By Prakash Neerohoo
The government has shelved the old age pension (OAP) reform by freezing the requirement of a means test to determine eligibility for that social benefit until all its options are reassessed. However, one consequence of the missed reform is that it has put in the spotlight the issue of tax treatment of dividends in Mauritius.
Under the Income Tax Act, dividends paid by a resident company in Mauritius are exempt from income tax (refer to “Second Schedule – Part II – Exempt Income, Sub Part B – Dividend, Interest and Royalty”). The minister of Finance, in his questionable wisdom, did not include dividends in the amount of taxable income (salary, rental income, business income, contributory pension, etc.) that would have been the basis to calculate the threshold of income (Rs 50,000) beyond which a person would not get OAP (now known as SAP).
Government’s reason to exclude dividends from OAP reform was probably the fact that dividends are not in general taxable in Mauritius. In the 2025-26 Finance Bill, the government included dividends in chargeable income over Rs12 million per year that would be subject to a Fair Share Contribution of 15% (over the 20% tax rate) for three fiscal years (July 2025-June 2028). In the 2026-27 Budget Speech (paragraph 280), the government replaced the Fair Share Contribution with a marginal tax rate of 35% on chargeable income in excess of Rs 12 million but did not specify whether dividends would be included therein. The Finance Bill 2026-27 will hopefully clarify this matter.
In pension accounting, all sources of income (including dividends and interest) must be included in the gross income that determines the threshold for ineligibility for OAP. This is the practice in all social-democratic countries that pay OAP to their senior citizens. If government’s intention behind excluding dividends from taxable income for OAP calculation was to protect the interests of investors, it would have created the absurd situation whereby an investor earning more than Rs 50,000 in dividends monthly would have been eligible for OAP if he/she had declared no other sources of income ( salary, contributory pension, business income, rental income, etc.). Whereas a worker in the 60-64 age group earning slightly more than Rs 50,000 in salary would have been denied OAP.
Fundamental issue
More fundamentally the tax treatment of dividends is an income tax policy issue that needs to be resolved once for all to ensure a fair and efficient tax system. This is the second time that taxation of dividends has come up as a major issue in a policy debate in the recent economic history of the country. The first time was in 2020 when the pandemic-induced economic crisis led private companies to seek government assistance to ride over cash flow constraints. At that time, in an article titled “State support for the private sector: How about taxing dividends” and published in “Le Mauricien” of May 22, 2020, I asked the question: Is it fair for private sector companies to be given support (via stimulus packages or wage subsidy) in bad times when, in good times, they distribute their after-tax profits to shareholders without building up any reserves for the future ? I argued that taxation of dividends is the only way to plough back some of the excessive dividends paid out by corporations.
It is high time to start taxing dividends as a source of income in the hands of shareholders in the same way that income from employment or office is taxed. The need for a level playing field between employees and shareholders in terms of tax treatment has never been more pressing if we are talking about solidarity and burden sharing among people.
In their drive to attract investors and stimulate growth, successive governments since 2005 have pursued a neo-liberal low-tax policy that has deprived the Treasury of substantial revenue. Mauritius has one of the lowest tax/GDP ratios in the world, i.e., 21 % compared to an average of 40% for the Scandinavian countries (which have a better standard of living) and an average of 34% for the OECD countries. For years, personal income tax and corporate tax were levied at a flat rate of 15% (with 3% corporate rate for export companies). Coupled with the absence of a tax on capital gains and dividends, the low-tax policy has narrowed down government’s fiscal space considerably. That is one of the major weaknesses of our economic policy.
Deficits and taxes
The government runs annual budget deficits (6% of GDP in 2025-26) that add to the public debt, which is almost at 90% of GDP. Public debt servicing is 25% of government’s current expenditure. With no significant increase in tax revenue, the budget deficit is bound to increase every year with uncontrolled public expenditure.
The government cannot keep borrowing without jeopardizing severely the solvency of the country and the exchange rate of the rupee. Do we want to go back to the 1980s when the country had to devalue its currency and surrender to IMF conditionality under its Structural Adjustment Program? Or does Mauritius want to emulate those countries that became basket cases of financial mismanagement because they did not clean up their own fiscal house?
It is essential that government expands its tax base to increase fiscal revenue instead of depending on the traditional sources such as VAT and commodity taxes, which account for 68% of total fiscal revenue. The country badly needs a new economic paradigm to turn around the disastrous economic situation. A critical part of that new paradigm is tax reform with a view to taxing all sources of income, including income from employment or office, business income, professional income, property income (dividends, interest and rents), and capital gains on the sale of moveable property (vehicles, boats, jewelry, shares) and immoveable property (land, residential property, commercial buildings).
The argument that dividends are an after-tax distribution of profits (since profits are taxed before dividends are paid out) and should not be taxed again in the hands of shareholders is a fallacy. Corporate law is based on the “entity view” that holds that corporations have a perpetual life of their own, that they are independent of their shareholders, and that they are legal entities. As such, they should pay tax separately on their earnings. Taxation theory reflects the entity view in that corporations are treated as taxable units that are separated from their owners (shareholders). Both the corporations and the owners should be subject to taxation, the former on corporate profits and the latter on dividends.
Under the source theory of income, dividends are a source of income for shareholders that should be treated like any other source of income (for example, wages and salaries for employees, and business income for corporations and unincorporated entities) if we want to achieve fiscal fairness in society. Whatever amount of income tax paid by corporations is their liability to the country as corporate citizens in return for the freebies they get from the State (public infrastructure, skilled labour force trained by publicly funded institutions, police service, etc.).
Claw back excess profits
Shareholders are rewarded for their investment in capital by way of dividends just like employees are rewarded through wages and salaries. Both groups should be treated equally and fairly from a fiscal perspective. Taxing dividends at applicable marginal tax rates (10%, 20% and 35%) is therefore a matter of economic equity. The low-tax regime in Mauritius has allowed many corporations to distribute their after-tax profits as dividends and/or to fund investments in other countries.
It’s time for the government to start clawing back part of the excess profits distributed with a tax on dividends. Most capitalist countries that have a free-market economy levy taxes on personal income, corporate income, capital gains and dividends. Why is Mauritius the odd man out? Are those countries less smart or worse off than Mauritius? Unsurprisingly, it will be argued that now is not the time to tax dividends as we need private sector capital to come out of the doldrums. When times are good, we don’t think about tax reform. When times are bad, we are told we should not think about it. So, when is the right time to talk about fiscal reform?
While the neo-liberal ideology advocates low-income tax to make our country tax-competitive with other jurisdictions, ignorance and inertia from political decision makers keep delaying crucial tax reform. To paraphrase Abhijit V. Banerjee, Nobel Prize in Economics 2019, should we allow the three I’s (Ideology, Ignorance and Inertia) to keep kicking the can down the road?