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IMPACT OF

CGT IN THE
MAURITIAN
CONTEXT
Contents
1.0 INTRODUCTION................................................................................................................................. 3
1.1 What is a 'Capital Gains Tax'? ........................................................................................................ 3
1.2 Who is liable to pay CGT? ............................................................................................................... 3
2.0 AFFECTED CAPITAL ASSETS ........................................................................................................ 4
2.1 What is Affected Capital Assets? ..................................................................................................... 4
2.2 What Happens When Businesses Dispose of Capital Assets? ....................................................... 4
2.3 Computation of CGT ........................................................................................................................ 4
2.3.1 Capital gains on shares .............................................................................................................. 5
2.3.3 Capital gains on a business ........................................................................................................ 5
2.3.4 Capital gains on valuables ......................................................................................................... 6
2.4 What is included in the base cost of an affected capital asset? ..................................................... 6
2.4.1 Acquisition costs ......................................................................................................................... 6
2.4.2 Incidental costs of acquisition and disposal ............................................................................. 6
2.4.3 Capital costs of maintaining title or rights to the asset........................................................... 7
2.4.4 Improvement / enhancement costs ........................................................................................... 7
2.4.5 VAT ............................................................................................................................................. 7
2.5 When is CGT triggered? .................................................................................................................. 7
2.6 What will be exempted? ................................................................................................................... 8
2.6.1 Private motor vehicles ............................................................................................................... 8
2.6.2 Personal belongings and effects ................................................................................................ 8
2.6.3 Lump sum benefits in respect of most superannuation and life assurance policies ............. 8
2.6.4 Compensation for personal injury or illness, or defamation actions .................................... 9
2.6.5 Betting, lotteries, competitions or the disposition of a chance to win a prize, or a right to
receive a prize ...................................................................................................................................... 9
2.6.6 Foreign legal tender (notes or coins) for personal use ............................................................ 9
2.6.7 Gains or losses made by foreign government agencies ........................................................... 9
2.6.8 Small-business assets disposed of where the proceeds are used for retirement ................... 9
2.6.9 Institutions fully exempt from normal taxation ...................................................................... 9
3.0 WHAT ARE THE ADMINISTRATIVE PROCEDURES FOR CGT? ........................................... 9
3.1 Advantages and Disadvantages of capital gains tax..................................................................... 10
3.1.1 Tax Deferment .......................................................................................................................... 10
3.1.2 Profit Reduction ....................................................................................................................... 10
3.1.3 Tax Rates .................................................................................................................................. 10
3.1.4 Double Taxation ....................................................................................................................... 10

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3.1.5 Does Not Apply to Inventory................................................................................................... 11
3.1.6 Does Not Apply to Corporate Income .................................................................................... 11
4.0 CGT in Mauritius ............................................................................................................................... 11
4.1 What are the economic issues in respect of introducing CGT and why is there NO CGT in the
Mauritian context?................................................................................................................................ 11
4.2 Why introducing CGT and Can CGT be applied to Mauritius?................................................ 12
4.3 Empirical evidence on the impact of Capital Gains Tax ............................................................. 14
4.4 The Impact of Capital Gains Tax on the Mauritian Economy ................................................... 16
5.0 CONCLUSION ................................................................................................................................... 17
6.0 REFERENCES .................................................................................................................................... 18

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1.0 INTRODUCTION
A country's tax regime is always a key factor for any business considering moving into new
markets. A tax is a mandatory financial charge or some other type of levy imposed upon a
taxpayer (an individual or other legal entity) by a governmental organization in order to fund
various public expenditures. Taxes consist of direct or indirect taxes and may be paid in money
or as its labour equivalent. Most countries have a tax system in place to pay for
public/common/agreed national needs and government functions. Companies holding Category
1 Global Business License are resident in Mauritius for tax purposes and are not subject to
capital gains taxation and there are no withholding taxes on the payment of dividends, interest or
royalties from Companies of the same status. There are no stamp duties or capital taxes.
Companies holding Category 1 Global Business License are liable to taxes at a rate of 15%.

1.1 What is a 'Capital Gains Tax'?

A capital gains tax is a type of tax levied on capital gains, profits an investor realizes when he
sells a capital asset for a price that is higher than the purchase price. Capital gains taxes are only
triggered when an asset is realized, not while it is held by an investor. At any time of sale of any
asset, tax is liable to be paid on the gains earned from the sale. Such gains can be either short
term capital gains or long term capital gains. Short term capital gains is when the asset is held for
less than 36 months contrary to Long term capital gains which applies when the asset is held for
more than 36 months( reduced to 24 months from FY 2017-18 onwards).

1.2 Who is liable to pay CGT?

Any natural person (individual) or any legal person (including a company, a close corporation or
a trust) resident in the Republic, as to be defined for the purposes of the switch to the residence
basis of taxation, in respect of capital assets held both in the Republic and outside of the
Republic. In the event of a cessation of residence, deemed disposal rules will take effect in order
to prevent tax avoidance.

Where a natural or legal person is not resident in the Republic, a liability in respect of CGT will
arise where a CGT event (a disposal or a deemed disposal) occurs in respect of:

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 Immovable property (including mineral rights) or interests in immovable property
situated in the Republic. For example, land held directly or through a ‘closely held’
entity. (Closely held being where the entity is controlled by a small number of
shareholders or members.)
 Those assets of any permanent establishment, fixed base, branch or agency in the
Republic through which a trade, profession or vocation is being carried on. This
treatment is consistent with international practice, as most countries operating a CGT
regime only tax capital gains of foreigners in respect of immovable property and assets
utilized in a trading activity. It is also consistent with South Africa’s agreements with
foreign countries for the avoidance of double taxation.

2.0 AFFECTED CAPITAL ASSETS

2.1 What is Affected Capital Assets?


Affected capital assets are considered to be property of any kind, including assets that are
movable or immovable, tangible or intangible, excluding trading stock and mining assets
qualifying for an income tax deduction as capital expenditure.

When a business purchases capital assets, the Internal Revenue Authority considers the purchase
as a capital expense. In most cases, businesses can deduct expenses incurred during a tax year
from their revenue collected during the same tax year, and they report the difference as their
business income. However, most capital expenses cannot be claimed in the year of purchase, but
instead must be capitalized or written off incrementally over a number of years.

2.2 What Happens When Businesses Dispose of Capital Assets?


Businesses may dispose of capital assets by selling them, trading them, abandoning them or
losing them in fore-closure. In some cases, condemnation also counts as a disposition. In most
cases, if the business owned the asset for longer than a year, it incurs a capital gain or loss on the
sale. However, in some cases, the MRA treats the gain like regular income.

2.3 Computation of CGT


Capital gains tax (CGT) becomes payable when you sell an asset such as a business, a second

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property, shares or an heirloom and make money from the sale. The amount you pay depends on
the individual’s income and the asset.

Following reductions in rates announced in Budget 2016, basic rate income taxpayers are liable
for CGT at 10 per cent, while those on higher rates of income tax pay 20 per cent.
There are higher rates, however, for gains made on the sale of residential investment properties
and "carried interest" - a mechanism used in the remuneration of some highly paid investment
managers. In these cases the rates are 18% for basic rate payers and 28% for higher rate payers.

Capital gains below a set level, currently £11,100 per year, are tax-free. The most common ways
to avoid CGT on investments are “tax wrappers” such as individual savings accounts (Isas) or
pensions, where gains are CGT-free.

2.3.1 Capital gains on shares


If you bought £20,000 of shares in a quoted company, which you did not hold in an personal
saving account, and you subsequently sold them for £100,000, you would be liable for CGT.
Your gain would be £80,000 minus your annual CGT allowance (£11,100), which comes to
£68,900. Depending on your income tax status, you would pay (with the exception of those cases
detailed above) either 10 per cent or 20 per cent of this, so £6,890 or £13,780.

2.3.2 Capital gains on a second home


CGT is also payable when you sell a property that is not your main home – eg, a buy-to-let or a
holiday home. In this case, you pay tax on your gain at a higher rate but you can deduct certain
expenses.
Let us say you bought the property for £200,000 and sell it for £240,000. Your gain is £40,000,
but you can deduct stamp duty, legal fees on purchase and sale, and estate agents’ fees.
If those come to £6,500 in total, your taxable gain is £33,500. Take off your personal allowance
of £11,100 and your taxable gain is £22,400. Depending on your income tax status, you would
pay either 18 or 28 per cent: £4,032 or £6,272.

2.3.3 Capital gains on a business


Selling all or part of a business that you own also incurs CGT. In this case, you will pay CGT on
your gain – but if your shareholding is 5 per cent or more, you may be able to claim

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entrepreneur’s relief at 10%. This only has an impact if you are a higher-rate taxpayer, who
would otherwise pay 20%.

So if you sell your shareholding of more than 5 per cent for £2 million, making a gain of £1.7
million, you will pay CGT at 10 per cent on your gain less your personal allowance: £1,688,900.
Total bill: £168,890.

2.3.4 Capital gains on valuables


If you sell a valuable personal possession – except a car, which you will not pay CGT on – for
£6,000 or more, CGT may apply.

Items covered include jewellery, paintings, antiques, coins and stamps, and in these cases you
will need to work out your gain on the item when you sell it and subtract your CGT allowance to
see if any tax is payable.

2.4 What is included in the base cost of an affected capital asset?


Base cost includes those costs that are actually incurred in acquiring, enhancing or disposing of a
capital asset and may include:

2.4.1 Acquisition costs


Those costs actually incurred in acquiring the asset. If the asset was acquired by way of a gift or
an inheritance, the base cost in the hands of the donor or the deceased is carried forward, i.e. the
original pre-exchange base cost is carried forward. If the asset is one that you created yourself,
for example, the goodwill of a business, any capital expenditure actually incurred in creating the
asset may form part of the base cost, to the extent that the expenditure has not been claimed for
normal income tax purposes.

2.4.2 Incidental costs of acquisition and disposal


Any cost actually incurred and directly connected to the acquisition or disposal of an asset. For
example, legal fees, agent’s commission, stamp duty, transfer duty, costs of conveyance,
advertising costs, broker’s fees and valuation costs.

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2.4.3 Capital costs of maintaining title or rights to the asset
These would include for instance, legal costs actually incurred in respect of a court dispute
relating to maintaining your right or title to an asset you own.

2.4.4 Improvement / enhancement costs


Those costs actually incurred for the purpose of improving or enhancing the value of the asset, as
long as the improvement or enhancement is still reflected in the state or nature of the asset at the
date of disposal.

2.4.5 VAT
VAT paid and not claimed or refunded may form part of base cost.

2.5 When is CGT triggered?


CGT will be triggered upon a CGT event. In essence a CGT event is when a disposal or deemed
disposal takes place. As a general rule, an asset is acquired or disposed of whenever there is a
change in the ownership of the asset. Disposal can occur when an asset is: Sold, Given away,
Scrapped, Exchanged, for example, a share swap, Lost, Destroyed, or When it is redeemed or
cancelled.

A number of rules will deem a disposal to have occurred and they include the following:
1. Where a natural person (an individual) or a legal person (an entity) ceases to be resident in the
Republic.

2. Where ownership of an asset does not change but for all intents and purposes disposal does
occur. For example, certain derivative and valueshifting transactions.

3. Where the beneficial interest in a trust changes.

CGT is a transaction-based tax where realised or deemed realised capital gains or losses are
brought to account on an annual basis by way of inclusion in the normal income tax return.

No special arrangements are proposed for the payment of CGT in the case of a deemed disposal.
As CGT forms part of the income tax regime, a taxpayer has ample time from the date of the
deemed disposal to the date of tax return submission and ultimately final assessment to make the
necessary payment arrangements. A taxpayer, as for normal income tax, may approach SARS

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and enter into an agreement regarding the term of repayment along with interest at the prescribed
rate.

2.6 What will be exempted?


A primary / principal owner-occupied residence The finer detail in respect of the following still
has to be finalised:
– Land owned adjacent to a residence,
– What constitutes a homestead in respect of a farm,
– Partial usage of a residence for business purposes, and
– The identification of the primary / principal owner-occupied residence where the taxpayer
resides in more than one center during the course of a year.

This exemption is only applicable to a primary / principal owner-occupied residence of a natural


person.

2.6.1 Private motor vehicles


All private motor vehicles except to the extent that the asset is used for business purposes. This
exemption is only applicable to private motor vehicles belonging to natural persons.

2.6.2 Personal belongings and effects


For example, clothing and effects commonly found within a home. This would include such
items as jewellery and ‘collectibles’ (stamps, works of art, antiques, coins and medallions).
However, it excludes such items as boats, caravans and aircraft, share certificates and coins
minted in either silver or gold. This exemption is only applicable to personal belongings and
effects of natural persons.

2.6.3 Lump sum benefits in respect of most superannuation and life assurance policies
On retirement or redemption where the recipient was the original beneficial owner or the
nominee or dependent of the original beneficial owner of the policy or instrument. For example,
lump sums subject to the Second Schedule of the Income Tax Act, 58 of 1962, life insurance
benefits and lump sums from endowment policies. However, ‘secondhand’ policies are excluded
from this exemption.

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2.6.4 Compensation for personal injury or illness, or defamation actions
Payments in this regard are essentially a substitute for restoring the ‘asset’ (yourself) to its
original state prior to the injury, illness or defamation.

2.6.5 Betting, lotteries, competitions or the disposition of a chance to win a prize, or a right
to receive a prize
Where a gain is made in a fortuitous manner in any of the abovementioned instances, i.e. where
you are not a professional gambler.

2.6.6 Foreign legal tender (notes or coins) for personal use


In the event of returning home from a trip abroad and a foreign exchange gain or loss is realised
upon converting the foreign currency into Rands.

2.6.7 Gains or losses made by foreign government agencies


For example, where a foreign government realises a gain on the disposal of immovable property
situated in the Republic.

2.6.8 Small-business assets disposed of where the proceeds are used for retirement
This exemption is only available to small business owners and is in respect of retiring individuals
over 55 or where retirement is due to ill-health or infirmity and the assets have been held for at
least 15 years, limited to a one-off exemption per taxpayer of R500,000. If the asset is a
membership interest such as a share, a ‘look through’ approach will enable the exemption to
apply where the interest is linked to an underlying eligible asset.

2.6.9 Institutions fully exempt from normal taxation


For example, government departments, local authorities and approved public benefit
organisations.

3.0 WHAT ARE THE ADMINISTRATIVE PROCEDURES FOR


CGT?
CGT forms a part of normal income tax and as such, chargeable net capital gains or losses are to
be included in the normal income tax return and subjected to rates applicable to taxpayers.
Where the taxpayer is a SITE only taxpayer, an abridged return will be available for completion
and subsequent submission. Capital gains and losses are to be excluded from the computation of

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provisional tax, based on the irregular nature of such items. The general provisions of the Income
Tax Act covering such aspects as returns, assessments, objections and appeals and payment and
recovery of tax also apply to the CGT regime.

3.1 Advantages and Disadvantages of capital gains tax

3.1.1 Tax Deferment


One advantage of capital-gains taxes is that tax payments are deferred until the asset is sold. For
example, a real-estate investor does not pay taxes on the equity gained in a property investment
until the year he sells the property for a profit. Further, a securities investor does not pay capital-
gains taxes on profits earned from stocks and bonds until he takes a distribution or sells the
assets. Investors only pay taxes during the tax year they realize the gain. This is different than
income taxes where you must pay a tax each time you receive an income payment.

3.1.2 Profit Reduction


According to the Internal Revenue Service, nearly everything you own for personal use or
investment purposes is a capital asset. A drawback to owning capital assets is that if they are sold
for profit, the IRS requires that you report gains as income. The disadvantage of this tax is that it
can reduce the overall profits realized from the sale of the asset.

3.1.3 Tax Rates


The amount of taxes you must pay on a capital gain depends on the length of time you owned the
asset prior to selling and can either be a benefit or detriment to the taxpayer. If you owned the
asset longer than 12 months and realize a profit, you have a long-term capital gain, which is
taxed at a lower rate. If you own an asset less than 12 months and sell it for a profit, you have a
short term capital gain, which is taxed at a higher rate. Long-term capital-gains taxes are more
advantageous than short-term capital-gains taxes because its rate typically produces savings.

3.1.4 Double Taxation


Taxpayers are responsible for paying federal, and in many cases, state capital-gains taxes.
Property owners and investors, for example, must report capital gains from the sale of real estate
on both federal and state income-tax returns in most states. The additional tax on the state level is
a disadvantage for many taxpayers.

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3.1.5 Does Not Apply to Inventory
The capital gains rate does not apply to property that would be classified as inventory, even if
you have held it for more than one year, because inventory is not considered a capital asset. For
example, assume you have a business that buys and sells investment properties. If you have a
property that you’ve held for more than one year when you sell it, your gains count as ordinary
income, not capital gains income, because the land is inventory to your business. Alternatively,
assume you own the land under your store as a sole proprietor and you sell it when you move
your store to a larger location. As long as you’ve held the land for more than one year, it
qualifies because you’re not a dealer in land.

3.1.6 Does Not Apply to Corporate Income

If you’ve incorporated your business, the capital gains preference doesn’t apply to gains for the
corporation because all corporate gains are taxed at the same rate. For example, if you’ve
incorporated your business and the corporation sells land it has owned for 10 years and has a
gain of $2 million, your corporation still pays taxes on that gain at the corporate tax rate, not the
long-term lower capital gains tax rates.

4.0 CGT in Mauritius


4.1 What are the economic issues in respect of introducing CGT and why is
there NO CGT in the Mauritian context?

The impact of CGT on investment in the economy, both from domestic and foreign sources, was
raised as far back as the Franzsen Commission in 1969. Whilst some commentators raise
concerns regarding the effects of CGT on capital formation, risk taking, and investment
preferences, it should be borne in mind that CGT is widely accepted internationally. The impact
upon the South African economy will be managed by the judicious choice of options with regard
to effective date, base cost (opening values of capital assets), exemptions, and rollover (deferral)
relief, relief available on assets acquired before the effective date, inclusion rate relief and rate
structure. These aspects are spelt out later in this guide. A further factor that should lessen
economic distortion is relative certainty in respect of the principles or characteristics of CGT and
hence, the reason for this guide’s existence.

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Mauritius is the only international financial services centre which is also a member of all the
major African regional organizations. It also offers one of the world’s most generous tax
regimes, complete with low business and income taxes, tax-free dividends, free repatriation of
profits and capital, and absence of capital gains tax. It has consistently been ranked as the top
African country in terms of governance, business efficiency, and democracy. Whilst
traditionally, Mauritius is known as a jurisdiction of choice for cross-border investments into
India, Mauritius has also signed Double Taxation Avoidance Agreements (DTAAs) with a
number of African countries. Mauritius currently has tax treaties with 14 African
states. Mauritius has also signed DTAAs with 4 other African states. Since there are no CGT in
Mauritius, the potential tax savings for the Mauritius registered entity are significant. The
DTAAs in force with Mauritius limit withholding tax on dividends. The treaty rates are generally
0%, 5% or 10% thereby creating potential tax savings of 5% to 20% depending on the investee
country.

4.2 Why introducing CGT and Can CGT be applied to Mauritius?

The absence of a CGT creates many distortions in the economy, by encouraging taxpayers to
convert otherwise taxable income into tax-free capital gains. The South African Revenue Service
has observed that sophisticated taxpayers have engaged in these conversion transactions, thereby
eroding the corporate and individual income tax bases. This erosion reduces the efficiency and
equity of the overall tax system. A CGT is, therefore, a critical element of any income tax system
as it protects the integrity of the personal and corporate income tax bases and can materially
assist in improving tax morality. In view of the benefits CGT offers and the enhanced
administrative capacity of SARS, the time is now right for Government to implement a CGT.

The capital gains tax raises money for government but penalizes investment (by reducing the
final rate of return). Supporters of cuts in capital gains tax rates may argue that the current rate is
on the falling side of the Laffer curve (past a point of diminishing returns) — that it is so high
that its disincentive effect is dominant, and thus that a rate cut would "pay for itself. "Opponents
of cutting the capital gains tax rate argue the correlation between top tax rate and total economic
growth is inconclusive.

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Mark LaRochelle wrote on the conservative website Human Events that cutting the capital gains
rate increases employment. He presented a U.S. Treasury chart to assert that "in general, capital
gains taxes and GDP have an inverse relationship: when the rate goes up, the economy goes
down". He also cited statistical correlation based on tax rate changes during the presidencies
of George W. Bush, Bill Clinton, and Ronald Reagan.

A change in the capital gains rate could attract more foreign investment. Understanding the fine
details of the capital gains tax (CGT) provisions can substantially improve investment returns
and even help reduce the impact of any future increases in the tax rate applicable. Compared
with paying personal income tax, being subject to CGT has major advantages.

With rare exceptions, it's difficult to postpone personal income tax assessments with income
being taxed as it is earned or accrues. Similarly, applying CGT taxation on an accruals basis is
not practical or acceptable with tax being payable only when assets are sold.

This allows taxpayers to choose when and if they pay tax giving them the freedom and ability to
realize gains at a time of their choosing, for example in retirement when their incomes are low.
Realizing gains can also be deferred for indefinite periods because the CGT provisions don't treat
the transfer of an asset by bequest as a sale.

In addition to allowing indefinite deferral of taxation on the gain, it also allows for the ultimate
transfer of the asset to a taxpayer with a lower applicable tax rate. This provision is particularly
useful for investors who bequeath properties to heirs who subsequently use them as a principal
place of residence.

Given the tax deductibility of interest costs on investment loans, borrowing against assets with
unrealized CGT liabilities to purchase new investments can help reduce both personal and CGT
liabilities. Even when CGT rates are lower than normal income tax rates as they currently are,
not realizing capital gains thus avoiding paying any tax can be an effective strategy.

The higher the rate of CGT, the greater the incentive not to realize gains will be. Indeed, for
assets with substantial capital appreciation, the CGT liability can and often does exceed the
potential loss in both assets if asset prices fall.

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Governments pay for the services catered to the public through revenue obtained by taxing three
economic bases: income, consumption and wealth. The Federal Government taxes income as its
main source of revenue. State governments use taxes on income and consumption, while local
governments rely almost entirely on taxing property and wealth.

The property tax is local government's main source of revenue. Most localities tax private
homes, land, and business property based on the property's value. Usually, the taxes get paid
monthly along with the mortgage payment. The one, who holds the mortgage, such as a bank,
holds the money in an "escrow" account. Payments then get made for the property owner.

Some state and local governments also impose taxes on the value of certain types of "personal"
property. Examples of personal property often taxed are cars, boats, recreational vehicles, and
livestock.

Property taxes account for more than three-fourths of the revenue raised through taxes on wealth.
Other taxes imposed on wealth include inheritance, estate, and gift taxes.

These show that if Capital Gains Tax is to be introduced in Mauritius, this is likely to contribute
towards the general reserve of the economy and the general interest of the republic. As stated
previously, it will also cater for economic growth, if not through investment then in terms of the
government meeting the needs of the public and allowing for an equal distribution of income and
wealth.

4.3 Empirical evidence on the impact of Capital Gains Tax

Kyle Pomerleau, an economist at the Tax Foundation argue that there are many problems
encountered the capital gains tax. First, he explains that capital gains tax is a tax on income that
was already taxed when it was earned originally. When an individual earns a wage, that wage is
taxed by the state and federal governments. He then takes what is left and purchases stock. When
he sells that stock and realizes a gain, that profit (the difference between the value of the stock at
time of sale and time of original purchase) is again taxed. Most notably, the difference in stock
value is often merely attributable to inflation, not an actual gain. As such, the effective capital

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gains tax rate is often much higher than what is stated on paper, as the individual may not even
have gain profit from the sale.

Moreover, the tax encourages an individual to consume rather than to save. An individual who
spends his money now on purchases will have to pay a one-time sales tax. However, an
individual who saves his money and invests in stocks or bonds will not only be subject to the
capital gains tax, but also to additional sales taxes once he uses the income generated to make
purchases. Since the tax encourages consumption, fewer funds are invested. And people who do
invest are hesitant, due to the tax, to move from one investment to another, even if it would be
better. As a result, all of this slows economic growth.

Furthermore, Jason Clemens, Charles Lammam, and Matthew Lo have produced a study for the
Fraser Institute about the economic impact of capital gains taxation. Their study focuses on
Canada, but the arguments apply in every nation. It turns out that there are many reasons why the
capital gains tax harms economic performance. Clemens, Lammam and Lo explain the "lock-in
effect." Capital gains are taxed on a realization basis and this means that the tax is only imposed
when an investor opts to withdraw his or her investment from the market and realize the capital
gain. One of the most significant economic effects is the incentive this creates for owners of
capital to retain their current investments even if more profitable and productive opportunities
are available. Economists refer to this result as the "lock-in" effect. Capital that is locked into
suboptimal investments and not reallocated to more profitable opportunities hinders economic
output.

The authors also analyze the impact of capital gains taxes on the "user cost" of capital
investment. Capital gains taxes lead to more expensive capital investments and therefore reduces
investments. Several studies have investigated the link between the supply and cost of venture
capital financing and capital gains taxation, and found theoretical and empirical evidence
suggesting a direct causality between a lower tax rate and a greater supply of venture capital.
Jason Clemens, Charles Lammam, and Matthew Lo further investigate on the impact of CGT on
entrepreneurship. Capital gains taxes reduce the return that entrepreneurs and investors receive
from the sale of a business. This diminishes the reward for entrepreneurial risk-taking and
reduces the number of entrepreneurs and the investors that support them. This result in lower
levels of economic growth and job creation.

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4.4 The Impact of Capital Gains Tax on the Mauritian Economy

India has recently signed a protocol amending the Double Taxation Avoidance Agreement
(DTAA) with Mauritius. While the protocol gives India the right to tax capital gains arising from
sale or transfer of shares of an Indian company acquired by a Mauritian tax resident, it has
exempt investments made until March 31, 2017, from such taxation. The government mentioned
that shares acquired between April 1, 2017 and March 31, 2019 will attract capital gains tax at a
50% discount on the domestic tax rate, that is, at 7.5% for listed equities and 20% for unlisted
ones. The full tax impact of the protocol will fall on investments beginning April 1, 2019, when
capital gains will attract tax at the full domestic rates of 15% and 40%.

The initiative to implement capital gains tax will curb black money in the system, money
laundering and tax avoidance. The Finance Ministry statement mentioned that the protocol
would tackle issues of treaty abuse and round-tripping of funds attributed to the India-Mauritius
treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment, and
stimulate the flow of exchange of information between India and Mauritius. It is also expected to
discourage speculators and non-serious investors, and thereby reduce volatility in the market.

The DTAA was a major reason for many foreign portfolio investors (FPI) and foreign entities to
route their investments in India through Mauritius. Between April 2000 and December 2015,
Mauritius accounted for $ 93.66 billion or 33.7% of the total foreign direct investment of $ 278
billion. The imposition of capital gains tax on the acquisition of shares of Indian companies after
March 31, 2017 could, however, result in a slowing of the flow of investments. A significant
collateral damage of the Protocol is its impact on the India-Singapore treaty; capital gains tax
exemption under the India-Singapore tax treaty is co-terminus with the capital gains tax
exemption under the Mauritius treaty. Capital gains arising to a Singapore tax resident from
transfer of Indian shares has therefore become taxable in India as from 1 April 2017. The long-
only funds are not being impacted as the domestic tax law currently provides for 0% tax on listed
shares held for more than a year. Hedge funds and other short-term investors will pay a 15%
short-term capital gains tax on transfer of shares (7.5% in the two years transition period) and the
private equity funds will pay long-term capital gains tax of 10%.

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Moreover, for Participatory Note (P-Note) investors, this will mean an increase in cost of taking
exposure to Indian shares and for P-Note issuers, this will translate into operational challenges of
computing taxes and recovery from clients. Mauritius will continue to remain relevant for fixed
income business with tax on interest being the lowest at 7.5% under the new treaty and capital
gains continuing to be exempt. India still has tax treaties with other jurisdictions (notably a few
European jurisdictions) which provide for capital gains exemption on transfer of shares and one
will need to see what India’s approach will be towards these treaties and whether the foreign
investors will now consider these jurisdictions for Indian investments. The shares acquired on or
before 31 March 2017 have been grandfathered which would mean a continuance of the
Mauritius structures for few more years.

5.0 CONCLUSION
This assignment has investigated and explored about why CGT should be introduced into
Mauritius. While many argue that the introduction of a comprehensive CGT will add to
complexity, others observe that a comprehensive CGT minimizes the level of compliance and
administrative costs. Although there is still substantial uncertainty as to whether or not gains
should be treated as capital or revenue in nature, the specific provisions of the Act effectively
carve out obvious intentions of taxpayers to make a profit. Therefore, what results is an equitable
and fair outcome for taxpayers on the whole. In our view, the dominant reason why Mauritius
should adopt a comprehensive CGT is to promote equity. People with the same taxable capacity
should be taxed the same. This reason alone has been why a comprehensive CGT has been
introduced into other counties worldwide. Furthermore, having regard to the two generally
accepted notions of tax equity, horizontal and vertical equity, the case for a comprehensive CGT
is justified. Failing to tax capital gains is highly regressive since capital gains accrue
disproportionately to the wealthy and this effectively shifts the tax burden to low and middle
income taxpayers.

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6.0 REFERENCES
NCPA, 2014. Impact of the Capital Gains Tax. [Online]
Available at: http://www.ncpa.org/sub/dpd/index.php?Article_ID=24139
[Accessed 11 November 2017].
Mitchell, D. J., 2014. The Overwhelming Case Against Capital Gains Taxation. [Online]
Available at: https://www.forbes.com/sites/danielmitchell/2014/11/07/the-overwhelming-case-
against-capital-gains-taxation/#1a4d73613b0a
[Accessed 11 November 2017].
Singh, S., 2016. What the changes in the tax treaty with Mauritius mean for India, investors.
[Online]
Available at: http://indianexpress.com/article/explained/what-the-changes-in-the-tax-treaty-with-
mauritius-mean-for-india-investors-2795965/
[Accessed 11 November 2017].
Desai, T., 2016. India-Mauritius tax treaty: An end and a new beginning. [Online]
Available at: http://www.forbesindia.com/blog/economy-policy/india-mauritius-tax-treaty-an-
end-and-a-new-beginning/
[Accessed 11 November 2017].
https://www.investopedia.com/terms/c/capitalgainstreatment.asp (LLC Investopedia, 2017)
http://www.pkf.com/publications/tax-guides/mauritius-tax-guide/ ( PKF International Limited,
2017)

file:///C:/Users/hp/Downloads/mauritius-tax-guide-2016-17.pdf ( 2016/2017)

http://www.treasury.gov.za/documents/national%20budget/2000/cgt/cgt.pdf (2000)

http://www.charteredclub.com/capital-gain-tax/ (CHARTEREDCLUB, 2017)

http://www.ocra-mauritius.com/local/setbusiness_mauritius.asp (2017 OCRA (Mauritius)


Limited)

https://en.wikipedia.org/wiki/Tax

https://object.cato.org/sites/cato.org/files/pubs/pdf/tbb-066.pdf

https://www.treasury.gov/resource-center/faqs/Taxes/Pages/economics.aspx (2010)

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