Tax Incentives and Impact on Investment In Pakistan
Ph.D Scholar, Iqra University Islamabad Campus
The objective of this research paper is to study the incentivized tax policy and its impact on investments in Pakistan. The study mainly relies on quantitative method of inquiry and is clearly aimed at providing insight about the impact of change in Tax and Tariff rates on domestic investment while examining and evaluating the impact of Tax and Tariff rates on FDI. The independent variables used for this study include Corporate Tax rates and Tariff rates while dependent variables are domestic investment and foreign direct investment (FDI). The research has been conducted using the data collected over a period of 25 years (1990 to 2014). Other sources/methods include secondary data analysis, inferential statistics and series data analysis involving multiple regressions for analyzing the impact of corporate tax, customs tariff rates and other tax incentives on FDI and domestic investment. The study uses both ARDL and regression analysis approaches to examine the relationship between corporate tax rate, tariff rate and domestic investment. Findings of the study reveal that corporate tax rate is significantly negatively associated with domestic investment and FDI. The study, however, also points to the fact that import tariff rates have no statistically significant relationship with foreign direct investment or domestic investment. It has been noticed that decrease in corporate tax rate results in significant increase in domestic investment and FDI and therefore it has been suggested that the government should take steps to rationalize the tax and tariff rates to attract investment. It has been further suggested that investment friendly environment may be provided to the investors through competitiveness, transparency, consistency and rationalization of tax policies. The study underlines the fact that tax policy should not only be focused on revenue collection but it should take a holistic view and planned and implemented in a manner that helps to promote investment leading to improvement of overall economic indicators of the country.
Keywords: Tax incentives, foreign direct investment, domestic investment, corporate tax rate, tariff rate, tax holiday, investment friendly environment