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VAT Reform and the Informal Economy:

Jason SHI SHUN Aug 1, 2025

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].

 

 

 

 

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