The Mauritius personal tax system gives the impression that it is fair and equitable. Those lower down the ladder either do not pay tax or derive a negative income tax allowance in the form of financial support from the government. Taxpayers at the lower end pay tax at 10%, 12.5% or 15%, while high income earners pay tax at 25% or 40%.
However, the significance of George Orwell's quote in Animal Farm: "All animals are equal, but some animals are more equal than others" comes to mind when one deep dives into the figures.
The cliff caused by tax bands
A fundamental feature of a fair tax system is that people should contribute taxes in proportion to their income. This was highlighted by Adam Smith when he developed the four canons of taxation. He argued that a good tax system should possess the following characteristics: fairness, certainty, convenience and efficiency. The applicable tax bands for individuals in Mauritius are as follows: all things being equal, a person who derives an annual salary of Rs 705,000 ends up with less take home salary than one who earns Rs 695,000.
This distortion also occurs for individuals earning income close to the Rs 975,000 threshold. Surely, this is enough to make Adam Smith turn in his grave?