Posted in Finance, Accounting and Economics Terms, Total Reads: 28
Definition: Tax Holiday
Tax Holiday is generally tax redemption or abatement provided by the government of a state or a country for the growth and stimulation of investments. They generally involve suspending of sales tax for a time so that it can promote local businesses. Due to tax abatement and less price, the consumers are encouraged to buy more and hence more production is done. This helps tax revenue in the long term as businesses survive and grow and hire employees as the companies pay taxes in the form of payroll and other taxes.
It is generally used by governments of various countries to increase foreign investments like FDI in the country. Elimination of corporate taxes is generally done in developing countries as they need more of Foreign Direct investments into their markets and for more investments. It is also used to increase the consumption or purchase of goods which will eventually lead to more production of goods by removing taxes like service tax.
Tax holidays are granted by governments at local, state or national level and include income, property, sales tax, VAT etc. Governments at times reduce or eliminate corporate taxes for the purpose of increasing foreign direct investments. It depends on the government of the particular area on whether it wants to grant a tax holiday or not.
Tax holidays are generally put up to promote growth. It impacts the Gross Domestic Product of a country as it encourages people to purchase and consume more. Generally a tax holiday is granted during the time when the consumers are in a phase of shopping mode. For example, for the start of schools which require clothes and school supplies. The tax holiday encourages customers to buy more as the sales tax is exempted and there is no limit on the amount of shopping a person can do.