The research is made with the objective of exploring and analyzing tax incentives granted to encourage the EIs of Ethiopia from policy, legal and practical perspectives. There are two arguments on tax incentives in EIs. The first argument holds that tax incentives are not best to encourage investment as they are suspected to reduce government revenue. Moreover, grant of tax incentives for EIs is unnecessary for the reason that investment on EIs could happen irrespective of such incentives. Further, better than tax incentives, political stability, infrastructure and investment friendly environment are more persuasive. The second argument is that the very nature of EIs i.e., capital intensive and longer period of time to commence commercial production, necessitate grant of tax incentives. Likewise, use of tax incentives in EIs of developing countries is essential due to governments’ inability to create investment friendly environment. In doing so, the researcher assessment and analysis of tax and EIs policy, laws and practices of tax incentives shows that Ethiopia opts for tax incentives. However, due to lack of policy document on tax, it is difficult to understand Ethiopian tax policy and the existence of it is also questionable. Yet, there is an argument that holds tax policy of Ethiopia is found under the preamble of tax laws and other important documents such as GTP documents and FDRE Constitution. Be that as it may, none of these sources define or justify tax incentives. Furthermore, Ethiopia’s EIs draft policy other than the interest to continue use of tax incentives, it neither define nor set objective of tax incentives. Still exemption of custom duties, deduction of expenses and loss carry forward are commonly provided in EIs. Currently, the Federal Income Tax Proclamation and laws of mining and petroleum are the primary source of tax incentives. Irrespective of the provision of tax incentives the sector economic contribution is unsatisfactory. Among problems of tax incentives granted to EIs, weak institutional cooperation, lack of research on the impact of tax incentives, inefficient auditing system of duty free privileged imported goods are prominent. For this and other reasons EIs tax incentives are exposed to tax abuse and avoidance. To tackle these problems legal and institutional framework are available. Yet, for the success of tax incentives, the researcher recommends extensive study on the impact of EIs tax incentives followed by amendment of tax incentive laws which incorporate definition and objectives of tax incentives.