The Government of Pakistan, like many other developing
countries, has opted for tax holidays as an important fiscal measure to
encourage rapid industrialisation in the backward areas. This concession
is also supplemented by several other economic and non-economic measures
including import duty, and depreciation allowances. Mintz (1990)
discusses the efficacy of tax holidays in the presence of accelerated
depreciation allowances concludes that tax holidays which are designed
to increase capital formation may end up penalising capital formation.
Mintz’s (1990) conclusion is based on the assumption that if the assets
are long-lived, and the income tax system allows deductibility of
accelerated depreciation but cannot be deferred, then the tax holidays,
by preventing depreciation deduction in the early period may actually
penalise investment during the tax holiday period. If on the other hand
the depreciation allowance is deferred till the end of tax holiday
period, the tax system is genuinely generous and provides a real
incentive for capital formation.