Under the Mauritius Budget and finance Bill 2025-26, the
government has announced a significant reduction in the
compulsory Value Added Tax (“VAT”) registration threshold from
Rs 6 million to Rs 3 million. This amendment is anticipated to
substantially affect micro, small, and medium-sized enterprises
(“SMEs”), many of which previously operated outside the VAT
regime. While this policy initiative is clearly designed to broaden
the tax base and enhance revenue collection, SMEs may now
need to allocate additional resources for accounting systems,
administrative staff, and professional services in order to comply
with tax regulations. Conversely, VAT registration confers
benefits, enabling SMEs to reclaim VAT on qualifying purchases,
thereby potentially lowering their overall tax liability. From a
broader economic perspective, this measure seeks to integrate
more businesses into the formal economy and promote
equitable tax compliance across the national landscape
Under the current VAT Act, individuals or entities with an annual
turnover of taxable supplies exceeding Rs 6 million are required
to register for VAT. Upon registration, businesses must levy VAT
on eligible goods and services, file periodic VAT returns, and
remit the collected VAT to the Mauritius Revenue Authority
(“MRA”).
Registering for VAT allows businesses to reclaim input VAT on
qualifying business purchases and may influence how the
company is perceived. It also introduces various compliance
obligations, such as maintaining accurate VAT records and
meeting filing deadlines. For small and medium-sized
enterprises (SMEs) that serve end consumers who cannot
recover VAT, these requirements can lead to increased prices
and potentially affect market competitiveness.
In the current economic context, with a y.o.y inflation rate of 5.4%
in June 2025, reducing the VAT registration threshold may affect
small businesses by increasing compliance costs, economic
activity, and employment sustainability. This fiscal measure
could lead to an increase in business splitting to remain below
the VAT threshold and may also result in a shift of activities to
the parallel economy, which are potential unintended
consequences
While some businesses may genuinely operate through separate
units, the MRA remains alert to arrangements that seem
designed to artificially split business activities. Under Section
36A of the Value Added Tax Act, the MRA is empowered with
anti-avoidance provisions, allowing it to issue tax assessments
that counteract any undue VAT benefits gained from such
artificial structures. Additionally, Section 15(5) empowers the
MRA to mandate VAT registration for all entities involved in these
schemes, ensuring the integrity of the VAT system is upheld and
not compromised through strategic segmentation.
Common Indicators of Artificial Business Splitting
Although each case is evaluated on its own merits, tax
authorities and courts often look for recurring characteristics
that may signal an attempt to artificially divide a business.
Financial interdependence: There is a common business profit or
financial interest that benefits the companies, or the businesses are
financially dependent on one another.
Economic links: The businesses are sharing equipment,
advertisements or are operating from the same offices.
Similar activity: Two or more entities under the same group are
performing the same activity.
Operational overlap: Common management, employees, premises, or
equipment across units.
Conclusion
The reduction of the VAT registration threshold under the 2025–26
Budget and Finance Bill will markedly expand the breadth of VAT
liability, thereby potentially increasing government tax revenues. This
policy change, however, simultaneously elevates the compliance
responsibilities for SMEs and self-employed individuals. Against a
backdrop of ongoing inflationary pressures and geopolitical
uncertainties in key export and import markets, the associated rise in
administrative and financial obligations may undermine SME
competitiveness. Consequently, there is an increased risk that
businesses may engage in artificial splitting to remain below the
threshold or shift their operations into the informal sector. To
counteract these unintended effects and foster sustainable growth
among SMEs, it is essential to introduce targeted relief initiatives and
enhance the efficiency of VAT compliance processes.
CONSUMER PRICE INDEX. (n.d.). Available at: https://statsmauritius.govmu.org/Documents/Statistics/Monthly/CPI/2025/
CPI_M_Jun25_070725.pdf [Accessed 28 Jul. 2025].