A Gradual but Continuing Hit against the economy

This week saw the signing off of a significant amendment to our Double Tax Avoidance Agreement with India dating back to 1983.

Mauritius’ Global Business sector is still reeling from the unexpected concession made by us in this regard. The ‘coup’ is programmed to start hurting the sector immediately by changing international investors’ perception of Mauritius at first. The final blow is programmed to be delivered as from 1st April 2017. Thereafter, it is India which takes over the right the DTAA conferred on us to charge capital gains tax on investments made by companies resident in Mauritius investing in India.

Professionals in the sector claim that the complete reversal of roles conceded by Mauritius will take away the main attraction international investors passing through Mauritius had when bringing their business to our shores. The signature given by us this week is the culmination of concessions already made, as it now appears, in July 2015 to a series of pressures and uncompromising demands made on us by Indian tax officials.

Having guessed the negative impact the concessions made would have if disclosed at that point in time, Minister for Good Governance who accompanied the official delegation to India at the time, refused to disclose the tenor of the concessions made on “grounds of confidentiality”. Now, we know, a whole sector has lost its sense of orientation. Maybe, practitioners from the private sector who formed part of the July 2015 delegation to discuss the matter in India and who must have seen the implied disaster, could not make themselves heard or must have been simply rubbished by authority.

There is generally an absence of results or strong initiatives as regards the economy in general. This last overturning episode adds to its woes. The Prime Minster himself, who has been chairing the public-private sector forum overseeing the implementation of projects outlined in the Vision 2030 program, lately expressed to the leaders of the private sector the lack of initiatives on their part. This, despite numerous specific tax exemptions and concessions given to them.

If the private sector has an opportunity to make profits by engaging in projects, it will normally rush to undertake the projects. If it is not taking up the opportunity, there must be reasons for it. It will deliver projects which are backed by a pipeline of demand, at present or in future. There might be a gap here. It cannot be said that private sector projects are not being undertaken for lack of funds. Our financial system has for long been swimming in a sea of excess liquidity despite a very low interest rate regime. It has plenty of funds to supply to businesses if presented with strong and financially viable projects. Something is therefore not working out.

We saw the great turbulence inflicted on the business sector as from April 2015 when the dismantling of the BAI group began. It may well be that there were many things to reproach to that group as regards the soundness with which its business was managed or mismanaged. However, there is a certain principle which governs how issues of the sort are dealt with, without sapping the basic confidence that people should always have in fair treatment according to law, in a rule-of-law country such as Mauritius.

The perception is that due process was not always followed. Instead of that, nearly everybody directly or indirectly involved, from financial regulators to public institutions, was publicly castigated. No one felt safe. It seemed laws could be introduced or amended at will, as suits immediate convenience.

A consequence of the way the BAI case was handled has resulted in an international arbitration case involving claims in damages filed by the owners of the BAI group against the Government of Mauritius. It’s uncertain which way the scales will tip. What is certain however is that the rough-handedness with which the matter was dealt with has signalled to businesses generally that they should be wary of risk-taking, lest they be handled in a similar manner on one ground or another.

Similarly, a long-term contract under which the Betamax Company was transporting oil to Mauritius was rescinded unilaterally on the grounds that it would have been incorrectly secured from the previous government. The company is now seeking an international arbitration in Singapore against the Mauritius government considering that the grounds on which the contract was rescinded are not tenable in law. Given the size of the contract, important sums may be at stake for us if the arbitration decides in favour of the company.

Not only is the economy not proceeding at an acceptable pace; it is, as it were, regularly being handicapped by emerging new factors.

The latest in the series is the manner in which the Global Business sector’s interest appears to have been altogether ignored when signing up unilaterally to the amendments nullifying the effectiveness of the tax treaty in bringing business to Mauritius. The sector was not consulted about the implications when signing up. It stands today a mere spectator to a fait accompli which risks washing out the core business it has concentrated on the past 25 years.

If the consequence of some of these government decisions is to produce situations in which funds are not sufficiently available to face their financial consequences – e.g., the case of payment to policy holders of the BAI Super Cash Back Gold policies – government will have to pick up more debts. Already at about 64% of GDP, public debt is way above the legally permitted limit.

It was advisable therefore not to take decisions that may, in the circumstances, add to the public debt, whether due to rash miscalculated decisions taken or if the social situation deteriorates due to increasing economic weakness. The time has come to take a step back and judge whether the consequences of irrational decisions taken on occasion should not be checked and everything put back on track instead, to move up the economy truly forward.

* Published in print edition on 13 May 2016

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