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What is professional tax and who is required to pay it?

State governments impose a professional tax in exchange for the infrastructure it provides to professionals conducting operations under its jurisdiction. For employees working with an organisation, it is deducted by the employer in line with Article 276(2) of the Indian Constitution. Under this head, the maximum amount that can be levied annually is ₹2,500. If the state levies professional taxes, employers must deduct it. The amount taxed under Professional Tax cannot be taxed for Income Tax again.

It is essential to note that it is not just employees working with a specific organisation that is liable to pay professional tax. Even professionals or consultants that are not part of an organisation but earn a certain amount of income are required to deduct professional tax in their independent capacity. For such freelance professionals, it becomes necessary to know the current professional tax rates in their state and pay it regularly. The states levying the highest professional tax rates include Maharashtra, Karnataka, West Bengal, Madhya Pradesh, Tamil Nadu, Andhra Pradesh, Gujarat and Odisha.

Here are some of the rules governing professional taxes in different states:

  • Every company needs two certificates for levying a professional tax, including a Professional Tax Registration Certificate (PTRC) demonstrating that it is the employer and a Professional Tax Enrolment Certificate (PTEC) which allows it to deduct the professional tax for employees earning a certain salary amount.
  • The company has to mandatorily acquire the PTEC within 30 days of it becoming eligible for paying professional tax.
  • Companies are often penalised for not depositing the amount they have deducted from their employees as professional tax.
  • Foreign professionals engaged in employment at these companies are not required to have professional tax deducted.
  • On the other hand, foreign diplomatic offices, as well as embassies and consulates established by foreign countries in states levying a professional tax, are required to get a PTRC and deduct professional taxes for Indians employed.

People need to understand the professional tax being levied in their state and plan since there are penalties in store for defaulters. Each month, a 2% penalty is levied when payments are delayed. An additional 10% penalty is imposed for non-payment. The government even penalises delay in obtaining the PTEC. Regardless of whether an individual is engaged full-time with an organisation or not, they need to be aware of the professional tax liabilities in their state.

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