This component provides functions and processes that compute the professional tax deductions of an employee. Professional tax is a statutory tax that state governments levy on professions, trades, callings, and employment. Professional Tax functionality in the SAP R/3 System, only covers the Professional Tax applicable on employee salaries.
Individual State Governments decide the rules applicable for computing the professional tax in their state. The Central Government, under the Constitution of India, fixes the limit on professional tax that the State Governments can charge.
Income Tax – the system estimates the annual professional tax of an employee and deducts it from salary as per sec 16(ii) of the Income Tax Act.
The system determines the professional tax payable by an employee, based on the following factors:
- Professional tax basis – comprises those salary components on which a professional tax is applicable. The salary components to be included for calculating the professional tax basis depend on the state. The different components are:
- Basic pay
- Dearness allowance
- Medical reimbursement perquisite
- Profits in lieu of salary
- Other remuneration that an employee receives regularly
Medical Reimbursement – The system includes the medical reimbursement amount which exceeds the amount exempt from Income tax (as fixed under the Income Tax Act), as a part of the professional tax basis.
Housing Allowance – Incase of a company leased or a company owned accommodation, the system checks the difference in housing allowance and the rent. If you pay an employee the positive difference between housing allowance and rent, then, the system includes this amount for calculating the professional tax basis.
Bonus - If the employment is in a state that specifies bonus as a component of the professional tax basis, then the system includes the same for professional tax basis calculations.
- Basis type – This is the type of basis considered while computing professional tax. Basis type can be:
- Nominal basis –The system considers the salary of an employee, while calculating professional tax. It does not take into account the actual number of days that the employee attended work within the given payroll period.
- Due basis – the system considers the actual amount that an employee receives as the basis amount for professional tax calculations. Most states specify Due basis for professional tax calculations. You can configure this for individual states.
- Computation frequency – This is the frequency with which the system computes professional tax basis for an employee. The computation frequency may span across one or more payroll periods, and the state specifies the frequency.For example, the frequency may be:
- Monthly – Where the professional tax basis computation occurs every month
- Half yearly- Where the professional tax basis computation occurs twice in a year, and each computation spans six payroll periods.
- Annual – Where the professional tax basis computation occurs only once in a year and the computation spans the twelve payroll periods.
- Deduction frequency – This is the frequency with which the system deducts the professional tax of an employee. The computation frequency may span across one or more payroll periods, and is state specific. For example, the deduction frequency may be:
- Monthly –Professional tax is deducted every month
- Quarterly – Professional tax is deducted once in a quarter and spans three payroll periods.
- Half-yearly – Professional tax is deducted twice a year, and the computation spans six payroll periods.
- Annual – Professional tax is deducted once in a year, and the computation spans the twelve payroll periods.
- Exemptions – Some states exempt certain categories of employees from paying professional tax. For example, in Karnataka, the following categories of employees are exempt from professional tax:
- Blind, deaf or dumb employees
- Employees who are 65 years of age
- Professional tax slabs – Employee salaries fall within different salary ranges or slabs, and the amount of professional tax to be paid depends on the salary range to which the employee belongs. Every state specifies its own salary slabs and the professional tax rate that is applicable for a salary range. The system calculates the professional tax amount accordingly.
- Arrears or the retrospective professional tax – When arrears are paid to an employee, the system determines the professional tax amount to be paid for previous periods by performing retrospective calculation. The system computes the retrospective professional tax in two ways, and the method it uses depends on the state. The two methods are:
- Gross Carry Forward – The system recalculates the professional tax basis for the past periods. It carries forward the difference in the professional tax basis for each retrospective calculation period into the current processing period, and sums it up into the current processing period.
- Deduction Carry Forward – The system recalculates the professional tax amount for the past periods. It carries forward the difference in the professional tax amount for every retrospective period into the current processing period, and then sums it up for the current processing period.
When there is a retrospective change of state, or a change in the professional tax liability of an employee, the system always uses the deduction carry forward method for retrospective professional tax computations.
- Reports – The system generates professional tax statements in a format prescribed by the concerned state authorities.
In some states, you need to pay tax as per the state act, but submit the returns at the local municipality or corporation level. The system generates the professional tax statements accordingly.
See also:Professional Tax Computation Defining Professional Tax Professional Tax Report (HINCPTX0) Other Statutory Deductions Infotype (0588), Subtype (0003)