Paying Professional Tax For Startups – How, What and Why

Lawyers at VakilSearch show you the way

Professional tax, as the term suggests literally and broadly, is tax levied for carrying on a profession (the law covers occupation or trade within the meaning of profession tax).

While the Central Government levies Income Tax on income earned, the State governments simultaneously levy Professional Tax on income earned by persons carrying on any trade, profession or occupation. A person ends up paying a income tax to the Central Government and Profession tax to the State Government, even though both are essentially taxes on income.

Even people who are exempt from Income Tax could end up paying a Professional Tax to their State Government. For instance, a person earning Rs. 5000 a month (Rs.60000 p.a.) is exempt from income tax. However, he is liable to Professional Tax in almost all states, notwithstanding his meagre wages.

How does it work?

The Constitution of India has divided the power to tax between the State and Centre, so that each limb gets its fair share. This division is contained in what are called “Lists”.

Item number 60 of List II (the “State” List) brings “taxes on professions, trades, callings and employments” under the authority of the state and municipal bodies.

As a result, the Profession Tax you pay is to the State Government. Consequently, the rate of tax is also fixed by the State Government and varies from State to State.

What is the procedure to be followed?

The first step is to get registered as a ‘payee’ of professional tax in the local Professional Tax Office under the respective State’s Act. This is mandatory for all individuals, persons and bodies who are liable to pay professional tax.

As to calculation and payment of these taxes through prescribed forms and methods, you have to do it yourself. Your calculation and payment has to be audited and certified by a Chartered Accountant.

When it comes to employees however, it is the duty of the employer to deduct Professional Tax. That is, apart from paying professional tax for its own activities, every employer has to calculate, deduct and pay the professional tax on the salaries paid to employees.

Professional tax, like Income Tax, follows an Ad Valorem, slab rate method (based on how much you earn) to ensure taxes are levied equitably.

Even though there is no formal ceiling limit on the amount of professional tax a person has to pay, the highest professional tax payable right now anywhere is Rs. 2500 per annum in Maharashtra (irrespective of your salary).

Some thoughts

It is baffling why Profession Tax is collected at all. Why not just increase the rate of income tax by 0.1%? That will save everyone considerable trouble and at the same time generate as much, if not more revenue for the Government.

Profession tax is one more of those inexplicable levies that, like the infamous Fringe Benefit Tax, serve to take valuable time that could be invested by a business owner in much more productive activities. The reality however is that it exists, and we hope this piece cleared most, if not all your doubts about it.

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