Executive summary

On 2 April 2026, the Mauritius Revenue Tribunal (Tribunal) ruled in favor of the Mauritius Revenue Authority (MRA) in CMT Spinning Mills Ltd. v. The Director-General, Mauritius Revenue Authority, applying section 90 of the Income Tax Act (ITA) to oppose the manner in which the appellant computed its annual allowances.

The Tribunal's ruling has significant implications for the application and scope of the general anti-avoidance rule (GAAR) under section 90 of the ITA.

CMT Spinning Mills (the Appellant) was granted a 10-year tax exemption from 2005 to 2014 under section 161A(7A) of the ITA for its factory activities. During this exemption period, the company calculated its annual allowances (i.e., tax depreciation) at lower rates, based on the maximum rates prescribed by Regulation 7 of the Income Tax Regulations. After the exemption ended, for the 2015/2016 to 2017/2018 tax years, the Appellant applied the maximum prescribed rates, resulting in higher annual allowances due to a preserved asset base. The MRA challenged this method, alleging deliberate under-declaration of allowances during the exemption period and claiming it constituted tax avoidance under section 90 of the ITA. Following assessments and objections, the dispute was escalated to the Tribunal.

Although the Appellant applied annual allowance rates within the statutory limits and did not engage in any restructuring or artificial arrangements, the Tribunal found that the resulting tax advantage was unreasonable and constituted tax avoidance. The case highlights a disconnect between strict legal compliance and the fairness of tax outcomes, as the appellant's method preserved the asset's cost base during a tax exemption period, enabling higher deductions once the exemption ended.

The decision underscores the Tribunal's willingness to challenge tax benefits arising from the timing and calculation of allowances, even absent a formal transaction or scheme. However, the Tribunal's use of section 90 of the ITA may not be the most appropriate legal basis, as other provisions of the ITA could more directly address the issue of allowances related to exempt income and asset use.

Detailed discussion

Facts of the case

The Appellant is engaged in the business of yarn spinning and had been tax-exempt for a period of 10 years from 2005 to 2014 (the exemption period) pursuant to section 161A(7A) of ITA. The exemption was applicable to its income from the factory's activities of spinning, weaving, dyeing and knitting of fabrics.

During this exemption period, the Appellant computed its annual allowances (i.e., tax depreciation of qualifying assets) at lower rates, taking the view that Regulation 7 of the Income Tax Regulations (ITR) prescribes maximum rates. In the years of assessment following the exemption period — the years of assessment 2015/2016, 2016/2017 and 2017/2018 — the Appellant applied the maximum prescribed rates.

This approach allowed the Appellant to compute higher annual allowances once it was subject to tax (i.e., no longer tax exempt) on the basis that the amount on which the annual allowances are computed are higher given the significant reduction of the annual allowances during the exemption period.

The MRA challenged this approach and stated that the Appellant deliberately under-declared the annual allowances during the exemption period. It argued that the Appellant's approach represented tax avoidance under section 90 of the ITA because a tax benefit that arose when the Appellant computed a lower annual allowance during the exemption period. The MRA subsequently adjusted the annual allowances and issued assessments. The Appellant objected to those adjustments; the MRA issued a determination against the Appellant, and the matter proceeded to the Tribunal.

A potentially incorrect basis

The Tribunal concluded that the Appellant's approach constituted a transaction designed to avoid tax liability within the meaning of section 90 of the ITA.

Note, however, that the case does not involve an identifiable transaction. The adjustment is driven by the outcome of applying the statutory rates, and by the MRA's view that the result is unfair. The Appellant considered that it had lawfully applied a statutory mechanism and exercised a choice within the range permitted by law. Although Regulation 7 of the ITR provides maximum rates, it does not impose a minimum rate, as confirmed in the Tribunal's ruling.

Section 90 of the ITA is directed at transactions, operations or schemes that give rise to a tax benefit. Under the facts of the current case, there are no steps taken, no arrangement to unwind or transaction to recharacterize. Furthermore, although modern jurisprudence on tax avoidance emphasizes the need to examine the substance of a transaction, consider that a substance-over-form analysis is not applicable in this case. The Appellant made the adjustment based on its interpretation of its statutory framework.

This is where the ruling seems to have missed the mark. The MRA could have challenged the Appellant's methodology through a provision that is designed to challenge the computation of its annual allowances, but did not and the Tribunal did not address this point.

A potentially correct result

The Appellant's tax position follows directly from the rate at which annual allowances were computed. A rate of 0.5% implies a useful life of approximately 200 years. That assumption does not reflect commercial reality and results in a negligible annual allowance during the exemption period.

The effect is cumulative. The Appellant benefits from the exemption in the early years and from the preserved deductions in later years. The tax treatment of the asset is detached from its economic use. The Tribunal's conclusion is best understood in light of that effect. The issue is not whether the Appellant complied with the law, but rather the result that compliance produced.

The assets are used during the exemption period, yet the corresponding deduction on the assets is largely recognized in the years the Appellant's income is taxable. This creates a mismatch between the economic life of the asset and the timing of the deduction for annual allowances.

The fluctuating annual allowances amount also produces a position in which the benefit of the exemption is effectively complemented by deductions that become effective once the exemption has expired. Once the exemption period ends, the Appellant should be at par with other taxpayers. Although it may be an unintended consequence of the wording of legislation, it appears inequitable for a taxpayer to emerge from tax-exempt status with a higher base cost or tax written-down value on its assets (allowing it to compute higher annual allowances) than the Appellant would have had if it had never qualified for tax exemption.

Seen in that light, the Tribunal's decision is understandable. The advantage is difficult to justify within a consistent system of taxation.

A more direct approach

The issue could have been addressed without relying on section 90 of the ITA and could perhaps have been considered in the light of section 24 of the ITA. The rate the Appellant applied could have been challenged as inconsistent with the purpose of the provision. This would have allowed the Tribunal to deny the advantage directly, without invoking the GAAR.

The Tribunal referred to section 24(3) of the ITA at paragraph 60 of the decision, but did not analyze its implications further. Section 24(3) of the ITA provides that annual allowances are relevant if an expenditure is incurred in the production of gross income. Section 26(1)(b) of the ITA disallows expenses relating to exempt income. The combined provisions point to a fundamental issue — if no taxable income arises, the basis for recognizing annual allowances is limited because no annual allowance should arise during the exemption period. For example, a company with partially exempt income would calculate annual allowances on its assets and, depending on whether the assets are used in generating exempt income, it will restrict the annual allowance accordingly. Therefore, it is appropriate that in this case, the tax base of the assets should be reduced annually, even if the allowance is not available for deduction. This would ensure that capital expenditure is recognized over time without creating deductions that are detached from taxable activity.

Furthermore, there is no indication that the MRA considered whether the assets on which annual allowances were computed for the years of assessment were in use. For example, if the MRA were successful in demonstrating that an asset acquired in 2005 was not in use in any of the years of assessment under review, the Appellant company would not have been eligible to claim any annual allowances on such assets.

Contrast the Tribunal's ruling with the Supreme Court's judgment in The Director-General, MRA v Mauritius Freeport Development Co Ltd. (2025 SCJ 153), which pertains to timing of annual allowances, as opposed to the rates of annual allowance. The crucial distinction is that the Supreme Court denied the advantage by applying section 24 of the ITA. In the present case, the Tribunal denies the advantage by applying section 90 of the ITA. Though the outcomes are nearly identical, the legal basis applied is not.

Conclusion

At the time of its introduction, the ITA did not address the interaction between annual allowances in situations in which income is exempt for a limited number of years. Neither the ITA nor the ITR has since been revised to address this issue.

In the context of an individual eligible for an annual allowance on an asset used for both business and nonbusiness purposes, the agreed approach has always been to reduce the cost base of the asset by the total annual allowances so that the restriction to the proportion of the business use is a subsequent step. Such a mechanism ensures that the annual allowance is based on the business use of the asset.

The application of annual allowances is tied to the existence of gross taxable income. If a person has both taxable and exempt income in the same year, the restriction on annual allowances applies accordingly. However, if income is fully exempt, the position becomes less clear.

Section 24(3) of the ITA provides a sufficient basis for denying annual allowances if an asset is not used to generate taxable income. Although section 26(1)(b) and (3) of the ITA do not expressly refer to annual allowances, it is difficult to justify allowing annual allowances on assets used solely to produce exempt income. To do so would result in a tax loss arising in a year in which the person has solely exempt income. In that context, sections 24(3) and 26(1)(b) and (3) of the ITA support the view that no annual allowance should arise during the exemption period, without the need to rely on the ITR.

From a practical perspective, the more logical approach would be to compute annual allowances during the exemption period but to treat them as non-allowable, such that the tax base of the asset is reduced annually. This ensures consistency between the treatment of capital and revenue expenditure. Put simply, it reflects a position in which the exempt income is applied against the taxable profit that would have arisen absent the exemption.

Once the exemption period ends, the person should be in the same position as any other taxpayer. It seems unintended that a person should emerge with a higher base cost or tax written-down value, resulting in increased annual allowances compared to other persons.

The outcome may differ if the terms of the exemption allow for the utilization of losses during the exemption period, or if the exemption explicitly provides that annual allowances are to be frozen during that period.

Annual allowances remain dependent on the use of the asset. Verifying use can be challenging in practice, but accounting depreciation may serve as a reasonable reference point. Regardless, the actual period of use may extend beyond accounting estimates and will necessarily involve a degree of judgment.

Flexibility in the computation of annual allowances serves a legitimate purpose. It allows taxpayers to operate within a framework that contains gaps and competing rules, including the interaction with Alternative Minimum Tax (AMT). In particular, restricting annual allowances may be a rational response if accelerated allowances would otherwise trigger AMT. This is a form of tax mitigation within the system, as opposed to a tax-avoidance scheme.

Implications

Taxpayers should be aware that although flexibility exists in computing annual allowances, outcomes that produce disproportionate tax benefits may attract scrutiny under anti-avoidance rules. The Tribunal's ruling may prompt taxpayers and advisors to reassess tax planning strategies involving asset depreciation during exemption periods to ensure alignment with both the letter and spirit of the law.

It is expected that the Appellant could appeal the decision to the Supreme Court. Though, the Appellant may lawfully challenge the application of section 90 of the ITA, it is unknown whether the Court will consider other provisions of the ITA in its analysis. However, this may not be as clear-cut as it first appears. Although the application of section 90 of the ITA is open to challenge, the Court may instead reach a result intended to reflect the underlying fairness of the system.