Major reform to bring fairer taxation system
01.12.2009
A wide-ranging reform of Seychelles’ taxation system was announced yesterday by Finance Minister Danny Faure in his Budget address for 2010.
The changes cover business and personal taxes, with the aim of setting up a fairer system and giving an incentive to businesses to invest. They should also mean that the prices of goods and services are reduced for consumers.
Addressing the National Assembly, Mr Faure gave details of a new personal income tax, a revised business tax, a new excise tax and changes in the way goods and services tax (GST) is applied.
He said the principles considered in reforming the tax system included ensuring a level playing field is achieved in the next three years for all businesses in Seychelles; ensuring all businesses enjoy the same benefits and are bound by the same obligations under the law; broadening the taxation base to ensure taxation is more fairly distributed; and setting up systems and structuring tax rates to be more in line with regional and international norms.
Speaking about business tax, Mr Faure said new tax thresholds will be set and rates of tax reduced, with the top marginal rate of 40% being lowered to a rate of 33%.
For companies and trusts there will be no tax-free threshold (as compared to the situation today where the first R250,000 of taxable income is at a taxation rate of nil), he added.
However, for companies and trusts, the first R1 million of taxable income will be taxed at a rate of 25%, and taxable income over R1 million will be taxed at a rate of 33%.
For sole traders and partnerships, the tax-free threshold will be reduced from the current level of R250,000 to R100,000, and taxable incomes over this amount, up to R1 million, will be taxed at a rate of 18.75%. Taxable incomes for sole traders and partnerships above R1 million will be taxed at a rate of 33%, as is the case for companies and trusts.
It is clear that many of our businesses will benefit directly from this move to lower rates of business tax, Mr Faure said. The government hopes to see this benefit the economy through better job opportunities for Seychellois, increases in wages in the private sector and a lowering of costs and charges to consumers.
From January 2010, a 15% rate of withholding tax will be applied on interest and dividend income. The 10% GST on interest will, at the same time, be abolished.
On GST, Mr Faure said Seychelles plans to move towards a full value-added tax (VAT) system by 2012 and various scenarios are now being looked at so a system can be introduced that is suited to Seychelles’ economy.
To alleviate the problem of the “cascading” of taxes where GST is concerned, from January 2010 those businesses that are now liable to pay GST on the goods and services they produce will be exempt from this tax on all goods they import that are used in their business.
This will result in cost savings for these businesses and should provide scope for them to reduce the prices of their services or goods to the consumer.
Businesses that will directly benefit from this change will include telecoms, insurance companies, professional services, restaurants, hotels and other operators in the tourism sector, and Mr Faure called on all these business owners to analyse their GST savings under this change and to pass on the benefits to the consumer.
The GST calculation for imported goods will be simplified, with a flat rate of 15% being applied to the value of the imported goods (inclusive of the trades tax) without recourse to the current practice of having to nominally increase the value of the imported goods by 15% to 30%, for GST calculation purposes, to take into account a deemed profit margin.
This change in the way GST is calculated will result in a lower amount being imposed on most imported goods than under the current system, again with the aim of this reduction being passed on by the importer to benefit consumers.
On the question of GST for the tourism sector, Mr Faure said he wished to remind the industry that the increase already announced but delayed from November 2009 will kick in from November 2010.
Speaking about trades tax and excise tax, Mr Faure said in January 2010, as part of the taxation reforms, Seychelles will move to align itself with international taxation norms and to prepare itself to meet its international customs tax commitments by revising its rates of taxation on imports and introducing an excise tax regime.
In its initial form, the excise tax will cover the four main revenue items – petroleum, motor vehicles, alcohol and cigarettes.
The introduction of an excise tax regime will see a common rate of tax applied to these four items, with the tax applied equally to imported and locally produced items.
A major result of this change will be a cut in the rates of tax for motor vehicles to a level that is broadly consistent with business sectors that now have access to concessional rates of tax to import a vehicle, substantially levelling the playing field and removing the need for future concessions for such imports.
The total combined excise and trades tax on vehicles will be as follows:
● On passenger vehicles with an engine size of up to 1600cc, the combined trades tax and excise tax will total 50% of cost, insurance and freight (CIF);
● On passenger vehicles with an engine bigger than 1600cc litres but not more than 2000cc, the combined tax will total 75% of CIF;
● On passenger vehicles with an engine bigger than 2000cc, the combined tax will total 100% of CIF.
Mr Faure said one of the major changes will take place next July 1 with the introduction of a personal income tax system that will replace the Social Security Fund (SSF) contributions now paid by employers and employees.
Employers now contribute 20% and employees contribute 2.5% of an employee’s salary. From July 2010 this employer and employee contribution will be replaced by one tax with a flat rate tax of 18.75% that will be levied under a personal income tax system.
Under this system, employers will be required by law to raise the salaries of all employees to offset the employers’ contributions that will have to be paid by them, and the employer will then deduct from this new “higher” salary a flat 18.75%, which will be paid over as a personal income tax by the employer on behalf of the employee to the Seychelles Revenue Commission.
Mr Faure stressed that as a result of this move to a personal income tax system, no employee will take home less than under the current system.
On January 1, 2011, the personal income tax rate will be reduced from 18.75% to 15%, he said.
In the case of foreign workers, because they do not qualify for benefits from the social security system and must pay for education and health, their PIT contribution rate will initially be 10% as from July 1, 2010.
This rate will be harmonised with that applied to Seychellois from January 2012.
The current concessions in the rate of SSF that is applied to domestic workers and to employees of day-care centres will continue under the income tax system so employers and employees in these sectors are not adversely affected by the change.
Similarly, the concession available to an employer when paying annual bonuses will still be enjoyed by the employee. Annual bonuses of one month’s salary (up to a R10,000 maximum per employee) will be exempt from liability to the 18.75% personal income tax.
From January 2010, the liability for social security contributions on employee benefits on staff accommodation, meals and transport will be exempt for the building and tourism accommodation sectors.
Under the new personal income tax regime there will be a rebate system for those workers who earn the least in the country. A threshold will be set, below which those workers will be reimbursed all or a percentage of the tax that has been deducted during the year.