Tax Holiday Definition

As per the tax holiday meaning, it is referred to as the government-centric incentive program that goes ahead with Offering tax elimination or reduction to business organizations.

Tax holidays are mostly utilized when it comes to reducing the overall Sales Tax by the respective local governments. At the same time, the given concept is also utilized by governments of developing nations for stimulating foreign investment.

Working of the Tax Holidays

In the scenario in which a specific government body would like to encourage the buying process of specific items or boost participation in particular activities, it might consider issuing a tax holiday. It serves to be a temporary period within which the respective Tax Rate that gets applied to specific goods or services tends to be removed or reduced.

For example, there are several local governments that tend to have a dedicated sales tax holiday. It is mostly held on the weekend before the resuming of the schools before the fall season. It helps in reducing the overall cost burden that parents are known to carry while shopping for the clothing or school supplies of children. Sales tax holidays –like the one described, serve to be a common form of tax holiday that is administered by the respective state governments.

Researchers have found that on the days of sales tax holidays, households tend to increase the overall shoes & clothing quantities by as much as 49 percent. This is in comparison to what they actually tend to purchase during the given lifetime.

A tax holiday gets implemented for business organizations for encouraging economic activities and fostering growth. Utilized in the hope of raising the overall GDP or Gross Domestic Product in developing nations, tax holidays are ways in which governments tend to draw the attention of foreign companies or foreign investors for establishing base in the host nation.

Tax holidays are mostly put in proper place in specific industries for promoting growth, developing, or diversifying domestic industries. Under some scenarios, new business organizations are provided tax holidays for helping them to reduce the overall cost of operation. At the same time, it also helps them to focus on growing and increasing the overall revenue. The given measure of fiscal policy is also known to serve as a type of incentive for people to start businesses.

Special Considerations

Whether or not there is any potential benefit of tax holidays, it is still a form of debate. On one hand, it can be observed that the government would lose out on significant revenues that might have been generated during sales at the time of the temporary tax holidays. On the other hand, it is believed that tax holidays are helpful in increasing the overall tax revenue on a long-term Basis as they can help businesses retain or even ensure growth. At the same time, it also helps them to create more taxable revenue for the respective tax authority.