the Commercial Tax Department. The commercial tax department of the respective states collects it which ultimately reaches the fund of the municipal corporation.

Persons responsible for paying professional tax

•  In the case of employees, an employer is a person responsible to deduct and pay professional tax to the State Government subject to the monetary threshold if any provided by the respective State’s legislation. 
• An employer (corporates, partnership firms, sole proprietorship, etc) also being a person carrying on trade/profession is also required to pay professional tax on his trade/profession again subject to the monetary threshold if any provided by the respective State’s legislation. 
  In such a case, the employer needs to register and obtain both a professional tax registration certificate to be able to pay professional tax on his trade/profession and a professional tax enrolment certificate to be able to deduct the tax from his employees and pay. Further, separate registration may be required for each office depending on the respective State’s legislation.
• Persons who are carrying on freelancing business without any employees are also required to register themselves subject to the monetary threshold if any, provided by the respective State’s legislation. 
  However, a professional tax levy is subject to the exemption provided by the respective State to certain categories. For example, parents or guardians of any person who is suffering from mental retardation, blind persons are exempted among others from the levy of Karnataka Professional tax.

What is the procedure to pay professional tax? Is any return to be filed?

This is again a State-specific query. However, in general, a professional tax may be paid either online/offline. Further, depending on the State’s requirement, professional tax returns also need to be filed at specified intervals.

Consequences of violation of professional tax regulation

While the actual amount of penalty or penal interest may depend on the respective State’s legislation, a penalty may be levied by all such states for not registering once professional tax legislation becomes applicable.

Further, there are also penalties for not making the payment within the due date and also failing to file the return within the specified due date.

For example: In the State of Maharashtra Rs5/day is imposed as a penalty for delay in registration, Interest @ 1.25% per month of delay in payment, a penalty of 10% of the amount of tax in case of delay/non-payment of professional tax, Rs1000 – Rs2000 penalty for delay in filing the return.