The Effect of Tax Holiday on Investment Decisions: Some Comments

In the Winter 1974 issue of the Pakistan Development Review, Messrs: Azhar and Sharif have published an article entitled “The Effects of Tax Holiday on Investment Decisions: An Empirical Analysis.” It was an interesting article in a very useful area of research. Apart from other subsidies, tax holidays are granted to encourage investment generally, but in certain areas particularly. Thus a study -on tax holiday is important from the policy point of view as it helps decide whether to reintroduce the tax holiday policy which was abolished in 1972. Unfortunately, there are some conceptual and methodological problems in the study so that the results presented by Azhar and Sharif are rather suspect. However, before taking up these problems, let it be pointed out that the conclusions drawn by Azhar and Sharif regarding ineffectiveness of the tax holiday policy in encouraging private investment is not quite correct. Their study showed that 20 percent of firms would not have invested if they had not been granted tax holidays. A policy which encourages investment by 20 percent cannot be called ineffective. Before drawing any such conclusions, one is advised to look at the relative effectivenesses of different investment-promoting policies.