There is no doubt that our individual income taxation is ridden with deductions and allowances that have impacted on government revenue. Nevertheless, many of them had served a useful purpose, whether economic or social or both. They have also served utilitarian national objectives. After all, the objective of income taxation is not only to raise revenue. It will be a very poor tax system if its sole objective is to maximise revenue. Income tax is a mechanism for encouraging savings and investment, for greater work effort and productivity, for channelling resources in economically and socially desirable sectors. Its ability to fulfil these objectives far outweighs any revenue shortfall that may eventually occur due to deductions and allowances. Budget making should not be limited to a mathematical equation.

Our income tax system has had a judicious blend of deductions and allowances that served the individual and the country right. They were the counterparts of incentives that existed in our corporate tax structure. They had been instrumental in not only encouraging savings but also in inculcating the spirit of savings in the population for diverse reasons, for example, life assurance and pensions.

By contracting loans and deducting interest, they encouraged Mauritians to invest especially in land ownership and housing, which remain even today a national priority. Had these incentives not existed, the country would have been facing more serious housing problems.

Many Mauritians benefited from deduction for children which helped parents cater for the educational needs of wards. The income tax system thus alleviated the high cost of education, especially overseas. Many of us are a product of such educational deductions. This has strengthened our educational base, contributed to the needs of the country in terms of professionals and skilled human resources. Education is in a sense a merit good and perhaps it is more than ever relevant today when the country aims at developing a knowledge hub. Other deductions related to the provision for medical facilities. In the absence of such incentives, more people would have been dependent on the State for such services.

It should also be added that the deductions most of the time were limited to a ceiling. As a result, the deductions were only partial. There was not a total dependency syndrome on the State for all services. The deductions also called upon the spirit of solidarity of Mauritians, especially for charities. We are following into the footsteps of developed countries in having a standard deduction. We might have reached the status of a middle-income country but we have yet to attain the higher level. Developed countries do have a range of quality educational and social facilities to which their citizens are entitled in return for their contribution to the national exchequer.

In these areas, we are dismally deficient. If individuals have to care for themselves in these respects, it is fair that the system provides for deductions. If these are eliminated, obviously, there is a need for the State to provide the same. Improvement in basic services provided by the State should be part and parcel of any tax reform where allowances are eliminated. On this point the budget is silent.

While the budget simplifies the tax system, it does not suggest alternatives to meet the objectives considered essential earlier. In this sense, it does not take into consideration the economic and social realities of Mauritians and the country. Simplification is good but oversimplification is bad. Too much simplification breeds inequity of its own. It will be simplistic to assume that the needs and aspirations of different individuals are or should be the same. The specific circumstances of individuals and families are not taken into account. To quote from George Orwell, four legs good, two legs bad. We should not throw the baby with the bath water. There are obviously some deductions that could have been maintained on both economic and social grounds.

Many of these deductions were also in existence because the personal deductions were admittedly fixed at a low level and had not even kept pace with inflation over the years. It was high time to rationalise the system. However, the system has been simplified with the main objective being to raise revenue. We believe that the system should have been rationalised rather than merely simplified.

A rationalisation system should have been based on a proper study with the implications analysed fully. A more professional approach was required. A study should take into account the impact of the entire tax system. It will not be surprising for such a study to show that salaried earners have a tax burden exceeding 50 per cent of their income enough to discourage professionals or Mauritians overseas from working in Mauritius. This is at a time when we are talking about attracting the Mauritian diaspora to invest in the country. We already have a severe problem of brain drain which will be further exacerbated. This is in contradiction in what the budget intends to attract Mauritians and professionals from abroad.

A major reform of such an important component of taxation cannot be undertaken without a complete analysis of the objectives, impact not only on taxpayers but on the economy and wide ranging implications for the future. In my opinion, the changes will have wide ranging implications on our economic and social landscape, functional income distribution and the entire salaried class which is already squeezed since they are the major contributors to the income tax. The system will breed much hardship in the middle class that will have a bearing on investment in education, land, housing etc.

It is clear that the simplification exercise is meant to maximise revenue to the State. The budget mentions that there are 100 income items that are tax exempt and 20 types of allowances and expenses deducted to arrive at chargeable income. Where revenue considerations predominate, the system is not totally simplified, for example, the National Residential Property Tax, the tax on second residence and tax on company cars.

?Improvement in basic services provided by the State should be part and parcel of any tax reform where allowances are eliminated. On this point, the budget is silent.?

The income tax changes are based on the expectation and promise that the burden will be alleviated in four years? time. In the meantime, we have to accept that the tax take will eat up a significant portion of income as tax. The shift to a standard deduction provides for uniformity but the basic question that remains is that on what basis is the figure reached. A rule of thumb will be a multiple of per capita income and once this is fixed it can be adjusted periodically. This would be fair and transparent. At the moment, the change does not pass this test; nor does it take into account the existing deductions and allowances.

A glance at the existing allowances will bear this out. If we take just five deductions and allowances, the total amount is Rs 695,000. The deduction proposed in no way matches these deductions. If we take into account other deductions, obviously, many Mauritians will be worse off. It will not be an exaggeration to state that the universal deduction is less than 50 per cent of existing ones. This will only be partially compensated in four years. However, the budget is silent as to the standard deduction over the next four years. If it remains static, the phenomenon of fiscal drag will operate and many people will be scooped up into the tax net even those who are exempt today. This has been the case with the Pay As You Earn whereby more people are scooped up into the system over the years.

The only silver lining in the clouds is the promised reduction in tax rates to 15 per cent in four years? time. A decline in rates makes the need for differential treatment unnecessary. But this is coming only in future. In the transition period, there are no transitional measures. The reform makes our tax system less amenable to encouraging productivity. It penalises people because certain existing deductions have long term implications. People have taken commitments over the long term and all of a sudden, these are removed. It penalises the middle-income groups, especially the salaried class. The budget is silent as to the taxation of other categories of income taxpayers where there may be a high revenue potential.

It cannot be denied that personal deductions are a cause of the erosion of the tax base. I can quote here what Richard Goode, an authority on taxation said in The Individual Income Tax: ?While a sceptical attitude toward personal deductions is justified, it should be recognised that properly limited deductions have advantages in adapting the income tax to individual circumstances and in advancing socially important objectives.?

There should have been an average rather than a minimalist approach. An average income provides a rough indication of a probable trend in a socially acceptable minimum. We are experimenting with a new system. There have not been alternatives that have been simulated for revenue implications. With the decline in the highest marginal rate to 22.5 per cent but with a very low deduction, the average will easily tend towards the top marginal rate.

I may once again quote Richard Goode on reform of income tax: ?It would be over-optimistic to expect sweeping reform that would resolve all outstanding issues at once. But gradually, with patience and energy in the study of taxation, in dissemination of research results, and in persuasion, income tax reform can be achieved and a good tax made better.?

At this stage, I am not sure that we have presently achieved a better income tax system neither in the process nor in the results. The measures may on their own have an economic sense but in a global context where all the ramifications have to be considered as a package of policies to fulfil the economic and social objectives of the country, these have not been studied or have simply been taken for granted. When the rate will go down to 15 per cent, it will be another matter but we are not yet there. In the meantime, the sheep are sheared.

<B>Dr Azad JEETUN</B>