Investment allowance vs general tax reduction evaluation of policy option

Abstract

he paper evaluates the general tax reduction in lieu of investment allowance. The general tax reduction affects the tax rates and has universal impact, while investment allowance helps lower the tax base and thus, affects different tax payers differently. By analyzing the impact of two alternatives on acceptance of a new project and relating it to existing operations, it is concluded that under the Finance Minister's proposal of reducing tax rates from 52.5 per cent to 45 per cent in lieu of investment allowance, the companies to be adversely affected are those which have at minimum more than 20 per cent growth in their profits. Not many companies are growing at that rate. Further research is advocated in the area of replacement cost depreciation and productive capacity creation, utilization and its profitability.