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Contribution Sociale Généralisée (CSG): facts matter by P. Neerohoo, Tax specialist

The Social Contribution And Social Benefits Bill (No. X11 Of 2021), with the object of introducing a new social contribution (also known as Contribution Sociale Généralisée (CSG)) to replace contributions to the National Pension Fund (NPF), has been voted in Parliament. 

The debate over the CSG has been heated with government and opposition locked in entrenched positions with no room left for compromise. Outside Parliament, a few reasonable and independent voices, namely competent actuaries, intervened to highlight the risks associated with abolishing the NPF and replacing it with a new system that would not be sustainable in the long term.

In this debate, it is important to stick to the facts to determine whether the CSG is good public policy for the retirement income security of employees and self-employed people. Amidst the confusion, three objective facts stand out.

First, the CSG is a payroll tax to be paid by employees by payroll deduction (e.g., 1.5% of monthly remuneration) and employers (e.g., 3% of monthly remuneration). It is not a contribution to a pension plan according to universally agreed principles and standards of pension accounting. As per subsection 3(3) of the bill, every payment made in respect of social contribution shall be credited to the Consolidated Fund. 

Hence all contributions collected from employees and employers will be deposited in the government’s Consolidated Revenue Fund (CRF) to be spent on any item, including the payment of social benefits (pension and other benefits). The CSG remittances will help the government in reducing the recurrent budget deficit as not all money collected will be paid out in pension benefits in one year. The contributions collected by CSG are not going into a dedicated fund for benefit payments but in a general pool to cover all current expenditures. The CRF accounting rules do not leave any doubt about that.

The CSG is replacing a contributory pension plan (NPF) that stood the test of time. The NPF invested all contributions collected to reap a dependable return from safe investments (dividends on shares, interest income on term deposits & Government bonds and rental income on property owned). Over the years, the NPF increased its assets. If it had any unfunded liability at a point in time, the options would have been, inter alia, either to raise contributions by a certain amount or to decrease retirement benefits to a certain extent. The CSG goes against all principles of pension management by an independent trust. It will be administered by the MRA, a government authority, and appropriate ministries.

Second, the CSG looks discriminatory in nature as it relieves public sector employees of the obligation to pay employee contribution (e.g., 1.5% of remuneration). Subsection 42(2) of the bill provides that government shall pay the contribution on behalf of public sector employees for a total contribution of 4.5%. (1.5% + 3%). By assuming the cost of employee contribution, the government is giving a benefit to public sector employees that should be taxable under the Income Tax Act. 

The benefit is notional as it entails no monetary payout, but it represents for those employees a saving of contribution that would have been otherwise payable under a contributory pension plan. To mitigate the discriminatory aspect of CSG, the monetary value of the benefit could be added to actual public employee compensation for income tax purposes. That would create a level playing field with private sector employees who are obligated to pay their contribution out of pocket. It would ensure fairness and equality of treatment for all citizens.

Third, the government has preempted a ruling from the Supreme Court on the CSG by passing a new bill that repealed the CSG Regulation 2020, which was the object of a dispute from Business Mauritius. Contributions made under CSG Regulation 2020 have been rolled over into the new system. Ideally, the government should have waited for the Court’s ruling for the sake of rule of law based on separation of powers. It would have been better to get the independent opinion of the Court on the validity of a regulatory policy. The constitutionality of the new law is always open to legal dispute in Court. Would Business Mauritius make a second try?

P. Neerohoo
Tax specialist