What is professional tax in India?

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Professional tax, a significant component of India’s taxation system, plays a crucial role in the financial landscape of the country. This levy, imposed by state governments, is designed to collect revenue that supports local government initiatives and services. In this comprehensive guide, we will delve into the various aspects of professional tax in India, exploring its significance, applicability, calculation and compliance requirements.

See also: Professional Tax in India: Rates, exemption, and applicability

 

What is a professional tax?

Professional tax in India stands as a state-level fiscal obligation directed at individuals who derive income from their professions, trades, employment, or callings. Governed by Article 276 of the Constitution of India, this tax is a testament to the fiscal autonomy granted to individual states. Its imposition is a means for state governments to bolster their revenue streams and channel funds toward essential local government activities. In this section, we will delve into the intricacies of professional tax, elucidating its purpose, the constitutional framework, and its role in contributing to state finances.

 

What is the objective of professional tax?

The overarching objective of professional tax aligns with the broader fiscal goals of state governments. By levying this tax, states aim to diversify their revenue sources, reducing reliance on other forms of taxation. The revenue generated from professional tax is earmarked for funding local government activities, including infrastructure development, public services and other community-centric initiatives.

 

What is the applicability and scope of professional tax?

Professional tax applies to a wide spectrum of individuals engaged in various professions, trades, employment, or callings. This encompasses salaried employees, self-employed professionals, and business owners. The tax rates and slabs, however, are determined at the state level, leading to variations in applicability across different states in India.

Professional tax is typically collected at the source, meaning that employers are responsible for deducting the tax from the salaries of their employees. The deducted amount is then remitted to the state government. This mechanism ensures a systematic and efficient collection process, with employers acting as intermediaries between employees and the state tax authorities.

 

How is professional tax calculated?

The calculation of professional tax is based on a slab system, where individuals are taxed according to their income levels. The tax slabs are predetermined by the respective state governments. Generally, higher-income earners fall into higher tax brackets. Employers are responsible for deducting professional tax from their employee’s salaries and remitting it to the state government.

Professionals and businesses subject to professional tax must file regular returns with the state tax department. These returns provide a detailed account of income, deductions, and the professional tax paid. Filing accurate and timely returns is essential for maintaining compliance with tax regulations.

 

What are the benefits of paying professional tax?

Paying professional tax in India offers several benefits for both individuals and the broader community. Here are some key advantages associated with the regular payment of professional tax:

Contribution to local development

Professional tax serves as a direct source of revenue for state governments. By paying professional taxes, individuals contribute to local development initiatives, infrastructure projects, and the overall improvement of public services within their respective states.

Fulfilment of civic responsibility

Paying professional tax is a civic responsibility that contributes to the smooth functioning of local governance. It ensures that individuals actively participate in supporting the fiscal health of their state, promoting a sense of civic duty and responsibility.

Legally compliant status

Regular payment of professional tax ensures that individuals and businesses maintain a legally compliant status. It helps in avoiding penalties, legal consequences, and other liabilities that may arise from non-compliance with tax regulations.

Access to public services

Contributions through professional tax play a role in enhancing public services. Individuals who fulfil their tax obligations can expect improved infrastructure, better healthcare facilities, quality education, and other essential services provided by the local government.

Funding for social welfare programs

Professional tax revenue contributes to financing social welfare programs and initiatives aimed at upliftment and empowerment. This includes schemes for the welfare of economically disadvantaged sections of society, promoting a more equitable distribution of resources.

 

Who is eligible to pay professional tax in India?

In India, the deduction of professional tax is governed by Section 16(iii) of the Income Tax Act of 1961. Contrary to its name, professional tax isn’t limited to specific professions like doctors or lawyers; instead, it applies to every salaried individual. The criteria for eligibility for professional taxpayers are outlined below:

Income

Individuals earning a monthly income exceeding INR 15,000 are typically subject to professional tax in most states. This criterion aims to ensure that those with higher incomes contribute proportionately to the state revenue through professional tax.

Employment

Various professionals, including corporate workers, doctors, lawyers, engineers, and chartered accountants, fall under the umbrella of individuals required to pay professional tax. This broadens the scope beyond traditional “professions” and encompasses a wide range of employment categories.

Business ownership

Business owners, regardless of their business structure (sole proprietors, partners, or directors of companies), are also obligated to pay professional tax. This ensures that individuals engaged in entrepreneurial activities contribute to the state revenue through this tax.

Age

Individuals above the age of 18 years are considered eligible to pay professional tax. This criterion underscores the idea that once individuals enter the workforce and begin earning an income, they are subject to the responsibilities associated with professional tax.

 

FAQs

What is professional tax, and who is liable to pay it?

Professional tax is a state-level tax imposed on individuals earning income from their professions, employments, or trades. Those eligible to pay include salaried individuals, self-employed professionals, and business owners.

Under which section of the Income Tax Act is professional tax deducted in India?

Professional tax is not deducted under the Income Tax Act but is governed by state-level legislation. It is not a component of the Income Tax Act, 1961.

Who needs to pay professional tax in India?

Individuals with monthly incomes exceeding a specified threshold (typically INR 15,000), corporate workers, professionals like doctors and lawyers, business owners, and individuals above 18 years of age are generally required to pay professional tax.

What is the purpose of professional tax?

The primary purpose of the professional tax is to generate revenue for state governments and fund local governance initiatives, including infrastructure development and public services.

How is professional tax calculated?

The calculation of professional tax is usually based on a slab system, with tax rates varying across states. Employers deduct the tax from the salaries of employees, and self-employed individuals are responsible for determining and paying it directly to the state tax department.

Is professional tax applicable uniformly across all states in India?

No, professional tax is a state-specific tax, and the rates and rules vary from one state to another. Each state has its professional tax legislation.

Are there any exemptions from professional tax?

Exemptions from professional tax may vary by state. Some states provide concessions for certain categories, such as senior citizens or persons with disabilities. It's advisable to check the specific rules of the relevant state.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com

 

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