All income earners, including the salaried and the self-employed, will soon have to fork out more tax. The Centre has finally relented on the long-standing demand from states to enhance the ceiling for tax on professions from the current level of Rs 2,500 to Rs 7,500 per year.

The tax on professions, trades, callings and employments, is a tax that the Constitution assigns to state governments/local bodies. In eight states, the state government itself collects the tax while in several others with active panchayats, the local bodies levy and collect the tax. Article 276 puts the ceiling on the tax at Rs 2,500.

The Constitution has been amended in the past to raise the tax level to bring it to the present level. Many states have been demanding that the Article should be amended again to hike the tax level to Rs 7,500 a year.

Eight states, including Maharshtra, Tamil Nadu, Karnataka, Gujarat, Madhya Pradesh, Andhra Pradesh and West Bengal, levy this tax on an annual basis. An increase in the ceiling is expected to substantially help these states in overcoming their revenue constraints.

A proposal in this regard is likely to be taken up by the cabinet soon. The present level of Rs 2,500 was fixed in 1988 though the 60th amendment. This time, the Centre wants to carry out another amendment though which it wants to retain the executive power to enhance the ceiling as and when required without having to go to Parliament for the same.

The amount paid to a local body/state government as tax on professions, etc is eligible for deduction from income while computing income tax payable to the central government. Therefore, a hike in the tax level could adversely impact personal income tax collections. States collect close of about Rs 3,000 crore by way of professional tax.

But, States feel that since the economy is booming and income tax collections are also on rise, this move would not have much impact. Earlier, when the proposal was mooted, centre had showed willingness to raise it to Rs 5,000 only. States want the additional revenues for meeting expenditure for creation of social infrastructure, including primary schools and hospitals.