Tax reform: ReA raises the stakes

Budget 2025-26

Mauritius’ tax-to-GDP ratio stands at 21%, well below the OECD average of 35% and Scandinavia’s 45%. Without a broader and more progressive tax base, the country cannot sustainably support a generous welfare state

By Prakash Neerohoo

In the context of the budget 2025-26, to be tabled by the minister of Finance in Parliament in June, the minority partner in government ReA is proposing an increase in the corporate tax (CT) rate from 15% to 20%, according to a statement of its leader Ashok Subron reported by the paper Le Defi on April 19, 2025.

Ashok Subron went so far as to say that the private sector should not hold government hostage while the latter is striving to promote social justice. I agree with Ashok Subron as I have been calling for tax reform in many media articles over the last few years. Fiscal consolidation calls for a proper tax reform to generate additional revenue at a time when the budget deficit is high (6% of GDP) and public debt is approaching 100% of GDP. The government cannot keep running huge deficits year after year, which increase public debt with huge debt servicing costs (about 30% of current expenditure).

I should point out that 15% is the general CT rate currently. Export companies and companies in global business pay only 3% CT. In his last budget, the previous minister of Finance added 2% to the CT rate for local and global companies (with turnover more than Rs50 million per year), jacking up the CT rate for global companies to 5%. This rate of 5% is still way below the 15% minimum global CT rate proposed by the OECD as part of its plan to combat the BEPS (Base Erosion and Profit Shifting) strategy practised by big international corporations to move their income to low-tax jurisdictions (Ireland, Mauritius and other tax havens).

In addition to a 20% CT for local companies and 15% for global corporations in the offshore sector, the government should explore other revenue generating avenues to increase tax revenue and reduce the budget deficit. Amongst other measures, the following should be considered:

1. Capital Gains: Introduce a capital gains tax on the sale and resale of moveable property and immovable property. At least 50% of capital gains should be taxed at applicable marginal income tax rates, as is the case in advanced countries such as Canada. A capital gains tax is an appropriate tool to keep track of wealth accumulation and combat money laundering from illicit trades. We know that tax evaders and underground economy operators invest their illicit gains in real property (houses, villas, buildings) and luxury personal property such as jewelry, boats and high-end vehicles.
2. Dividends: Introduce a tax on dividends as a source of income to be taxed at marginal income tax rates. The argument that dividends are an after-tax distribution of profits to shareholders is a fallacy. Dividends are a source of income according to the theory of income sources (employment income, business income, capital gains, dividends, interest in bonds, etc.). All advanced countries tax all sources of income at marginal tax rates.
3. Personal Income Tax: Make the personal income tax structure more progressive by adding marginal tax rates of 25% and 30% on higher income. The top marginal tax rate is now 20%, but high-income earners pay an effective tax rate less than 15% on their total income thanks to multiple exemptions (including a personal exemption of Rs 390,000) and various deductions (dependent allowance, interest deduction on housing loans, medical insurance premiums, university fees, etc.).
4. Property Tax: Introduce a property tax on houses, apartments, villas and cottages over a certain value to raise funds for local government services. Local government reform is meaningless if municipalities are deprived of a tax base and have to rely on central government funding for current and capital expenditure. The abolition of property tax in cities was a demagogic measure that did not take into account the need for sustainable finance for our municipalities.
5. Pensions: In line with the theory of sources of income, all pensions should be taxable beyond the personal exemption threshold, whether it’s workplace pension, old age pension or parliamentary pension.
6. Tax Exemptions: Government should give up any tax exemptions promised to specific groups based on age (people over 65 years or people in the 18-25 age bracket). Income tax is based on ability to pay, not on age. Introducing age as a criterion for exemption defeats the principle of tax equity.
7. President/Vice President: Abolish the tax exemption for the President and Vice President of the Republic. They should be treated like all taxpayers in the same way. They don’t work harder than the common man.

I have discussed these proposals in more details in previous articles.

A country’s fiscal capacity is measured by the tax-to-GDP ratio. Mauritius’ ratio is 21% compared to an average of 35% for OECD countries with 45 % for some Scandinavian countries. Mauritius cannot afford a generous welfare State without a broad and progressive policy tax base. Neoliberal economists would shoot down the above proposals on the grounds that they would scare away investors and high-income earners. But what is their alternative for reducing deficits other than reducing expenditure?

Mauritius Times ePaper Friday 16 May 2025