■ Bumper increase in revenue

Government has, in fact, collected a bumper increase in revenue to the tune of Rs4 billion more than expected. This is principally thanks to broad-based economic and tax reforms that have delivered a higher growth performance. Reforms to the tax system in particular were key features of the two previous budgets in 2006 and 2007, guided by the philosophy of low and simple taxes coupled with fast and efficient administration in order to create an enabling environment in which individual effort and enterprises can thrive.

■ The tax base

Taxation is the most important and practical means of raising revenue to finance the public provision of goods and services with tax receipts representing more than 80 percent of Government recurrent revenue. Budget estimates show that total tax revenue for the financial year 2008/09 will reach Rs50.7 billion, an increase of nearly 10 percent over the previous year.

Government derives revenue from a range of taxes which can be classified into three main categories namely, taxes on income and profits (income and corporate taxes), taxes on consumption/expenditure (VAT, excise duties and other indirect taxes) and international trade taxes (customs duty). For the year 2008/09, consumption taxes are expected to generate 64 percent of the total tax revenue. It is anticipated that taxes on income and profits will account for 23 percent and trade taxes only 3 percent of the total tax outlay.

■ Shift to consumption taxes

The historical trends of the different components of tax revenue reveals a gradual substitution over time of consumption taxes for customs tariffs as the primary source of tax revenue. Taxes on international trade represented more than 50 percent of total tax revenue in 1980/81 and expenditure taxes only 20 percent. The declining role of trade taxes is characteristic of the process of trade liberalisation which started in the 1980s. Consumption taxes, in particular VAT (or sales tax prior to 1998), have compensated for the loss in tax receipts, subsequently emerging as Government?s main revenue earner by the turn of the century.

The reduction in custom tariffs announced in the Budget 2008-2009 reflects the commitment to increase trade openness and represents a step closer toward turning Mauritius into a duty free island. It is clear that Government is set to become even more reliant on VAT in the future.

VAT has a higher yield and is less costly to administer compared to personal income and corporate taxes. Furthermore, consumption taxes are generally more efficient than taxes on income and profits as they entail smaller economic disincentive and distorting effects. Besides, raising income and profit taxes would appear to be a less practical policy alternative as we seek to promote Mauritius as a low tax jurisdiction to attract FDI and where effort and initiative are rewarded.

However, there are equity concerns with regards to a shift towards consumption taxes. Taxing expenditure is inherently regressive as it falls more heavily on poor households as opposed to the rich. As such, it can be argued that with flat income and corporate tax rates of 15 percent and the growing reliance on VAT, the Mauritian tax system is likely to become more regressive.

■ Impact of trade openness

The fall in custom duties not only affects Government revenue but also has implications for households and businesses. Openness to imports usually entails positive welfare effects for consumers. They are able to benefit from lower prices as well as greater variety and quality of products.

But lower tariff barriers may leave the domestic industry exposed to greater foreign competition, leading to declining market share and profitability and, in some cases, job losses as a consequence of downsizing or even closure of enterprises.

It can be argued that exposure to import competition may spur domestic enterprises to become more productive, efficient and competitive through the use of new technology, training of their workforce, improvement in quality and modern management practices.

Recognising the need for upgrading our domestic enterprises and the restructuring cost involved, the Budget 2008-2009 makes provision for a Manufacturing Adjustment and SME Fund of the order of Rs500m. In addition, to provide a level playing field for domestic and imported products, amendments will be made to the Legal Metrology Act, Food Act and the Dangerous Chemicals Act. Mauritian enterprises, in particular SMEs, will be hoping for a swift implementation of the measures announced so that they are better equipped to face stern global competition.

■ Growth and competition

In line with the tax reforms undertaken so far, the Budget 2008-2009 contains additional measures to further improve the effectiveness of the Mauritian tax system in promoting investment, growth and competitiveness.

For instance, the introduction of Public Based Budgeting should provide more efficiency and transparency in the use of public money. Improving the quality of public spending is necessary because businesses and individuals care about how their taxes are being spent.

There are also sound economic policies delivering an enabling business environment, better education and public infrastructure that promote macroeconomic stability.

A tax regime geared toward creating more economic incentives, as is presently the case, may well lead to greater income inequality if the appropriate redistribution mechanism is not in place. It is of considerable importance therefore that the Budget 2008-2009 has adopted a targeted approach to income redistribution and proposes an array of social measures for alleviating the plight of the neediest segment of society.

Dr Vishal RAGOOBUR

Economist, Mauritius Employers? Federation