Overview of The Structure of The Personal Income Tax

Two theoretical models available for the structure of the personal income tax are termed as schedular tax system and global tax system. A schedular tax system is when the tax rates are determined by separating income levels into different classifications whereby each classification represents a different source of income, for example capital gains, business profits or employment income. They are taxed according to the provision of the tax act to which it applies. Mauritius operates a global system of taxation where an individual is taxed on his income derived worldwide. Under a pure global system, the category of income is irrelevant as all income and expenses are considered together to arrive at a single net gain that is subject to tax.

However there is an application that restricts this system which is section 4 of the Income Tax Act 1995 where it is clearly stated that every person has to pay tax on all income derived in the preceding year other than exempt income and it shall be calculated on a chargeable income at a specified rate. What is exempt income? Following the above statement the first question that would arise will certainly be some knowledge concerning exempt income. Exempt income refers to certain types of income which is not subject to tax. The second schedule of the Income Tax Act provides a list of all income which is exempted from income tax. It is divided into two parts where part (i) consists of exempt bodies of income such as a charitable institution or trust, a trade union, the Mauritius sugar authority, the sugar employee’s fund, a trust in respect to a superannuation fund and many more. The part (ii) comprises mainly of exempt income such as dividend from a resident company, transport allowance, first 2 millions of lump sum payment, passage benefits, capital gain or emoluments derived from the office of president and vice president. Taxable personsTax is paid by both individuals and companies. An individual is classified as either tax resident or non-resident. According to section 73 (1) (a) of the ITA 95, there are three conditions to classify an individual as a resident taxpayer:

• He is physically present in Mauritius for an aggregate period of 183 days or more in a tax year.
• He has his domicile in Mauritius unless he permanently lives abroad.
• He is physically present in Mauritius for an aggregate period of 270 days or more in 3 income years.

An individual is considered to be non-resident if he fails to meet any of the three conditions and he will be taxed solely on his Mauritian source. Only one condition met is enough to be considered as a resident. A resident individual is taxed on both Mauritian source and foreign source however the foreign source is subject to remittance basis which means that not all income is taxed. On the other hand, according to section 73 (1) (b), a company is considered to be resident in tax purposes if it is incorporated in Mauritius and it has its central management and control in Mauritius that is the place where the board of directors meets and decide about the major policy matters of the company. If accompany is considered resident it will be taxed on worldwide income whereas a non-resident company is taxed on Mauritian source only.

Calculation of tax (employment income)

Mauritius runs a self assessment system whereby taxpayers are responsible for paying the correct amount of tax on set dates without waiting for the revenue authority to demand this. Normally the tax year starts from 1st July and ends on the 30th of June of the following year. Generally tax is paid on the 30th of September but the deadline is extended to 15th of October if payment is made electronically. Everyone has to fill in a tax return which records the amount of tax due. The formula for calculating tax is as follows:

• Gross income
• Net income
• Chargeable income
• Gross income

Gross income is an individual’s total pay before taxes and other deductions have been made consisting of salaries, wages, overtime pay, bonuses and many more as stated in section 10. It is the income received for services rendered both past and present in terms of money and money worth. There are six principles which must be considered before including an income in gross income. To start with, money received by an employee should accrue to him in respect of the employment rather than his personal or any other capacity. Taking example of the tax case Hochstrasser V Mayes HL 1959, 38 in which the debate was whether the compensation for loss on sale of house is an assessable emolument.

The House of Lord held that the compensation was not an assessable emolument as the payment was not made as wages but rather in respect of his personal situation as a house owner. Secondly identity of the payer is irrelevant even if payments have been made as a result of the employment. In Calvert V Wainwright 1947, tips received by a taxi-driver were held to be taxable even if the payment is made by the passenger and not the employer. Thirdly payments must be made in reference to the services the employee renders by virtue of his position and it must be something in nature of a reward for services whether it is past or future. In the case of Cooper V Blakiston 1908, the Easter offerings given to a vicar by the parishioners were taxable as he received these offerings due to his position. Fourth, a one-off payment in the form of personal appreciation is not taxable.

In the case of Moore V Griffiths 1972, 48 the payment received by the captain of English Football team in recognition of winning the world cup was held not assessable as it was a one-off payment to mark an achievement which is not likely to be repeated. Fifth, it depends on whether the payment is contractual and if so then there are strong grounds for it to be included in gross income. In Moorhouse V Dooland 1955, collections from the crowd for a professional cricketer were held to be of income nature as the collections were part of the cricketer’s professional earnings and were provided for under his contract. Last but not the least, payments to compensate the tax payer for some sacrifices made by taking up an employment is generally not taxable because they are not in return for services.

According to section 17 of the ITA 95, any expenditure which is wholly, exclusively and necessarily incurred in performing the duties of an office or employment shall be deductible from the gross income derived by that individual in the income year in which it is incurred. Travelling expenditure such as bus fare is not deductible as it is incurred before and after performing the duty whereas the expenses incurred by an architect when he moves from one place to another is deductible as it is performed during working hours and is productive. Moreover working from home is also a deductible expenditure. In Owen V Pook 1970 AC 244, the travelling expenses of a doctor were considered allowable as he commenced his duties when the hospital telephoned him thus the expenses were incurred wholly, exclusively and necessarily in performing the duties.

The final step before arriving at the chargeable income is deducting all the exemptions and reliefs which the taxpayer is entitled to. The first deduction that will be allowed is Income Exemption Threshold (IET). It is the amount that a taxpayer can deduct from his net income before arriving at chargeable income. However this is only possible if the latter is resident in Mauritius in the income year in which the income has been derived. The table below shows the different category of IET and the amount that is deductible for the income year ending June 2018.

A child over the age of 18 who cannot earn a living due to mental or physical disabilityIf a spouse is working and earning less than Rs 110 000, he or she may be considered as dependent but this amount must be included in the gross income of the taxpayer. The second allowable deduction would be additional exemption on undergrad education. The taxpayer will be allowed to deduct Rs 135 000 per dependent if he or she has a child pursuing undergrad education. Nevertheless under this section the word dependent comprises of child only which means that if the spouse of the taxpayer is pursuing undergrad education this will not be categorized as dependent and unfortunately there will not be additional exemption.

Another deduction that is allowed is interest on housing loan but this relief is appropriate only for the purchase of first house. A person willing to extend his house will not be granted any relief unless the house is not livable. In case where there is no dependent the relief should be divided equally between each spouse. There are certain conditions for the taxpayer to be eligible for this relief such as the person must be resident in Mauritius in the income year or the person must not be the owner of any other residential building.

Moreover the taxpayer is eligible for a relief on medical insurance premium that is he can deduct from his net income the actual amount paid in that income year in respect of a medical or health insurance policy contracted for himself which is limited to Rs 15000 and his dependent. The amount allowed for the first, second and third dependent are Rs 15000, Rs 10000 and Rs 10000 respectively. Under two situations there will be no relief allowed. First one would be if the insurance premium has been paid by the employer of that person and second when the premium is paid under a combined medical and life insurance. Having gone through all these steps we finally arrive at the chargeable income which is taxed at the specified rate. Previously the rate was 15% but as from July 2018 to June 2019, the rate will be applied depending on the annual net income of the taxpayer. If he earns above Rs 650000 yearly, he will continue to pay tax at 15% however if his annual net income is less than Rs 650000 he will be charged with only 10% of income tax. However there are certain individuals who are not subject to income tax even if they are deriving income in Mauritius only if their monthly salary is less than Rs 23077 or their annual salary is less than Rs 300000. They are referred as exempt person.

Business means any trade, profession, vocation, occupation or any other income earning activity in a view to make profit. Trade refers to the exchange of goods and services for money on a regular basis. Subject to section 44B, companies should pay tax on their chargeable income at a specified rate which is stated in part I of the first schedule. Failing to pay before the given date is liable to a 5% penalty on the unpaid tax. A company does not necessarily submit its return on 30 September as it can choose its closing date of accounts and the return is submitted 6 months after. To be able to know whether the activity of a taxpayer is in the nature of a trade we have to consider the badges of trade which is as follows:

• Modification of asset pending resale
• Acquisition method
• Underlying nature of the asset
• Repetition
• Interval between purchase and sale
• Transaction how financed?
• Interest in the same field
• Ultimate motive
• Sales organization

Section 18 to 24 provides for all allowable expenses that a company can deduct from his gross income before arriving at the net profit such as expenditure on interest in respect of capital employed, losses from previous year, bad debts and irrecoverable sum of money, contribution to superannuation fund or pension to former employees. Section 24 consists of annual allowances which is the only allowable deduction that will be deducted from the net profit to compensate for depreciation and not discourage business to invest in non-current asset. Section 26 of the act refers to unauthorized deductions. It states that expenditure or loss which is:

• Of capital nature,
• Attributable to the production of exempt income,
• Recoverable under a contract of insurance or indemnity,
• Private or domestic in nature

Is to be considered disallowed expenses and should be added back to the net profit to obtain the tax-adjusted profit. Moreover provision of any kind and income tax is also non-deductible. A final disallowed expense would be expenditure in providing business entertainments and gifts unless the gifts or entertainment are meant for all staff without excluding any member. Finally tax is charged on the tax-adjusted profit unless it is an individual deriving business income then he will be entitled to IET and reliefs before being taxed. Generally the specified rate is 15% but if a company engages in export sector, he pays tax of 3% only on the income derived from his exports. Negative income taxThis system was introduced on 1st July 2017 where an employee earning a basic salary less than Rs 9900 monthly receives financial support from the government instead of paying taxes.

The taxpayer is eligible for NIT if he is a Mauritian citizen, his net income or that of his spouse is less than Rs 390000, he must work at least 24 hours a week and if his employer has paid contributions for him to the authorities in the month in which NIT is claimed. Double taxation agreement Bringing income earned abroad to Mauritius is taxable. However if a person resident in Mauritius transacts business in another country, the profits accruing to him is subject to tax in Mauritius because he is resident in Mauritius and he is also taxed in the foreign country as the gains are derived there. Thus the same profit is subject to double taxation.

Therefore a double tax agreement (DTA) exists to avoid such situation. A DTA is a contract signed by two countries to avoid territorial double taxation of the same income by two countries as well as to avoid discouraging international trade. India and Mauritius have signed a Protocol to the India-Mauritius Double Tax Avoidance Treaty on 10 May 2016. DTA makes it clear which of the countries have taxing rights over an individual and if both have such rights, which one takes the priority. They may agree to exempt some income from tax or allow a set-off of tax paid in one country against tax due in the other. Even if double tax agreement has not been reached, tax relief may still be provided in the form of tax credit.

For example, if a resident of Mauritius pays 10% tax in the country in which the income is derived, he still has to pay tax in Mauritius. As the Mauritian tax rate is 15% he will only pay 5% of tax in Mauritius benefiting from a relief of 10% for tax having paid overseas. ConclusionIn the light of the above reflection it can be seen that Mauritius runs a global system of taxation. The MRA has played an important role in promoting fairness of the tax system by providing many facilities to tax payers. Mauritius is one of the countries in the world to enjoy a fair tax system where it is simple, transparent, and also being always supported by an agency which provided many incentives to taxpayers.