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All about Professional Tax Compliance for Start-ups

What is a professional tax?

Ad Valorem is the tax levied for carrying on a profession, as the law covers occupation or trade within the meaning of profession tax. Andhra Pradesh, Assam, Chhattisgarh, Gujarat, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Meghalaya, Orissa, Tamil Nadu, Tripura, and West Bengal are the states in India imposing a professional tax. Every start-up shall apply for professional tax registration to the appropriate authority.

The taxing power is divided between the State and the Centre by the Constitution of India. 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. Thus the Profession Tax paid is to the State Government’s consolidated fund. The rate of tax is also fixed by the State Government which thereby varies from State to State. Professional tax, like Income Tax, follows an Ad Valorem, slab rate method (based on how much you earn) to ensure taxes are levied equitably.

According to Article 246 of the Constitution of India, only Parliament has the elite capacity to make laws regarding Union List which incorporates taxes on income. The state can make laws just as for the Concurrent and State list. Be that as it may, professional tax however is a sort of duty on pay is imposed by State Government and not all states in the nation decided to levy professional tax. State Government is likewise enabled to make laws concerning professional tax however being a tax on income Article 276 of the Constitution of India which manages tax on professions, trades, callings and employment.

It might be noticed that professional tax is a deductible sum with the end goal of the Income-tax Act, 1961, and can be deducted from taxable income. Further, Article 276 of the Constitution which enables the State Government to impose professional tax additionally has accommodated a maximum cap of Rs 2,500, above which professional tax cannot be charged on any individual.

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Points to be considered by the founder of a start-up

Probably the soonest choice which a beginning up necessities to make is about the constitution of the start-up by its founders, regardless of whether to frame it as a sole proprietorship, partnership, limited liability partnership or a private limited company. Tax and regulatory outcomes contrast for each of the above mentioned. Less complex the constitution, better it is for its founders.  

Even though most start-ups do not anticipate a taxable profit in the initial years of existence, there are regulatory requirements, for example, TDS, equalisation levy, labour law compliances, indirect tax compliances such as service tax returns, statutory audit, annual tax filings, and so forth. Further, it is basic for start-ups, especially the misfortune making ones, to file their tax returns on time to ensure that misfortune is eligible for carrying forward for set-off against future incomes.

Where overseas payments, for example, online advertising, cloud server charges, and so forth, are included, start-ups need to consent to cross border withholding, FEMA compliance, and equalisation levy rules. The bigger concern lies with indirect tax non-compliance as these are demands on gross revenues and the outcomes can be horrendous on a fledgling start-up.  A business person ought to comprehend the regulatory framework pertinent to his endeavour before beginning activities to maintain a strategic distance from regulatory repercussions.

The absence of attention to the tax and regulatory scene pertinent to their business is the biggest challenge. Taxation and compliance are not commonly viewed as a necessary piece of core business capacities, at any rate during the initial years of existence. Confined access to quality and unprejudiced expert direction is another test. Numerous business visionaries are non-finance professionals and are drawing in with civil servants/controllers for the first time.

Registration and assessment of professional tax

The initial step is to get enrolled as a ‘payee’ of professional tax in the nearby Professional Tax Office under the appropriate State’s Act. This is compulsory for all individuals, persons, and bodies for example Start-ups who are obligated to pay professional tax. To computation and payment of these taxes through endorsed forms and methods has to be done by the founder. The founder’s estimation and payment must be audited and certified by a Chartered Accountant. With regards to workers, be that as it may, the founder should deduct Professional Tax. That is, aside from professional tax duty for its exercises, each start-up needs to ascertain, deduct, and pay the professional tax on the salaries paid to employees.

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If there should be an occurrence of employees, a founder is a person responsible to deduct and professional tax to the State Government subject to the monetary threshold by a particular State’s enactment. Furthermore, the start-up (corporate, partnership firms, sole proprietorship, and so forth) additionally being an individual carrying on trade/profession is likewise required to pay professional tax on his trade/profession again subject to the monetary threshold by particular State’s enactment. In such cases, the founder of the start-up needs to register and obtain the professional tax registration certificate to have the option to pay professional tax on his trade/profession and professional tax enrolment certificate to have the option to deduct the tax from his employees and pay. Further, separate registration might be required for every office relying upon the particular State’s enactment. People who are carrying on freelancing business with no employees are required to register themselves subject to the monetary threshold, given by the particular State’s enactment.

Be that as it may, a professional tax levy is dependent upon the exemption given by the State to specific categories.


The following individuals are exempted to pay Professional Tax:

  1. Parents of children with a permanent disability or mental disability.
  2. Members of the powers as defined in the Army Act, 1950, the Air Force Act, 1950, and the Navy Act, 1957 including members from assistant powers or reservists, serving in the state.
  3. Badli workers in the textile industry.
  4. An individual suffering from a permanent physical disability (including blindness).
  5. Women exclusively engaged as an agent under the Mahila Pradhan Kshetriya Bachat Yojana or Director of Small Savings.
  6. Parents or guardians of individuals suffering from a mental disability.
  7. Individuals, above 65 years of age.
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Failure in registration and payment

While the actual amount of penalty or penal interest may rely upon the State’s enactment, a penalty might be levied by every such state for not registering once professional tax legislation becomes applicable. Further, there are also penalties for not making the payment within due date and neglecting to file the return within the specified due date.

  1. Fails to Get Registration
    1. He will be liable to a penalty for the period during which he stays unregistered.
  2. Fails to Deposit to the Government/ Late Deposition
    1. He will be liable to a penalty for the period during which he stays unregistered.
  3. Non-Deposition of Amount.
    1. The authorities can recover such sum alongside applicable penalty and interest from the assets of such defaulter. Besides, they can attach his bank account also. In serious cases, the prosecution case also can be filed.
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