Answer to Question #177943 in Macroeconomics for Prama

Question

On the basis of the recommendations of an 11-member committee, a decision was taken to offer tax benefit to the active pharmaceutical ingredients (API) and laboratory-reagents manufacturers.

The policy offers the API and laboratory-reagents manufacturers in the country corporate tax holiday facility until 2032. This includes exemption from paying advance income tax (AIT), value-added tax, and VAT deduction at source on the purchase and sales of raw materials and spare parts until 2032. The manufacturers will also get duty-free facility for import and priority for land allocation in the government's special economic zones and export processing zones.

API are the main raw materials used in the production of most drugs and policies such as this will increase the profitably of investment in current and future periods.

Based on the information above, answer the following questions

a. How is the industrial investment affected in industries that receive tax credit incentives?

Answer 1

a. The industrial investment will increase in industries that receive tax credit incentives, because with lower taxes the profitably of investment into this industries will rise, and the potential investors will gain higher future returns on investment. As a result more firms will enter the industry and more output will be produced at lower prices.