This research is aimed at exploring existing gaps on the design and implementation of tax holiday policy and laws of Ethiopia. Hence, the study tries to answer questions: To what extent are the tax holiday laws of Ethiopia certain enough? What is the place of deprecation allowance and loss-carry forward under the law in order to fill the pitfalls of tax holiday relief, and make the privilege more attractive to investors? How much strong are the monitoring mechanisms by the EIC to control the activities of income tax exempted sectors? What does it look like the coordination of tax authority and investment authority/board to grant and to carry away tax holiday privilege? To answer these questions the study analysis related provisions of investment proclamations and investment regulations. Moreover, the findings are based on a qualitative research approach by reviewing laws, analysis of secondary sources and data collected through interviews. Accordingly, promotion of infant industries and encouragement of innovation via special income tax exemption are found the neglected issues both in the investment policy of Ethiopia and the entire investment legislations. The study also found that the income tax exemption legislations are surrounded by a number of shortcomings including legal uncertainty, disproportional measures against law violators, absence of deferral deprecation allowance, discrimination between firms and failure to recognize mechanism that enables individuals to provide objective and verifiable information for the better implementation of income tax exemption laws. Additionally, the funding verified that coordination problem among the relevant organ and weak follow up are the other problems in effective implementation of income tax exemption laws. Specifically, weak coordination between EIC and TAs, between EIC and regional investment bodies, limitation on awareness creation as well as weak follow up and control of income tax exempted firms by EIC are found the other crucial problems which hinder the tax exemption regime to be effective. Based on the findings, the research recommends that necessary amendments should be made on investment legislations. Besides, EIC should devote itself on awareness creation about the income tax exempted sectors, on controlling income tax exempted sectors and it should strengthening its cooperation with the tax authorities, regional investment body and private individuals for the better implementation of income tax holiday legislations.