Businesses have a unique rapport with taxes. At times, the very purpose and direction of companies take a different course as a result of tax changes. The measures related to Corporate Tax mentioned in the last Budget speech will have far-reaching consequences on the way business is conducted in Mauritius.

The Finance minister has announced an Alternative Minimum Tax (AMT) on companies in a bid to rectify what government considers as unfair boardroom attitudes. The additional fiscal charge shall apply to companies whose tax payable works out to be less than five percent of its profits after eligible deductions and if dividends have been paid out. Alternatively, the taxman shall claim a sum amounting to 10 percent of dividend payout in the form of the AMT.

Company dividend policies are guilty of charge here. Large corporates have been handing out handsome dividends to their shareholders at a time when the economy was suffering from low investment being ploughed back into productive projects rather than being distributed.

The AMT comes in as a penalty on the companies that do not reinvest enough. Many incentives offered by government have failed to boost investment. Will this kind of coercive measure help? The rationale of the ATM sounds clear and simple but its implications are very complex indeed. Pravind Jugnauth is introducing double taxation through the back door. Taxes will now eat into companies? profits twice before the latter reach shareholders? pockets. On the one hand, government is keen to promote shareholding across the population and, on the other hand, it is penalizing businesses with generous dividend policies.

Companies with skilled tax specialists will easily get round the AMT trap. Lately, large corporates have been returning value to shareholders through massive buy-back schemes. To the extent that few investment opportunities are available and that the AMT is being used to put off big dividend payouts, one can expect an increase in buy-back activities as a handy means to reward investors.

The new tax hits only one component of the income stream, namely dividends. The increase in wealth the shareholder enjoys as a result of selling back his shares to the company is not affected at all as there is no tax on capital gains.

The AMT might have another big drawback. It can end up strengthening the preference of debt financing in the economy at a time when an equity culture is being fostered. The local business establishment has often been accused of being overly leveraged and of holding webs of subsidiaries and affiliates through debt-dominated capital structures.

Government?s intention to bring more fairness in income distribution is in fact very laudable. It considers it should have a higher share in wealth creation as it provides the necessary incentives and infrastructure to that effect. There is however a limit to what fiscal policies can achieve in influencing the investment mood of companies, especially when the "feel-good" factor is missing.