After more than two decades, the government is planning an over three-fold increase in the ceiling on professional tax levied by states. A Cabinet note is being prepared to amend the Constitution so as to provide for increase in the cap from Rs 2,500 per annum at present to Rs 8,500 a year. The issue will be discussed next week at a meeting of the Empowered Committee of State Finance Ministers.
Article 276 of the Constitution empowers the states to levy tax on professions, trades, callings and employments. But, state legislatures are free to decide the tax amount, subject to a ceiling of Rs 2,500, and the professions they want to tax under their respective laws on professional tax. This will not be subsumed in the proposed goods & services tax (GST).
The cap was last increased in 1988 — from Rs 250 a year originally given under the Constitution. Some states have now proposed to the finance ministry to increase the limit further to Rs 8,500. The ministry has invited comments from various stakeholders. Once the Empowered Committee discusses the matter at its meeting in Bhopal on January 9, it will seek Cabinet nod to table a Constitutional Amendment Bill in Parliament.
Finance ministry officials say the idea is to enable state governments and local bodies increase their revenues by directly levying tax on professionals. Maharashtra, with an annual revenue of about Rs 250 crore from tax on roughly 60 professions, is the biggest proponent of a higher ceiling, according to one official.
Apart from Maharashtra, states such as Andhra Pradesh, Assam, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Orissa, Punjab, Rajasthan, Sikkim, Tamil Nadu and West Bengal also have their Acts governing tax on professionals. The slabs and professional tax rates vary from state to state. For instance, Maharashtra levies a monthly professional tax of Rs 200 on income above Rs 10,000, while West Bengal collects the same amount of tax when the payer’s monthly income breaches Rs 40,000.
Professional tax is a kind of direct tax collected by local municipal bodies in addition to the income tax levied by the Centre. It is collected from businessmen, working individuals, merchants and people involved in various occupations.
The amount paid to local bodies is allowed for income tax deduction.
The Thirteenth Finance commission had called for a raise in the ceiling on profession tax. It said such a levy of the tax could help states augment their consolidated funds to supplement the resources of the panchayats and municipalities. It also suggested discouraging the state governments from following the recently established trend of abolishing panchayat level taxes.
Efforts made in the past few years to revise the ceiling have not succeeded, as amending the Constitution is a cumbersome process. The National Commission for Review of the Constitution had suggested the removal of the ceiling on profession tax imposed by Article 276 of the Constitution. It wants Parliament to be vested with the power of determining this limit. The law ministry, though, has not found the proposal feasible, it is learnt.
