Tax expenditure

A tax expenditure is a special feature in tax legislation—such as an exemption, deduction, credit, concessional rate, or rebate—that reduces the tax that certain taxpayers would otherwise owe under the general tax rules. These measures are often introduced to support particular sectors, behaviours, or social objectives. Even though they appear within the tax code, their financial impact is similar to government spending because they reduce revenue in order to achieve policy goals.

Example: Suppose the government allows companies operating in the renewable energy sector to claim a full deduction on the profits generated from such projects. By lowering the firm’s taxable income, the government forgoes revenue it would normally receive. This foregone revenue is treated as a tax expenditure, designed to encourage investment in clean energy.