The Impact of Tax Holiday on Investment in Ethiopia: The Case of LTO Branch

Abstract

Many developing nations formulate tax policies aimed at stimulating rapid economic growth. One of the policies in Ethiopia is a tax holiday with the main goal of enhancing investment. But, many writers argue that tax holiday is not an effective measure of attracting investment. The present study attempts to look into  the impact of the tax holiday on investment using experimental research in a case-control study design. Specifically, this paper tries to investigate whether (1) tax holiday has an impact on increasing employment opportunity, (2) tax holiday has a role in attracting new manufacturing investments and (3) tax holiday is reducing tax revenue.The study  utilized a total of 70  taxpayers  from manufacturing and construction sectors and 20 tax employees.To undertake this study, in addition to the secondary data, primary data collected through interviews and questionnaires are utilized to arrive at the findings. The T- distribution and ANNOVA statistical methods  werealso used to examine the relative impact of the  tax holiday on employment creation, revenue reduction, attracting of new investment and to identify the most tax sensitive sectors. The impact of tax holiday incentive for investment of Ethiopia is significant, but has not motivated investors effectively since the time period of the tax holiday is too short for investors who produce for local consumption purpose.

Keywords: Tax holiday, Investments, Employment creation, revenue reduction