Tax Reform: A Climbdown in the Offing

Budget 2025-26

The government is on a slippery moral ground: how can it justify fiscal concessions to rent-seeking capitalists and high-income earners while imposing austerity on low-income people depending on old-age pension?

By Prakash Neerohoo

The budget 2025-26 presented on June 5, 2025, by the Minister of Finance introduced some measures that signalled a willingness to reform the income tax system (both personal and corporate) to improve the country’s fiscal capacity while injecting a dose of progressivity in the income tax structure. Now it seems that government is having second thoughts because at the last Cabinet meeting, it was decided to make some adjustments to those measures.

The official communique “Highlights of Cabinet Meeting – 11 July 2015” states the following:

“Cabinet has further noted that with a view to supporting economic growth:

(a) the Fair Share Contribution on High-Income Earners and on Corporates has been adjusted and clarified, taking into account the need for our jurisdiction to attract foreign investments and talents; and

(b) some grandfathering and moratorium will be provided for more certainty to the property market.”

Background

To better understand the significance of those proposed adjustments, we need to refer to the budget documents tabled in Parliament on June 5, 2025.

In the Budget Speech 2025-26, the minister of Finance mentioned two new Personal Income Tax (PIT) measures as follows:

Paragraph 275: A contribution of 10 percent will be introduced on chargeable income for individuals earning annual net income exceeding Rs 12 million up to Rs 24 million.

Paragraph 276: For those earning annual net income above Rs 24 million the rate of the contribution will be 20 percent.

However, the “Annex to Budget Speech 2025-2026” replaced those two PIT measures by a “Fair Share Contribution on High-Income Earners”, in Section 21 (d), which states:

“An individual earning annual net income exceeding Rs 12 million, inclusive of dividend income, will be required to pay a Fair Share Contribution at the rate of 15% of his chargeable income after adding thereto any dividend income received during the year from domestic companies. The contribution will be collected under the PAYE system on income received by an individual as from 01st July 2025 and it will be applicable for 3 consecutive income years, i.e., up to 30th June 2028.”

So, the special contributions of 10% (on annual net income of Rs 12 to Rs 24 million) and 20% (on annual net income over Rs 24 million) were replaced with a Fair Share Contribution of 15% on annual net income over Rs 12 million, including dividends. It is alleged that the government succumbed to pressure from high-income earners to water down those two proposed special contributions into one contribution of 15%.

Personal Income Tax

Under the new PIT structure, the government introduced two tax rates of 10% and 20% on chargeable income (see Table 1). Chargeable income (taxable income) is gross income less allowable deductions (dependents, housing interest, medical insurance, university fees, etc.). The 15% contribution on annual net income over Rs 12 million created a top Marginal Tax Rate (MTR) of 35%. However, a taxpayer earning a net income Rs 12 million will pay an Effective Tax Rate (ETR) of 18.8% and a taxpayer earning a net income of Rs 24 million will pay an ETR of 26.9%.

The special thing about the top MTR of 35% is that it was intended to apply only for three years (2025-2028). So that at the end of the three-year period, we will have only two tax rates (10% and 20%) in a new version of flat tax reminiscent of the period 2005-2010 when a Labour-led government introduced the flat tax rate of 15%. We should recall that the last MSM government (2019-2024) repealed the flat tax of 15% and replaced it with a relatively progressive structure of 11 tax rates (ranging from 0% to 20% with an increment of 2% for each successive income bracket between the lowest rate and highest rate) in June 2023.

The MTR of 35% was couched as a Fair Share Contribution from high-income earners in these hard times where solidarity from well-off citizens was required to reduce the budget deficit. Since that measure was announced, there has been a campaign in the media by the private sector, including accounting and law firms, against what is called “high or punitive taxation” on high-income earners. We heard the classical arguments from neoliberal economists against progressive taxation, namely that a high MTR is a disincentive to productivity and investment by clawing back higher income earned from personal occupations. They conveniently downplayed the time limitation on the measure (three years) although some ministers gave the assurance during budget debate that government will revert to a low tax regime after that period.

Tax reform watered down

Now it appears that the government has caved in to more pressure from the private sector and will adjust the 35% MTR with the intent of keeping the Mauritian jurisdiction attractive to foreign talents. What will be these adjustments? Will the Fair Share Contribution of 15% come down to 5% so that the top MTR will be 25% (20% + 5%), that is the same rate that was in place between July 2020 and June 2023? Will there be an exemption for certain categories of high-income earners, for example foreign citizens working in Mauritius? Will dividends be excluded from the annual net income over Rs 12 million that is subject to 35% MTR? High-income earners like to treat dividends as a distribution of after-tax profits and not as a source of income. But we know that taxation of dividends is a common practice in advanced social-democratic countries (e.g. Canada) where it does not scare away investors.

We don’t know yet how these adjustments will be done. The government could spell them out in the Finance Bill 2025-26 to be tabled in Parliament for a vote. Or it could provide administrative easements to be implemented by the Mauritius Revenue Authority (MRA) under a regulation to the Income Tax Act.

The government’s climb-down reminds us of a similar scenario that happened in the budget 2020-21 when the former minister of Finance, Renganaden Padayachy, introduced a Solidarity Tax of 25% on high-income earners earning more than Rs 3 million annually, including dividends. That proposed 25% Solidarity Tax added to a basic tax rate of 15% to create an MTR of 40%. There was an immediate backlash from the private sector, led by accounting firms and neoliberal economists. Among them notably was the present governor of the Bank of Mauritius, Rama Sithanen, who criticized harshly that measure in the media. In a radio interview, he argued that “educated people should not be penalized for earning Rs 200,000 a month”.

The pressure was so strong on the then minister of Finance that he watered down his proposal by limiting the Solidarity Tax to 10%, thereby creating a top MTR of 25% (15% + 10%). That 25% MTR did not last long since it was replaced with a top MTR of 20% as of July 1, 2023, in a new tax structure. What is noteworthy is that of all opposition parties, only the left-wing party Resistans ek Alternativ (ReA) welcomed the 40% MTR as a progressive measure. This time around, the ReA has welcomed the 35% MTR in the new budget, extolling it as a progressive measure in times of fiscal hardship.

Tax on Corporates

Section 21(m) of the “Annex to Budget Speech 2025-26” mentioned a “Fair Share Contribution on Corporates”, defined as follows:

“Corporates having annual chargeable income above Rs 24 million will be required to pay a Fair Share Contribution at the rate of:

(i) 5% of chargeable income if they are subject to the standard tax rate of 15%;

(ii) 5% of chargeable income for banks including on income derived by banks from transactions with non-residents and Global Business Companies; and

(iii) 2% of chargeable income if they are subject to the reduced tax rate of 3%.”

With this new Corporate Income Tax (CIT) measure, to be applied for three years only (July 2025- June 2028), local corporations earning annual taxable income over Rs 24 million were going to be charged a CIT rate of 20% (15% + 5%). Export companies would be paying a CIT rate of 5% (3% + 2%). Adjustments will now be made to those CIT rates to attract foreign investments. Will the proposed contribution rates be reduced from 5% to 2%? It is obvious again that the private sector has influenced the government to water down its CIT measures on the grounds that higher tax rates do not attract investments in the economy.

Property market

Section 23 of the “Annex to Budget Speech 2025-26” mentioned new tax measures for the property market, especially the Smart City Scheme (SCC). Most noteworthy is the proposal to remove fiscal incentives for the SCC, such as VAT exemption on building and infrastructure, 8-year tax holiday on real estate income, customs duty exemption on imports of equipment and materials for construction, exemption from registration duty and land transfer tax, exemptions from morcellement fee and land conversion tax, etc.

It was also proposed to subject non-citizens selling property acquired under various schemes (SCC, IRS, PDS, RES and HIS promoted by the EDB) to a Land Transfer Tax at the higher of 10% of the property value or 30% of the gain realised on the resale. The gain is the difference between historical cost (purchase price) and market value (selling price). For example, if a property acquired for Rs 2 million is sold for Rs 5 million, the gain of Rs 3 million would be taxed at 30%.

For the first time, a Capital Gains Tax of 30% was proposed on the resale of real property by non-citizens, who already do not pay property tax. In contrast, in other countries (e.g. Canada), 50% of capital gains are taxed at applicable Marginal Tax Rates when they are added to other taxable income (emoluments, dividends, etc.). After those tax measures on real estate were announced, all property developers took up the cudgels to sound the death knell of real estate development in Mauritius. Some even blamed the new measures for bringing a potential end to economic development in a catastrophist way, as if economic development boils down to property development.

The government has now announced a grandfathering of real estate projects from the new tax measures, probably those that were launched before the budget or were approved for post-budget execution. A moratorium on new taxes for real property projects already in the pipeline to provide more certainty to the property market was also announced. The new tax measures were indeed necessary to put an end to unbridled real estate development that has diverted capital and land from productive investment purposes (food production, farming, sugar cane for bagasse production for hydro generation). Real property development for rich foreigners has raised real estate prices through the roof in a country with limited space, thus crowding out Mauritian citizens from the housing market or access to land ownership

Moratorium on real estate taxes

During the last electoral campaign, the leader of the PMSD, then a partner in the “Alliance du Changement”, proposed a one-year moratorium on real estate development in the country to reassess its impact on the environment and land use planning (refer to the article titled “Développment foncier: un moratoire pour l’immobilier” published in our edition of February 9, 2024). After he left the alliance, we never heard again about that proposal. Instead of a moratorium on real estate development, we are probably getting a moratorium on new taxes on real estate. For how long? We don’t know yet.

In previous articles, I have advocated for a general capital gains tax (CGT) on the resale of moveable property (vehicles, boats, jewellery, shares, etc.) and immoveable property (land, commercial buildings and residential units) to control the unbridled enrichment of property owners and combat money laundering. It is known that operators in the informal economy (e.g., drug traffickers) launder their illicit money through the purchase of real property and personal property with cash. In the fiscal toolbox, a general CGT is the best tool to keep track of real estate sales in the economy. By compelling notaries to refer all real property sales to the MRA for CGT assessment or be the source collector of the CGT upon transfer of property, the government can keep a database on real estate transactions to allow the analysis of ownership trends and identify who is buying what.

The rationale for increasing tax revenue and reducing public expenditure (e.g., increasing age eligibility for old-age pension from 60 to 65 years) was to improve the country’s fiscal position with a view to avoiding a downgrading of our sovereign rating by the credit rating agency Moody’s. It now seems that the government will forego part of the new tax revenue that was expected by making adjustments to its original tax measures. Therefore, fiscal consolidation might not be achieved within the predicted timeline (three years). The government is on a slippery moral ground: how can it justify fiscal concessions to rent-seeking capitalists and high-income earners while imposing austerity on low-income people depending on old-age pension?

Mauritius Times ePaper Friday 18 July 2025