Remove two institutionalized tax discrimination against 80 % of our working population

A. Imagine Le Maire, Sunak and Sitharaman doing the following 

Bruno Le Maire, France’s Minister of Finance, stands up in the National Assembly and states that French citizens who receive a prescribed level of salary will be taxed at 40 % while a foreigner in the same category will be charged only 15 %. 

Rishi Sunak, UK Chancellor of the Exchequer, presents a Budget in the House of Commons and announces that all UK citizens with a given salary will pay 40 % tax while all foreigners in the same situation will be charged only 15 %. 

Nirmala Sitharaman rises in the Lok Sabha and declares that all Indian citizens who earn a threshold of salary will be charged at the rate of 40 % while foreigners in a similar position will be taxed at only 15 %. 

Just imagine what would be the reaction to this callous institutionalized fiscal discrimination against their own citizens. 

B. Now consider what our Minister of Finance has unabashedly done 

He did not blink his eyes and has remorselessly raised the solidarity tax by 400 %. Mauritian citizens who earn more than Rs 3 million annually will pay 40 % tax (plus 3 % CSG tax) while foreigners in the same category will pay only 15 %. Discrimination of 186 %! 

He is proud of inflicting such discrimination on his fellow countrymen. He even went on to categorically affirm that he has simply raised the existing solidarity tax from 5 % to 25 %. And if it was not discriminatory then, it cannot be now. This is plainly false. The current 5 % solidarity applies to RESIDENTS not to CITIZENS. The new one will be levied on Mauritian CITIZENS only. It flouts the best practice of international taxation based on residency. He punishes Mauritians further by lowering the threshold of imposition by Rs 500,000. He has eliminated the existing 5 % solidarity tax for foreigners. He has also introduced a dividend tax of 25 % after companies have already paid 15 % tax on profit. And a tax on turnover of up to 0.3 % on revenue. Some sectors will pay around 55 % if we include the surtax that already exists, the CSR and the new CSG. 

C. Few legitimate questions

Why should Mauritius stand out as a country that taxes its doctors, dentists, lawyers, accountants, economists, engineers, architects, wealth managers, bankers, entrepreneurs, investors, business people and many other occupations at 43 % when foreigners will be charged only 15 %? They use the same public infrastructure, amenities and services. And carry out the same work. 

Why should a foreigner that has lived in Mauritius for years pay a much lower tax rate of 15 %? 

Why should someone who has an occupation permit or is a permanent resident (between 10 and 20 years stay) be fiscally favoured compared to Mauritians?; 

I agree that we should attract foreign talents, expertise, capital and technology. Will Mauritians be crowded out in the labour market now that we are opening the floodgate and it will be cheaper to employ foreigners? 

What happens to a Mauritian who has a foreign spouse? Will there be two tax treatments in the same household? 

And to people with dual nationalities? Will a carve-out be included in the Finance Bill to prevent them from using their non-Mauritian nationality to benefit from the significantly lower tax? 

Some are already withdrawing their money from Mauritius. How does Government deal with such exit because of policy reversals and heightened risks and tax discriminations? 

D. The CSG is institutionalized discrimination against a huge majority of our working population. 

Without tripartite consultation, the Minister is eliminating contributions to the NPF and will replace it by the CSG from September 2020. He has coldly instituted systemic discrimination against all employees of the private sector. They account for around 80 % of the working population and they should have the same rights and obligations as every other employee in our country. 

The NPF is a defined benefit scheme for private-sector employees. It is funded by mandatory contributions of 3 % from employees and 6 % from employers subject to a monthly salary ceiling of Rs 18,740 as well as by returns from the fund’s investments. Benefits accumulate on the basis of pension points and on retirement employees receive a pension proportional to their contribution. 

The Minister is replacing a funded defined-benefit pension that accrues to all private sector employment by a contributory, participatory and collective CSG Fund. It is, in fact, a straight tax to raise fund to pay future increases in BRP to beneficiaries over 65 years old. The tax varies from 1.5 % to 3 % for employees and from 3 % to 6 % for employers. The CSG will also be mandatory for self-employed individuals who will pay Rs 150. 

Today the benefits from the NPF contribution accrue only to those who pay. They contribute and they benefit. Henceforth while only employees of the private sector and self-employed will pay the CSG tax, the benefits will accrue to every single person above 65 years. Not only will these employees not obtain benefits proportional to their contribution, but they will also pay BRP increases for those who have not contributed a single cent. The Minister has arbitrarily decided that employees in the public sector and their employers (Government and other public sector bodies) will not contribute to the CSG but will benefit from the funds collected. 

This discriminatory system is characterized as “fair and equitable” at para 162 of the Budget. Simply baffling and insulting. How can a system that makes it mandatory for “tens of thousands of Mauritian working informally as household employees, construction workers, gardeners, helpers and carers” and also only employees in the private sector, including small planters, fishermen, hawkers, taxi drivers, barbers, etc. to pay a tax to subsidize the BRP increases of CEO’s of public sector bodies and all employees of the public sector as from July 2023 be “fair and equitable”? 

E. Why only one segment of the working population bears the brunt of the painful adjustment? 

Our compatriots in the private sector have to face the following traumatic experience: 

    Job losses because of bankruptcies and redundancies facilitated and fast-tracked by Government through the Covid-19 Bill; 
    Furloughing of workers with long leave without pay in some sectors; 
    Reemployment of these employees at lower wages and fringe benefits; 
    Loss of overtime payment; 
    Work-sharing among employees with loss of income; 
    Significant reduction in salaries of those retaining their jobs, up to 60 % in many cases ; 
    Huge reduction in benefits such as travelling, petrol allowances, paid leaves, etc. 

They also face a collateral pension risk. As employers have to fork out a new payroll tax of up to 6 % with the CSG, many will lower their contribution to their private pension fund as there will be a piling up of costs that will affect competitiveness. There is no burden-sharing by the public sector. The burden is entirely on 80 % of employees in the private sector. Yet these hundreds of thousands of our fellow countrymen contribute much more indirect and indirect taxation. They deserve fairer treatment. 

And to rub salt into their wounds and impose further discrimination, the Minister is compelling them and their employers to pay a tax of up to 9 % to subsidize BRP increases for public sector employees. And he calls it “fair and equitable”. 

F. Unnecessary tax disruption with a massive fiscal space of 33 % of GDP 

The pandemic has damaged our economy. Some sectors such as tourism, travel, aviation and the export-oriented industries are deeply impacted with almost no revenue. Many of our compatriots will lose their jobs, thousands will be furloughed, and some will share employment while others will take a cut in salary and fringe benefits. The revenue and profit of SME’s and corporates will shrink drastically. 

However, the Minister of Finance has been spared the brunt of the adjustment because of the extreme generosity of the Bank of Mauritius. There is a grant of Rs 60 billion, then the setting up of the MIC with Rs 80 billion drawn from our foreign exchange reserves to invest in some strategic sectors. In the absence of such funding, Government, through the COVID Development Fund and/or the SIC, would have had to intervene to support the afflicted sectors. Third, there is a residual amount of Rs 10 billion from the Rs 18 billion transferred from the SRF of the Central Bank. All these are free money without any interest and capital repayment. It is, in fact, the contribution of the people of Mauritius to the Minister of Finance. 

The colossal fiscal space created at Rs 150 billion or 33 % of GDP should have allowed the Minister to focus on protecting people, rescuing firms and saving jobs. Under these circumstances, speaking of a difficult Budget is a cynical farce as never has a Minister of Finance been blessed with such fortune. He expects receipts of around 0.75 % of GDP from the solidarity taxes, a tiny amount compared to the 33 % of GDP from the BoM. Worse, it could be lower as individuals and companies will avoid the discriminatory taxes through creative arrangements which many are already setting up. The game is not worth the candle. 

G. From an attractive, competitive and simple tax regime to a punitive, unappealing and discriminatory one 

We are a very small economy that does not feature on the radar of many investors and entrepreneurs. We, therefore, have had to walk the extra mile to lure foreign investment and expertise and to entice local entrepreneurs to invest in many sectors. We had introduced a simple, attractive and competitive tax system to reform our economy and facilitate its integration in the global economy. The PM did not change this paradigm when he was Minister of Finance (three times). Nor has Xavier-Luc Duval and Vishnu Lutchmeenaraidoo. There is already a progressive element built into the system with many people paying zero tax and then 10 %, 15 % and 20 %. Of course, people who can afford are already contributing more. The question is how much more while the economy stays competitive and efficient. And is the timing right to play Russian roulette with our country? When we are on the grey list of the FATF, the blacklist of the EU and the fraud and corruption revealed by the AfDB that will tarnish our image. How do we sell Mauritius to the world? What story will the EDB invent for its audience in roadshows? Business sentiment is very low, investor confidence is badly shaken and the wrong signals sent to both locals and the outside world. 

H. Simply listen to the experts on reforming the NPF and the BRP 

It is true that both the NPF and the BRP have long-term sustainability issues. However, the Minister has chosen a discriminatory tax to address them without any consultation or a white paper. His solution has never been advocated by experts who have submitted various reports on both pensions. The sustainability of the NPF could have been addressed in a truly fair manner. The National Savings Fund could have been merged with the NPF as both caters to employees’ pension while the threshold of Rs 18,740 could have been increased significantly to ensure its long-term viability. The fund should also enhance the returns on its huge investments through better fund management. Fourth, Government could have used some of the Rs 70 billion gift (Rs 60 b in grant and Rs 10 b left from the Rs 18 b) from the BoM to make a one-time contribution to the NPF to guarantee its sustainability. It would remain a defined-benefit scheme with proportionality between contribution and benefits. 

The experts have also been clear on reforms to make the BRP sustainable. Three policy measures stand out. First, the retirement age should be raised to account for the ageing population while protecting those below the prescribed age who rely on such pension. They have proposed the age of 65 and then to adjust according to rises in life expectancy at 60 years. Second, they have recommended a review of the eligibility to the BRP. Those who depend entirely on the BRP as a source of income should be protected and should receive the full pension. The lower middle and the middle-income groups could receive a share of the full pension (say 66 % and 33 %) while the upper-middle-income group and the rich should not be eligible. Third, there is need to parametrically pre-determine the annual increase in the BRP so as to avoid populist measures that considerably affect the sustainability of the regime.

I. The Prime Minister has saved lives. Now he must intervene to save the economy 

The PM has shown leadership, flexibility and a capacity to listen in managing both the unprecedented public health emergency and now the return to normality. We face a sharp economic decline, especially in sectors that rely on an open border. We have to tackle both a supply shock and a depressed demand that could morph into a financial crisis, a shortage of foreign currencies and ultimately a social disaster. 

Sadly, the Minister of Finance has completely missed the targets in the current challenging circumstances. He should have focussed on robust measures to boost private investment and FDI, support strategic sectors, rekindle the export of goods and services, invest in food security, put money in new economic clusters, and revive economic growth with three key aims. Protect people, rescue companies and save jobs. This is certainly not the time for reckless experimentation and the uninformed disruption of the economic model that has delivered results irrespective of who was Minister of Finance. The country cannot alienate its citizens when we desperately need unity and all the resources, energies, efforts, imagination, innovation, investment and entrepreneurship to steer the nation away from the severe economic slowdown that has engulfed us. 
Especially with a massive fiscal space of 33 % of GDP. 

Keynes famously spoke of the ‘Animal Spirits’ to describe the instincts, proclivities and emotions that influence and guide human behaviour and their decisions and which can be measured in terms of business sentiment, investor confidence, and people’s trust. The Minister has manifestly killed these spirits. The PM must restore them. 

There is still time to save the country from the irreversible path of going back to an era of high taxes and high expenditures that will stifle effort, smother innovation, choke entrepreneurship and asphyxiate investment. Resulting in a deeper and longer recession. Basically a predictable white swan. 

The PM must intervene to protect people, avoid bankruptcies and a sharp increase in unemployment that will affect the very fabric of our society. He should start by removing the institutionalised tax discrimination against 80 % of the working population.