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A case for professional tax in India
January, 28th 2016

There are approximately 4,000 municipalities in India, with aggregate revenues of less than Rs.1 trillion, which includes grants from central and state governments and loans. Urban India is estimated to need capital expenditure of the order of around Rs.3 trillion per annum, besides additional funds for revenue expenditure. A substantial portion of these monies will need to be raised by municipalities themselves, given that state and central funds are spread over various equally important priorities. One revenue stream that could hugely empower municipalities is professional tax. They can reap the benefit of a rapidly urbanizing population and a concomitant increase in the workforce by paying greater attention to mobilizing professional tax.

professional tax is levied by state governments or municipalities under Article 276 of the Constitution, which provides for levy of tax in respect of profession, trade, calling and employment. Unfortunately, the Constitution also fixes a ceiling of Rs.2,500 per taxpayer per annum.

Important source of revenue

Municipalities are local self-governments and need access to several buoyant revenue streams if they are to evolve from rickety institutions into transformative city governments. At present, most cities are greatly dependent on property tax revenues to finance their budgets. professional tax can be a significant auxiliary source of income which ensures that a sliver of the economic growth being enjoyed by the city and its citizens is partially harnessed for public infrastructure.

At present, 21 states in India impose professional tax. The tax is applicable to all persons engaged in any employment or profession in some states; in some others, it is applicable only to certain specified professions. The tax may be levied and collected by the state government alone in some cases, while in states such as Kerala and Tamil Nadu, municipalities also levy and collect the tax.

For some cities, professional tax is the most important source of income after property tax. In the Corporation of Chennai, for instance, it contributes Rs.200 crore annually, half as much property tax. Profession tax contributes around Rs.90 crore to the revenues of Surat Municipal Corporation, around 30% of its property tax collection. The corresponding figure for Hyderabad is around Rs.100 crore.

professional tax could provide an alternative source of revenue to cities that stand to lose current sources of revenue such as octroi, entry tax or local body tax due to the impending roll-out of the goods and services tax. However, to plug the gap, a renewed focus on leveraging professional tax would be called for.

The 14th Finance Commission recommended that professional tax could be an important source of revenue for local bodies, if they are allowed to levy and collect it under state legislation within a reasonable ceiling set by Parliament. The empowered committee of state finance ministers on the implementation of the goods and services tax had also recommended removing the cap on professional tax, which would bring more revenue to the states.

The original ceiling on professional tax, as prescribed in the Constitution passed by the Constituent Assembly, was Rs.250 a year. It was raised to Rs.2,500 a year in 1988 and since then both the 11th and 12th Finance Commissions have recommended an increase; the 11th Finance Commission also suggested that the current requirement of a constitutional amendment to fix the ceiling be replaced with parliamentary approval. The 14th Finance Commission has also recommended an increase in the ceiling to Rs.12,000.

In a research report submitted to the 14th Finance Commission, the Vidhi Centre for Legal Policy reveals that the Government of India Act, as enacted in 1935, did not contain any limit on the amount of professional tax that could be levied by the provincial legislatures. The relevant section was inserted in 1940 to curtail the powers of the provincial states to tax income.

As per Vidhi, in most federal systems, either the levy or collection of income and professional tax is wholly within the purview of municipal bodies (Switzerland) or with the federal government (Mexico). In the context of the US and Canada, both federal and state governments have the power to impose income taxes. In none of these nations is the state government’s power to impose a professional tax limited by the federal government.

After almost 70 years of independence, with the question of the federal structure of our government largely being settled, the time is opportune to empower states and municipalities with greater responsibility for their finances. Parliament should consider empowering state legislatures to decide on all aspects related to imposition of a professional tax, including the need for a ceiling.

Striking a balance

Revenue enhancement of municipalities needs to be a national priority if the yawning infrastructure gap in our cities is to be addressed. A principal component is fiscal decentralization, with a focus on devolving buoyant revenue streams to municipalities. In the case of professional tax, Parliament should devolve to state legislatures the power to legislate on all aspects related to imposition of the same. State legislatures should do their part by committing to pass on this revenue generated by the cities back to their municipalities.

States and municipalities have to find the right balance between lowering taxes to attract investments and maximizing revenues to make their cities more livable. No rational citizen will grudge their government that extra rupee, if used to provide them a better quality of life.

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