<B>Tax Partner at Ernst & Young</B>

<B> What is the new philosophy of taxation of the 2006-07 budget?</B>

The government policy seems to set up a fair, simple, transparent and equitable tax system. Firstly, Mauritius will ultimately become a 15% tax rate island, since the income tax rate will be 15%; the same as the VAT standard rate. Secondly, various measures have been taken to ensure that taxpayers comply with the various fiscal laws: for instance, the “amnesty measure” of a four-year exemption to small enterprises, which convert into companies.

<B>What are its advantages?</B>

The expected advantage of a simple and low tax rate is the hope for an increase in the level of compliance. The introduction of the cumulative system to compute the amount of tax to be withheld under the PAYE system will also lead to a more realistic tax computation. The powers of the minister of Finance to remit taxes under various fiscal laws will be removed. This means that, unless an income and/or transaction is exempt, tax will be due on it. Hence the “subjective area” of fiscal laws will be eliminated.

<B>Which income group or population segment will benefit from these new measures?</B>

Whether the new measures will benefit them or not will depend on their present level of exempt income and personal reliefs and deductions. The material point here is that the reduction in maximum tax rates may be more than offset by the increase in the chargeable income of the individual.

<B>Who are those affected by these measures?</B>

Let’s take an example. Currently, certain interest income is exempt. The Budget proposals provide that all interest income will now be taxable. Pensioners who have made their financial plans on the basis that their interest income would be exempt will experience a tax cost on their interest income. I know that at a minimum the first Rs 215,000 will not be taxable; but there are cases where the tax cost will be substantial. It must be remembered that the Rs 120,000 exemption announced by the Minister relates to an exemption from withholding tax and is therefore only a cash flow benefit.

Let’s take another example. Take the case of an individual with a monthly salary of Rs 75,000 and the following profile- dependent spouse and three children studying abroad (the studies are financed by a secured loan). The new measures will lead to a substantial increase in the tax liability of the individual.

<B>Some businesses and insurances are affected as well. Can you explain how?</B>

Reliefs such as interest on secured loans, life insurance premium and savings relief will no longer be relevant for individuals as the level of exemptions will depend solely on the number of dependents they have. To the extent that the tax benefits of the financial products have been used as the driving factors to contract a financial transaction, insurance companies and finance providers may lose business.

The minister of Finance announced that all exemptions will be removed. If that is the case, then I think certain businesses will cease to operate in Mauritius and relocate to other jurisdictions. An example of this is shipping income, which is exempt in other jurisdictions, such as Singapore.

Corporate losses will be available for future set off for 5 years only. Businesses which are in a loss making position will not welcome this measure. If the law on group relief is not amended to apply to all types of companies, irrespective of their incorporation date, this measure will be extremely unfair to companies operating in a group situation.

<B>From an economic point of view, would an increase of Value Added Tax (VAT) have been better than a change in direct taxation?</B>

The standard rate of VAT was not increased, but the annual registration threshold will be lowered from Rs 3 million to Rs 2 million. Other things being equal, this measure implies that the selling price of goods and services of the newly registered persons will increase, although the price increase may be less than 15% on account of the input tax the persons will be able to claim. VAT is by nature a regressive tax and the introduction of a rate higher than the standard rate to certain goods and services would have alleviated this drawback.

The measures pertaining to campement site leases, the temporary levy and the National Residential Property Tax will, on the other hand, not affect all consumers. It is virtually impossible to have a tax system having all desired objectives at optimum levels. This is because all the objectives are inter-related; for instance, an action to enhance the fairness of a tax may only be achieved by having a complex law. The key to an appropriate tax system is therefore to determine the right balance amongst the objectives of tax policy.

<B>What would you suggest to improve the budgetary measures?</B>

I think that it would be useful if the Finance Bill could be circulated to all stakeholders for their comments prior to its adoption by Parliament. I suggest that at least one week be given to stakeholders for this process.