Investor Presentaiton
FINANCING SUSTAINABLE TOURISM IN KHYBER PAKHTUNKHWA
2.3
Fiscal Incentives
Fiscal incentives can take the form of tax
holidays, exemptions from customs duties,
initial capital allowances, and accelerated
depreciation on buildings. They are usually
granted to promote investment in a sector.
When providing incentives, governments must
distinguish between different types of tourism
to avoid unnecessary distortions. Where
tourism is based on unique attractions, or
business uses, the destination has a
competitive advantage and its demand is
relatively inelastic. In such cases, fiscal
incentives are futile. However, where the
inverse holds true, fiscal incentives can be used
to encourage businesses 13. For example, tax
credits could be given to tourist related
activities and businesses focused on the
protection and preservation of natural resource
and environment. Similarly, to encourage
female participation in hospitality and tourism
related services, grants can be given to women
proprietors to help setup or run businesses.
There are a number of problems associated
with fiscal incentives. They are often granted
on a discretionary basis-not through tax
law-and can potentially introduce a range
of problems, including a bias towards large
foreign firms, administrative burdens, reduced
competitiveness and corruption. Despite the
problems associated with incentives, they are
employed by governments because tourism
has a high price elasticity of demand, positive
externalities are associated with its develop-
ment, and because initial investments can pay
off in the long run. An example of this is
Mauritius, where the government offered
incentives to boost tourism in the 1980s but
abolished them later when the sector had
developed considerably. Generally, sector-
specific incentives should be reduced or
eliminated over time, in favor of even applied
tax rates for all investments. A clear timeframe
for this must be established so the incentives
can be gradually phased out 14.
Countries tend to grant fiscal incentives
to infant industries to
Promote Investment
in the sector through the
following actions:
- Tax holidays
- Initial capital allowance
- Exemptions from custom duties
Accelerated depreciation on buildings
100
Some of the drawbacks
of fiscal incentives
in tourism industry
- Granted on discretionary basis
Bias towards big foreign firms
- Administrative burden
-
- Reduce competitiveness &
corruption
13 Corthay & Loeprick, (2022). Taxing Tourism in Developing Countries: Principles for improving the investment climate
through simple, fair, and transparent taxation.
14ibid
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