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MAURITIUS - OFFSHORE SECTOR
The offshore international financial services centre has now been in operation for a decade. The positioning of the island as a business hub to service the region along with its natural comparative advantages of geography and time zone
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MAURITUS - FREEPORT
The Freeport operates as a customs-free zone for all goods destined for re-export.

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MAURITUS – THE FINANCIAL SERVICES COMMISSION
In May 2001, the Financial Services Development Act 2001 was voted to provide for the establishment and management of a Financial Services Commission (FSC) to regulate the non-banking financial services.
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Mauritius - Country Highlights
Mauritius is located in the Indian Ocean approximately 2,400 km off the East coast of Africa and covers an area of 1,865 sq km. The island forms part of the Mascarenes in the south-western part of the Indian Ocean. Its time zone is + 4hrs GMT.
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Mauritius New Budget 2006-2007
A Business-Friendly Budget by Mr Swadick Nuthay, Economist
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Forthcoming Budget
Le peuple admirable: Put your hand in your pockets
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TOTAL SOLAR ECLIPSE
ACCRA, Ghana - Tourists and scientists were gathering at spots around the world for the first total eclipse in years
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Mauritius New Budget 2006-2007

A Business-Friendly Budget by Mr Swadick Nuthay, Economist

3.jpgThe First Budget of l?Alliance Sociale presented by Rama Sithanen is undoubtedly a break with the past not only in the way it was presented but also in its contents. It is probably the first time ever that in one-go a government comes forward with such an impressive number of reforms and decisions that will affect the lives of each and every Mauritian. This package of measures aims at a new economic paradigm whilst at the same time addressing the fundamental weaknesses of our economy.

Situating the Context of the Budget
Before analyzing the budget one must be able to situate the economic context in which it was presented. Indeed, the macro-economic outlook is marked by sluggish growth, low investment and saving rates, rampant budget and current account deficits and gargantuan pubic debt as well as rising unemployment. Against such a backdrop, there was urgent call for action to stop the situation from deteriorating further. In this regard, the Minister of Finance had to come up with a cocktail of measures with a view to stimulating entrepreneurship, attract human capital, make Mauritius an attractive place for investment whilst at the same time contain public spending.

Opening Up The Economy
In its quest to attract foreign capital and expertise, the government has come up with a blend of measures to make life much easier for investors, businessmen and professionals willing to come to Mauritius. Indeed an occupation permit will be issued to a foreigner citizen within 3 working days provided he/she is one of following: i) an investor willing to invest a minimum of Rs3m; ii) a professional having secured a job paying no less than Rs30,000 ; iii) a self-employed person who wants to set up a business that will generate annual income of Rs600,000. Besides, after 3 years of activity in Mauritius, the foreign nationals will be allowed to apply for a permanent resident permit that will be valid for a period of 10 years. Consequently, they will face no restrictions to acquire real estate.

This represents a fundamental shift in our degree of openness towards foreign professionals. Mauritius has always been very conservative regarding the employment of foreign labour which includes professionals. Our Non-Citizens Employment Restrictions Act as the title itself suggest contains a number of ?restrictions? in this regard. Indeed, foreign professionals/workers willing to work in Mauritius need to acquire a work permit which is left to the discretion of the relevant authorities. The only ?flexibilities? that had been allowed so far involved the Scheme to Attract Professionals in Emerging Sectors (SAPES) where regulations were made under the Investment Promotion Act.

However, the measures announced in the context of the recent budget will require amendments to a few pieces of legislation. Undoubtedly, these measures will encourage mobility of foreign labour in Mauritius. It is true that our emerging sectors- namely the information technology sector ? requires more IT professionals than the local labour market can supply. However, government should be wise to put in place relevant and effective screening processes to keep in check the long-term implications of these measures. Indeed, the possibility for foreigners to buy foreign property in Mauritius will very likely result in real estate speculation and hence a hike in the prices of real estate in the medium to longer term.

Ease of Doing Business
One cannot deny that the new budget has given a new boost to the confidence of those contemplating to set up businesses in Mauritius. Indeed, bureaucracy and red tape acts as a disincentive to the mushrooming of new businesses. Thus the new budget scraps ex ante trade licenses and streamlines development and building permits into three clusters: commercial, industrial and services. Facilitating the setting up of new businesses in the services sector is particularly important in this respect, as the government has the hope of enhancing the contribution of this sector to GDP. Also, it will also be interesting to see how amendments will be brought to the existing functions of the Board of Investment so that it becomes a facilitator and promoter of investment.

Labour Market Reform
To address the issue of unemployment, it was important to review the regulations that govern the labour market. To this end, the government has announced its intention to come forward with new legislations to reform the outdated labor laws and regulations as well as the wage determining mechanism. In this context, government has already announced that the Tripartite Mechanism will be replaced by a National Wage Council that will henceforth link compensation to productivity and capacity to pay. A wage policy based on inflation is no longer sustainable. Productivity should be the key factor of wage determination to keep our enterprises competitive.

The long awaited reforms should also address the rigidities characterizing the labour market. Our present labour laws do not provide the flexibility that will ensure the survival and expansion of the existing pillars and the emergence of new ones in the economy. For these reasons, the reforms should attempt to create a more business friendly environment that will benefit both the employers and employees.

Moreover, in an effort to eliminate the disparity that currently exists between the EPZ and non-EPZ sectors, government has announced that the Industrial Expansion Act will be abrogated. The direct consequences of this decision is that EPZ companies will no longer be exempted from certain obligations under the Labour Act such as the provision of a retiring gratuity to their employees, which is currently half-month per year of service.

Pension Reform
Another quite complex area that the government wants to bring changes is the pension sector. However, apart from increasing the retirement age from 60 to 65 and minor changes that would be brought to the Public Sector Pension, the government did not go far enough as is currently happening in many countries. Australia is a good case in point where government has provided various types of incentives including a tax break for contributive old age pension. This is conducive for people to look after their own retirement and invest in approved pension funds which in turn alleviate the burden of government. In Australia, employees must contribute a minimum of 9% of their gross salaries to a pension scheme of their choice - contribution is made on a pre-tax basis. Indeed, compulsory superannuation has done wonders for savings which has ultimately boosted up investment in this country. Mauritius could have borrowed the Australian experience in order to give a boost to our faltering savings rate. Many specialists fear that by removing the tax incentives on contributions made to pension schemes, people will give less importance to investing for their retirement.

It is also important to bear in mind that as per the new tax regime, the capital invested in a pension plan will be taxed twice. Though the Minister of Finance has recently made a good move to exempt lump sum payment up to a threshold of Rs 1 million from being subject to income tax, there is still an inconsistency in the government approach towards avoiding double taxation. A simple example can be used to illustrate this point. Mr. YZ decides to invest into a personal pension plan whereby he will invest every month Rs 5,000 for 30 years. The total capital invested therefore will be Rs1.8m. At the age of 65, let us assume that he will receive a lump sum payment of Rs3m and Rs40,000 every months. Note that under the new tax regime that the payments made into the pension scheme are on a post-tax basis. The Rs1.8m invested has already been subject to income tax once on a monthly basis and at retirement Rs 800,000 of his lump sum (Rs1.8 m less Rs 1m) will again be subject to tax.

Government has also announced that it will review the composition of the Investment Committee of the NPF. Recall that the NPF is made of contributions received from employees/employers of the private sector only, but is managed and administered by the government. It is felt that the management of the Fund could be made more transparent by disseminating information about the investment made on behalf of the Fund and the return it generates. Transparency could also be enhanced by having a team of professionals from the private sector overseeing the Fund.

Fiscal Reform
Against a backdrop of subdued economic growth, the primary objective of the fiscal reform is three-fold: (i) redress the poor state of public finance, (ii) stimulate private investment and (iii) enhance the tax buoyancy.

In the new budget, the government has made fundamental changes to personal income tax, corporate tax, registration duty, custom duties, excise taxation and finally the tax administration. With lower tax rates on an across the board basis, we are moving towards a low tax regime. John Snow, former US Treasury Secretary, recently said that the two main ingredients that explain the good health of the US economy are: (i) low tax base, (ii) economic openness. These two factors combined have indeed attracted FDI in the US and allow the expansion of the existing pillars.

By keeping the Value Added Tax at its current level while at the same reducing customs duties, government is sending a strong signal that it does not want to slow down consumption which is an important generator of growth. This is also ultimately expected to increase tax buoyancy (increase in tax revenue through increased consumption).

However, government could have accompanied this measure with measures to stimulate savings, as one should not forget that Investment depends to a large extent on the savings rate. It could have been wise to encourage people save for example in pension funds as outlined above.

Swadicq Nuthay