Sudhamo Lal, Director-General of the Mauritius Revenue Authority (MRA), announced recently that tax collection had increased to Rs 62 billion in 2013 from Rs 58 billion a year earlier.
Amongst others, he attributed the various facilitations and enforcement measures adopted – including e-filing of tax returns, amnesties, dealing with tax frauds, bringing new taxpayers into the fold, carrying out regular tax audits, chasing perpetrators of the drugs trade, etc. – as factors contributing to uphold the higher tax collections.
All this shows that a well-coordinated revenue authority – which employs all the information it has access to, with the help of technology and common sense – can raise additional revenues even when the overall fiscal policy framework is not terribly conducive to expanding the tax base.
The natural expansion and responsiveness of the tax base from year to year no doubt also has to do with this healthy growth of our tax revenues. Even actions like bringing to book those who may have used contrivances like the Returning Resident Scheme to beat down tax payments on imported cars constitute a strong signal to bring eligible taxpayers of all sorts to comply. Efforts of this sort by the tax authorities should narrow down the scope of the underground economy. This may not bring in a huge amount of money to the Treasury immediately but it is a significant deterrent to tax evaders and those who operate in the dark. It also disciplines those who may be tempted to beat the system and makes them concentrate instead on producing more national wealth.
It may be recalled that the British colonial administration had a rigid tax, fees and dues collection system in place in Mauritius, right from those days. The span of tax collection was nothing as wide as what we have today but it must be said to the credit of the British colonial administration that it left no stone unturned, despite the narrow economic base of those times, to pick up all the dues belonging to the State.
We inherited this rigorous system from the British and it goes to our credit that we did not allow it to slip out of our hands. There have been periods of oppressive direct taxation during our short history as an independent state but this was quickly reversed once the fiscal authorities found alternative sources from which to tap revenue.
In the process, we changed over during the past few years to a flat rate of 15% for both personal and corporate direct tax, irrespective of income levels of individual taxpayers. (A better revenue-yielding and fairer tax system would have been the application of higher tax rates at higher income levels (called progressive taxation) so that those who are better off contribute more equitably in terms of taxes paid. Naturally, the highest marginal tax rate under this system cannot be so high as to become a disincentive to business growth.)
The trend has been for Mauritius to give up on high direct taxes for both individuals and corporations, to rely less on certain customary sources of tax revenue – such as import tariffs and export duties — but to lean more extensively on alternative revenue sources. The focus has changed to placing increasing reliance on indirect taxes such as the Value Added Tax and on excise duties to give the government the means to meet its expenditures.
The bulk of government revenues come from such indirect taxes today and we are given to understand that the MRA is using some devices to plug loopholes which might have a negative effect on tax collection from this source. It shows that we need a proactive tax administration system, taking informed initiatives to thwart leakages. Institutions will contribute the most if they are fully empowered to carry out the work for which they were created.
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Why a no-nonsense tax administration is important
The world over, countries which fail the most to achieve their full potential, are those which are least able to collect necessary taxes. The governance system is so unruly that few comply with tax rules and pay up their fair share to the public exchequer. This is typical of countries which are torn by various sorts of strife and lawlessness at home making it nigh impossible for the tax agency to enforce rules and collect all the fiscal dues rigorously. In such countries, there may be several unofficial centres of power which decide whether or not to pay any taxes or, for that matter, whether to abide by laws given by the central authority.
In such places, the black economy thrives and corruption of all sorts – often aided and abetted by the potentates of power — proliferates. A country like Nigeria, which is one of the thriving global oil exporters, has one of the highest rates of poverty in Africa. Mal-distribution of the country’s earnings from this major source holds down its huge development potential. Government fails, in cases like this, to fully undertake its principal responsibility to redistribute – by means of an equitable tax system — national wealth fairly among the country’s citizens.
In other places, the domestic tax régime becomes so oppressive and complicated as to encourage tax evasion and avoidance. High tax rates coupled with complex tax reporting and assessment systems not only make it difficult for citizens to be fully tax compliant. They end up discouraging the undertaking of economic activities based in the home jurisdiction. In such cases, enterprises and individuals employ their time and skills to minimize tax payment in the home jurisdiction. They employ less of their time and skills to sharpen up their businesses instead. Complicated tax systems tend to be accompanied by corruptions of different sorts which could easily discourage the brightest and the best.
When they are tired of it all, capable individuals quit and go to other places which apply clearer and more predictable rules of fiscal and other accountabilities. It has been observed that citizens of certain countries with inefficient and oppressive tax systems have thrived exceptionally well in business in places they have emigrated to. Some of them have even gained global ascendancy from their new countries of adoption. This represents opportunity foregone for their home countries. The lack of a predictable environment for undertaking activities destroys value.
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Let’s chase our productive potential while keeping an eye on tax concerns
We have in Mauritius employed our fiscal policies to good effect. It is one of the factors that has clearly propped us up. We provided incentives to producers when it came to enlarging our economic base without crashing government finances. Governments lifted up the country’s infrastructure whenever it threatened to become an obstacle to development, without taking taxes beyond tolerable limits. Fiscal pressure remained soft, with a good mix of an acceptable level of both taxation and public debt policies. This is a track record worth preserving and pursuing.
There is a feeling today that we need to trim down the welfare system to manageable proportions so that we don’t have recourse to oppressive taxes to bridge the gap in future. We could cope with the problem, not by squeezing out welfare expenditures altogether. Instead, we could increase the scope of the economy as a means for the government to collect more revenues to meet its commitments, including on reasonable welfare spending. As things stand today in the global economy, we can grow that scope by going for production that matches the pattern of demand on today’s markets.
We can all see how the smart phone business is still upbeat in developed and developing countries alike despite the world economy not being as strong as it used to be. Nearly every equipment which lands up in our offices and houses or on our roads today is fitted with ever more electronic components or has been fashioned by the use of modern technology. We could increase the scope of our production by meeting this kind of demand the more we adopt modern technology in the production of our goods and services. All it requires is creating the right environment for the next generation of transformational activities to emerge fairly quickly.
Next door, tax and tariff policies have changed. We have reciprocal duty-free access to the SADC market if we can meet the rules of origin requirement and develop the right know-how to penetrate promising nearby markets. We have made some inroads there (largely through financial investments) but this may not make us sufficiently involved in sustainable production of goods and services in our proximate markets. The opportunity has been beckoning us for a number of years now. It’s a long time ago we ought to have paired ourselves with peers in the regional market, equipped with the necessary skills, to add value both to ourselves and to the regional markets. The groundwork and reform process to embark on this vaster economic integration process should have begun at home and in our diplomatic missions.
We still have an edge in terms of good governance. We have to buy in the specific skills that should accompany it and the drive to make things happen on a larger scale than to keep shrinking ourselves as a small island economy. It is our foundation in terms of several parameters such as: sticking to strong institutions, rule-based decision-making, keeping our public finances in good health and making our private sector dream and realize dreams beyond our shores, that will take us sustainably forward. If we don’t lose track of the painstaking path we have followed to score success, we can still make it to the top.
* Published in print edition on 28 February 2014