THE NEW TAX BURDEN

Following the advice of the IMF in its document “FISCAL ADJUSTMENT STRATEGY AND MEASURES TO PROTECT LOW-INCOME HOUSEHOLDS” of February 2006, the Ministry of Finance decided to apply some of its recommendations in the reform of our tax system. The IMF, in its standard application in most countries, usually argues in favor of streamlining the tax expenditures or tax concessions. 

They believe that “tax concessions generally have good intentions of promoting jobs and growth, but they effectively result in discriminatory higher tax rates for those who are not intended to benefit from the concessions. These results in an inefficient allocation of resources by promoting unproductive investment whose main purpose may be to take advantage of these incentives. As a consequence, relative incentives are distorted and government revenues are reduced.”

The IMF had estimated that the tax concessions in the individual income to be around 40 percent of the revenue actually collected, or 0.6 percent of GDP. Salaried employees, in the PAYE system, are the main beneficiaries of these concessions. Likewise, deductions for alimony and maintenance, for medical expenses and for donations to charitable institutions are not considered as tax expenditures. The deductions considered as tax expenditures were: Retirement pension relief. - a deduction enjoyed by salaried employees only, with a maximum, in 2004/05, of Rs 75,000. Emoluments relief. - a deduction, enjoyed by salaried employees only, of 15 percent of gross income with a maximum, in 2004/05, of Rs 125,000.; Pension contribution- contributions to approved superannuation/pension funds or schemes are deductible. Interest relief. - a deduction of interest paid on loans for the purchase of a house or financing of tertiary education of dependent children. Investment relief- A deduction of 40 percent of shares bought in the Stock Exchange, or authorized mutual funds; or investments in newly issued securities of an investment trust company. The maximum allowable is, in 2004/05, Rs 50,000 and any excess over this amount shall be deductible in two succeeding income years- Relief for life insurance premium. The amount of life insurance premium payable under a policy on the taxpayer’s life, the life of the dependent spouse, or any children under 18 years of age is deductible. Saving relief. - the deduction of the contributions payable to a personal pension scheme, the contributions payable under an approved annuity contract to provide for a life annuity during old age, and the contributions payable under a scheme to provide medical and ambulance services.

But the IMF had recommended that since the salaried employees are discriminated against vis a vis self-employed workers, there are grounds to maintain the tax expenditures in the individual income tax until the tax administration reforms make it feasible to bring all workers (including the self-employed) into the tax net. The MOF did not wait for such tax administration reforms; it chose to go in drastically for the complete removal of tax expenditures and some non-tax expenditures in the 2006/07 budget.

As a result the MOF will be collecting some extra Rs 4 billion in taxes in FY 08/09 and an extra Rs 9 billion in terms of total revenue and grants. Over the 2005/06 figures, tax revenue in FY 08/09 are expected to show a boon of Rs15 billion whereas total revenue and grants are expected to increase by 22 billion .Total expenditure and net lending will however increase by 21.3 billion. The budget deficit has been reduced by maintaining a relatively low capital expenditure without any meaningful effort to reduce recurrent expenditure and wastage and by increasing the tax burden on the

population and creating doubtful funds outside the budget- a practice that has often been criticised by the IMF. On the expenditure side, the IMF had recommended “a sharp reduction in poorly targeted transfers and subsidies, accompanied by a moderate increase in capital expenditures in priority sectors, including energy, transportation, ports, and telecommunication. Capital spending increase would include the spending on retraining workers in non-priority “sunset” industries with a view of shifting them to priority “sunrise” industries and would possibly be financed by external grants.” It has been much easier to tax and much more difficult to reduce redundant expenditures and boost priority capital expenditures.

We are thus not surprised that a study carried out by the Ms Kumari Juddoo & others from the University of Mauritius-The Impact of the Tax Reform on the Individual Income Tax System – has found that

• New tax regime being simple has not been able to achieve the other main canons of a good tax system – fairness (based on ability to pay) and equitable (decrease tax distortions for the couple)
  
• New tax regime has eliminated all tax planning possible by taxpayers for a better quality of life
  
• Taxpayers earning more than Rs 25,000 especially the middle income earner having a relatively higher burden of the new tax
  
• Inequality increases slightly with the imposition of the new tax regime except for the taxpayers with more than three dependents where the Gini coefficient decreases slightly.
  
• Previous regime shows sign of progressivity, taking a greater share from high- income earners and a smaller share from low-income earners – Income distribution more equal
  
  Post tax Gini Coefficient
  

	No Dependent	1 Dependents	2 Dependents	3 or more dependents
Monthly Gross Income	0.234	0.412	0.371	0.355
Monthly Disposable Income	0.242	0.415	0.378	0.352

This report of the UOM in a way concludes that the tax reform was not anchored in Mauritian realities; it was another blind application of IMF prescriptions that are usually applied to all developing and emerging market countries; and the MOF as a good student applied these to the letter. The report is categorical that the previous system was better and that it should be reintroduced with

• some new savings scheme within the tax system to enable economy growth and encourage better future quality of life;
• some savings scheme within the tax system to encourage taxpayers to plan for a better future. There are many households who are dipping deep into their assets and savings to ensure a better human capital formation of world standards for the country. These expenses are not liable for deduction under the new tax system despite the fact that Government has failed to provide to these households the necessary institutions of learning in fields of medicine, engineering, computer science –you name it- that meet minimum global standards.
• the deduction for donations to charity and as such many of those NGOs are facing financial crisis as they were heavily dependent on such donations.
• a new Income Deduction Threshold to alleviate the taxpayers not liable to tax prior to publication PRB Report and
• the compulsory pension contribution tax deductible to reduce the burden on taxpayers
  The reduction in of the corporate tax rate to 15% had gifted millions of rupees to big enterprises and banks; now we see that the high income earner is also benefiting from the income tax reform; that’s what we have been always saying-the reforms imposed by the Bretton Woods Institutions, including the new employment legislation, that has now given the private sector a free hand to fire workers, have mostly benefited “les grands patrons”
  
  

High Income Earner	Old	New
	Rs	Rs
Salary	3,250,000	3,250,000
Emoluments relief (15%)	(135,000)
Personal allowance	(85,000)
Dependent Children	(60,000)
Dependent Spouse	(60,000)
Interest relief	(250,000)
Savings relief	(650000)
Insurance premium	(80,,000)	(415,000)
Income exemption threshold	1,930,000	2,835,000
Chargeable income
Tax liability
10%	2,500
15%		425,250
20%	5,000
25%	470,000
TOTAL tax paid	477,500	425,250
Effective tax rate	14.7	13.1

Middle Income Earner	Old	New
	Rs	Rs
Salary	650,000	650,000
Emoluments relief(15%)	(97,500)
Personal allowance	(85,000)
Dependent Children	(60,000)
Dependent Spouse	(60,000)
Interest relief	(250,000)
Savings relief	(130,000)
Insurance premium	(80,,000)	(415,000)
Income exemption threshold	112,500	235,000
Chargeable income
Tax liability
10%
15%		35,250
20%
25%
TOTAL tax paid		35,250
Effective tax rate	0.0	5.4