Understanding Professional Tax in India

As a salaried professional, you might have noticed a deduction called as professional tax in your payslip or the form 16 issued by an employer. Have you ever wondered what this professional tax is, who should pay these taxes, or its compliance rules?

Unlike the name suggests, the liability of paying professional tax is not limited to only the professionals. Instead, this tax can be levied on income generated from all kinds of professions, trades, businesses, freelancing work etc., subject to the respective professional tax slabs and the income threshold.

Why is Professional Tax Deduction Unique?

As per Article 246 of the Constitution of India, only the Indian Parliament can make laws regarding taxes on income. Therefore, every deduction that you see in your income slip, such as EPF, ESI, or TDS, is levied by the central government.

However, professional tax is a tax on income that is levied by the state government. The state government can make and amend laws related to professional tax. As a result, while all other deductions like EPF, ESI, etc., follow a uniform rule across the country, professional tax varies depending upon the state you are working in.

The commercial tax department of the respective states is responsible for collecting professional tax. There are many states like Arunachal Pradesh, Haryana, Delhi, etc., that do not levy professional tax.

Procedure to Pay Professional tax

Every state drafts its own rule for payment of professional tax. Today, most states have adopted the online payment mode. Additionally, many states might require to file professional tax returns.

For example, the state of West Bengal requires employers to file annual professional tax returns while exempting individuals.

How is Professional tax Calculated?

Professional tax is calculated as per the respective income slabs of the state where the person is working. Each state has its own professional tax slab.

Professional tax is allowed as a deduction from the salary income while filing income tax returns.

Who Needs to Pay Professional Tax?

  1. In the case of an employee, the employer is responsible for deducting professional tax from his salary and submitting it to the state government.
  1. Traders, business owners, and professionals are responsible for paying professional tax on their income, provided that their income comes within the respective state’s professional tax slab.
  1. Freelancers are also required to register themselves if they come under the purview of the professional tax laws of the respective state. 

Certifications and Enrolments 

  1. Individuals or businesses need to obtain a professional tax registration certificate for professional tax on their trade.
  1. In addition to a professional tax registration certificate, employers need to obtain a professional tax enrolment certificate so that they can deduct the tax from the salary of their employees and pay the same to the state.

Professional tax is an important source of funds for many states. Therefore, any violation of regulations will attract penalties from the concerned state department. Businesses generally hire an expert such as a chartered accountant for the submission of professional tax and preparing related documents.

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