Tax Holiday refers to a period when a new firm pays no tax. It is used as an incentive to attract companies to set up industrial undertakings in industrially backward areas. It is the benefit given by the Government to various industries with a view to encourage the setting up and development of various industries.
Tax holiday is the new system mooted by the Government to remove regional imbalances in the level of industrialisation. In the post independence period, the industries were set up in the areas where the raw materials were easily available and which were well connected through rail or road. This lead to a regional imbalance and certain portions of the country remained backward and the levels of industrialisation in these areas were very low. The Government with a view to attract investment in these backward areas and with a view to generate employment in these areas offered many sops/ incentives to the industrial houses. These were in the form of land at concessional prices, single window approval for new projects and Tax holiday in the form of tax deductions and exemptions.
Tax Holiday implies that the entity will get benefits in the form of NO TAX (both direct & indirect) for a specified period. The Tax Holiday is given with various objectives. To list a few
1. To promote the setting up of industries in the under developed areas in the country like the North Eastern States
2. To promote the industries in the sun rise areas like Business Process Outsourcing, Information Technology or Bio Technology.
3. To promote exports and for earning of foreign exchange.
4. To make the Indian products and services more competent in the international market.
In essence Tax Holiday is the concession given by the Government for encouraging the setting up and development of the industries.