One of the misconceptions about statutory charges in India is professional tax, particularly among employers and companies that are just being incorporated. Although it is called a tax, it is subject to state legislation as opposed to the laws of the central government’s income taxes. It is a common confusion among companies whether professional tax registration, tax deduction, and payment are mandatory requirements for companies.
This blog provides the definition of professional tax, the legal structure, applicability of such tax to a company, the duties of an employer, legal differences by state, penalties of failing to meet the requirements, and some practical implications of the business in India.
Introduction
When running a business in India, compliance with multiple tax and labour laws becomes unavoidable. Among these, professional tax often creates confusion due to its name and varied applicability across states.
Some company owners believe that professional tax applies only to a single professional, such as a doctor or a lawyer. As a matter of fact, there are also statutory requirements for professional tax by companies that have employees.
What is Professional Tax?
Professional tax is a tax that is imposed on the state governments on people who have an income from employment, profession, trade or calling. Although its name implies otherwise, it is not limited to professionals; it also applies to salaried employees and business owners, depending on state laws.
Article 276 of the Indian Constitution gives the powers to impose professional tax. Nevertheless, there is also a limit on the highest amount of professional tax that could be levied per person in a financial year stipulated by the Constitution.
Legal System in the Context of Professional Tax
The state-specific law, e.g., the Maharashtra State Tax on Professions, Trades, Callings and Employments Act or other legislation in other states, governs professional tax.
Professional tax is a state subject, and as such, there is no standard law that can be used throughout India. Every state has a choice on whether to impose a professional tax, the tax rates, exemptions and compliance conditions.
Is Professional Tax Compulsory for Companies?
Professional tax applies to firms when the state in which they conduct their business imposes professional tax and has employees who are within the taxable wage pay range.
In this instance, the company is considered an employer and must be registered according to the laws of professional tax, taxing the pay of employees and paying it to the state government. The obligation does not occur as a result of the company making an income, but due to the employment of individuals who are subject to professional tax.
There are also states in which companies can pay professional tax on their own behalf, depending on their legal form and business.
Responsibility of the Employer in the Professional Tax Law
When the professional tax comes into play, there are certain obligations of the companies. The employer has to acquire professional tax registration and, in a few instances, a distinct enrollment certificate.
The company must also subtract professional tax on the salary of qualified employees on a monthly basis and pay the amount collected to the state government within the stipulated period of time. Failure to deduct or deposit professional tax may attract the imposition of penalties and interest.
The employer also has a duty to make periodic professional tax returns as mandated by the state law.
Employees Applicability of Professional Tax
Professional tax is usually taken away from employees whose monthly wages are higher than the set amount in the respective government. The tax is different according to salary slabs and state laws.
Workers with salaries less than the threshold do not pay professional tax, and employers do not charge them an amount of tax.
State-Wise Professional Tax Applicability
Professional tax is not paid in all states in India. Other states, such as Maharashtra, Karnataka, West Bengal, Tamil Nadu, Gujarat, and Andhra Pradesh, collect professional tax, whereas some states, such as Delhi and Haryana, do not.
Companies working in multiple states additionally become location-specific with compliance. The professional tax only comes into being in the states where the company has workers, and where professional taxes come into effect.
Such a state-based difference renders it imperative to have businesses familiar with local standards of adherence.
Company Registration for Professional Tax
Companies that are required to deduct professional tax must be registered with the state professional tax department. Various states have two forms of registration, both of which are enrollment (liability of the employer) and registration (deduction as an employee).
Registration is also typically performed online and involves providing the minimal company information, the number of employees, and the location of the business.
Penalty for Non-Compliance
Failure to comply with professional tax laws may lead to penalties, interest and lawsuits. Penalties can be attracted by late registration, non-deduction of tax, late payment or non-filing of returns.
Although the financial burden of professional tax can seem small, a repeated lack of compliance can result in the accumulation of liabilities and administrative inconveniences in the course of the audit or inspection.
Professional Tax vs Income Tax
There is a difference between professional tax and income tax. The central government imposes income tax on the total income, and the state imposes professional tax on the privilege to earn income.
Interestingly, professional tax paid by an employee is qualified as a deduction during the calculation of the taxable income under the Income Tax Act, but is limited.
Exemptions under Professional Tax
There are groups of people who are not taxed by state law. These can be older people, individuals with disabilities, military personnel, and women entrepreneurs based on the state.
Employers should ensure that they check exemptions to ensure that they do not make wrong deductions.
Significance of Professional Tax Compliance
The compliance amount of professional tax may be considered a small tax, but it will help to understand that the company is serious about the statutory requirements. Compliance helps the company run payroll without difficulty, prevents fines, and improves the company’s credibility.
Clean compliance records are essential to growing companies, particularly companies intending to grow or raise funds.
Conclusion
Professional tax is compulsory for companies operating in the state where the laws governing professional tax apply, and for workers paid a salary above the set amount. Although the tax is imposed on individuals, companies are essential in the deduction and easing of compliance. Learning about state-specific regulations, proper registration, correct deductions, and timely filing of the information allows companies to remain within the framework and not face any penalty. In the case of businesses in India, the issue of professional tax compliance is a minor, albeit significant, element of the duty of statutory responsibility.
