About Professional Tax

Posted by teg on October 8, 2014

Professional Tax (also referred to as Profession Tax) is a tax on income levied by state government authorities in India. If an organization operates in a state which has legislated levy of Profession Tax, it is bound to deduct Professional Tax from its employees’ salary and remit the same to the relevant state government authority within the specified statutory deadline. Currently, Professional Tax is levied in only some states and union territories in India.

Statutory Basis

Article 276 in the Constitution of India empowers states to levy taxes on professions, trades, callings and employments. According to Article 276:

“Notwithstanding anything in article 246, no law of the Legislature of a State relating to taxes for the benefit of the State or of a municipality, district board, local board or other local authority therein in respect of professions, trades, callings or employments shall be invalid on the ground that it relates to a tax on income.”

Professional Tax or Profession Tax is more formally referred to as “tax on professions, trades, callings and employments” by state governments. The Income Tax authorities (Section 16 (iii) of the Income Tax Act, 1961) refer to Professional Tax as “tax on employment.” Professional Tax features as item no. 60 in the State List under the Seventh Schedule of the Constitution of India.

Article 276(2) mandates the maximum amount of Profession Tax which can be levied by state governments in a year. Currently, the Professional Tax levied cannot exceed Rs. 2,500 per person per annum.

Article 276(2) –

The total amount payable in respect of any one person to the State or to any one municipality, district board, local board or other local authority in the State by way of taxes on professions, trades, callings and employments shall not exceed two thousand and five hundred rupees per annum.

Article 276(2) states that the maximum Professional Tax payable to the “state or to any one municipality…” shall not exceed Rs. 2,500 per year. Surely, the term “state” is overarching and includes municipalities and other state authorities. We wonder what was the need to refer to “municipality, district board..” in the text of article 276(2). Given that each state levies Professional Tax through a designated body, it can be assumed that an individual is not liable to pay more than Rs. 2,500 per annum as Professional Tax to a state.

Excess Deduction of Professional Tax - An Example

An employee in Chennai earns a salary Rs. 1 lakh per month and is liable to pay Rs. 1095 as Professional Tax to the Corporation of Chennai (the levying authority) every six months (Apr to Sep and Oct to Mar). In July 14, the employee resigns his job in Company A and moves to Company B located in Chennai. Company A deducts Professional Tax of Rs.1095 (for the salary it pays for Apr 14 to Jun14). Company B deducts Rs.1095 as Professional Tax (for the salary it pays for Jul14 to Sep 14) and further expects to deduct Rs. 1095 as Professional Tax for the salary it is likely to pay for Oct 14 to Mar 14). On account of Company B deducting Rs 1095 as Professional Tax for the period Jul 14 to Sep 14, the employee ends up paying Rs. 3,285 as the Professional Tax for 2014-15. This is well above the Rs. 2,500 limit as mandated by article 276(2) of the Constitution of India.

Can the employee, on the basis of article 276(2), make a case to Company B that they should not be deducting Professional Tax of Rs. 1095 for the salary he receives for Jul 14 to Sep 14?

While the employee has a case, employers typically do not consider the Professional Tax deducted by other employers within the same Professional Tax deduction period while calculating Professional Tax on an employee’s salary. Employers argue that there is no official mechanism to validate information on Professional Tax deducted by an employee’s previous employer(s).

Authorities such as the Corporation of Chennai do not track individual employees with a unique identifier (such as PAN or Aadhaar number). Consequently, such authorities receive more than Rs. 2,500 per annum as Professional Tax from a single employee in some instances, particularly when employees move from one employer to another within the same Professional Tax period.

The Impact of Professional Tax on Income Tax Calculation

Section 16(iii) of the Income Tax Act, 1961, states that “the tax on employment (Professional Tax) within the meaning of article 276(2) of the Constitution of India, leviable by or under any law, shall also be allowed as a deduction in computing the income under the head “Salaries.”

To the extent of Professional Tax, the salary of an employee may be reduced while arriving at the taxable salary of the employee.

Attention: Payroll Manager

Check if work locations of the offices in your organization are liable to pay Professional Tax to the state authorities and if applicable, register your organization with the state authorities responsible for levying Professional Tax.
Apply the correct Professional Tax slab rates as mandated by local authorities.
Deduct Professional Tax periodically from employees’ salary as a deduction in payroll and display the amount on employees’ payslip.
Calculate the income tax of your employees after considering the Professional Tax amount as a deduction.
Calculate Professional Tax correctly whenever your employees are transferred from one location of your organization to another within the same Professional Tax deduction period and when a resignee rejoins your organization within the same Professional Tax deduction period.

Posted in: Blog

Blog