Tax specialists may become an endangered species. By introducing a new system of taxation that is simple, transparent and easy to comply with, the government is making their job somewhat irrelevant. This is the last time you can see a billboard advert where an insurance company proposes to minimize your chargeable income. With the abolition of personal exemptions and deductions goes away the tax incentive for individuals to take an insurance policy scheme or a collective investment scheme.

Lobbyists may disappear too. By relinquishing his discretionary power to remit duties and taxes and grant exemptions, the Minister of Finance shrugs off the overimportance of the Joint Economic Council, its member organisations and other pressure groups. By bringing new rules which would allow the obtaining of all business permits within three working days, the government encourages would-be entrepreneurs to rely less on consultants. These are tough times, and our ministers cannot afford to bargain under pressures from various quarters.

Everything starts from the tax system. To reform it is to reform the economy. An economic restructuring worth its name involves the implementation of a new fiscal architecture. It is on this article of faith that the Deputy Prime Minister and Minister of Finance, Rama Sithanen, has focussed the 2006-2007 Budget: only fiscal modernisation is likely to revamp the Mauritian economy and bring about a sustainable economic growth, so essential for the creation of jobs.

At least, the government has chosen not to stifle growth, which has lifted its head this year. People, who feared a hike in the rate of Value Added Tax (VAT), can keep spending to back up growth. Thanks to our tax buoyancy system, the government expects to collect an addition of Rs 1.3 billion in VAT during the next financial year on the back of an economic growth of 5.3%. Meanwhile, the private sector, which dreaded a dividend tax, can go on investing to create jobs. Private consumption and investment should be our two growth engines in the coming years.

As 40,000 income earners currently paying taxes will be removed from the tax net and will gain up to Rs 12,000 in tax savings a year, this should boost up consumption spending. To the business community, the government sends a strong message by lowering the corporate income tax from 25% to 22.5%, a figure close to that in Singapore, a model which our Prime Minister wants Mauritius to emulate. Better still, the corporate tax will be reduced each year to reach a uniform rate of 15% for all sectors by 2009-2010. By setting the course for the next four years, the 2006-2007 Budget creates a predictable environment for investors.

However, the abolition of the 25% investment allowance is a wrong move because this tax relief did provide an extra incentive to invest on new capital goods. Besides, heavy capital investment is needed to increase the capacity of our industrial plant to manufacture high quality products that can be competitive on the export markets.

Rightly, the government does not intend to boost the economy through public spending, as it aims to bring the budget deficit to 4% of gross domestic product next year. On the contrary, it is determined to make an optimum use of government revenue in social allowances. Avoiding the word “targeting”, the Chancellor of Exchequer refers to “reorienting” subsidies towards the most vulnerable people. This is a sensible policy which will enable him to use more wisely Rs 350 million by combining social fairness with economic efficiency.

In effect, this sum will help finance the Empowerment Programme which will receive a budget allocation of Rs 750 million for the year 2006-2007. This programme will promote the emergence of small entrepreneurs and the training of unemployed women. The objectives are well targeted because the female unemployment rate has shot up to 16.5% while the male unemployment rate has stabilised at the rate of 5.8% in 2004 and 2005. On the other hand, it is the Small and Medium Enterprises sector which provides jobs – 27,600 between 2000 and 2005. A tax holiday for a period of four years will be granted to small enterprises converted into companies and which register for the first time with Income Tax.

Introducing a national residential property tax, reducing the maximum customs duty to 30%, opening the economy to foreign talents, instilling flexibility in the labour market, cutting red tape drastically and reforming the public sector pension are among the most audacious measures. But more importantly, the overhaul of our tax system makes room for a more efficient tax collection. Employees will not be able to mislead their employers by paying a lesser amount of tax under the Pay As You Earn system.

Two discreet measures brought by the 2006-2007 Budget need to be put into perspective. First, any individual who owns more than one residence, or an immovable property with price at time of purchase exceeding Rs 2 million, or a car with an engine capacity exceeding 2,000 cc, or a private pleasure craft, will be required to file an income tax return. This individual, anybody can guess, must be wealthy. So one can ask whether this obligation to declare these assets is a first step towards the determination of a wealth tax in the near future.

Second, all persons will be required to declare in their income tax returns the total exempt income, such as dividends, derived in the year. Here also, one can ask whether this requirement, which can be seen as an embarrassment imposed by the Ministry of Finance, is a device for the latter to eventually determine the dividend threshold above which a dividend tax will apply.

Such tax, which was subject to rife speculation before the Budget day, has finally remained in abeyance probably because of a lack of data on the distribution of dividends among individuals. As soon as the authorities gather sufficient information to be able to determine a fair threshold which would exempt small shareholders from paying dividend tax, will the government reintroduce it?

The timing could be politically motivated. Is it just sheer coincidence that the uniformisation of both the personal income tax and the corporate income tax into a same flat tax of 15% will come about in the year 2009-2010? This is the year when the next general elections will be organised.

As the government will have forgone a big chunk of income taxes by decreasing the income tax rates, and as the share of customs duties will have come down, it will have to find other sources of tax revenue. Now l’Alliance sociale will commit political suicide if the rate of VAT is raised on the eve of general elections! Instead, new direct taxes against the rich and the wealthy would generate political gains for the party in power.

Time will tell whether the Minister of Finance is preparing the ground for the introduction of a wealth tax and a dividend tax by 2009-2010. For sure, the debate on taxes will continue unabated. As Minister Sithanen said in his Budget speech, “the means may be painful, especially for the next two to three years”.

<B>Eric NG PING CHEUN</B> <I>Pluriconseil</I>