The purpose of this study is to investigate â€œThe challenges of tax incentives on governmentrnrevenues: the case of ERCAâ€. The study employed a descriptive research method and usedrnboth qualitative and quantitative research approaches. The primary and secondary datarnwere gathered and used for this research. The data collected through different tools werernanalyzed and interpreted by using descriptive statistics tools. The finding of this studyrnshows that the investment related tax has a significant negative effect on governmentrnrevenue. This study also revealed different challenges in the administration of therninvestment incentives in ERCA. The legal framework is found as complex, inconsistent,rnunstable, and insufficient and lack coordination with administrative procedures. Similarly,rnadministrative under capacity, non-coordination between ERCA and different organs,rninterventions from both internal and external bodies and lack of attention are identified asrnthe major challenges. It is also found that incentives are prone to abuse and the authorityrndoes not have strong mechanisms of monitoring and controlling. The researcherrnrecommended that ERCA should have a mechanism to measure the cost and benefit of taxrnincentives on timely manner. The tax expenditure amount should be reported timely withrnother reports to the concerning body to create transparent and accountable tax system.rnFinally, the study suggested some probable solutions including keeping the tax incentivernsystem simple, strengthen administrative capacity, strengthening continuous audit system,rnimproving enforcement capacity and imposing economically meaningful penalties in therncase of abuse