No More Free Rides: Sri Lanka to Reform Tax Exemptions

COLOMBO (News 1st): The Government of Sri Lanka has pledged to end discretionary tax exemptions under the Strategic Development Projects (SDP) Act and the Port City Act, marking a significant shift in its investment incentive regime. The commitment, outlined in the latest IMF staff report, comes amid concerns over uncoordinated exemptions granted to dozens of companies without prior consultation with the IMF.

Since December 2023, Sri Lanka has ceased approving new projects under the SDP Act and has refrained from offering tax incentives, aiming to minimize revenue losses and reduce corruption risks. However, between January and September 20, 2024, 24 companies were granted Business of Strategic Importance (BSI) status under the Port City Act, allowing them to access tax exemptions. These included four Primary Businesses, three Duty-Free Businesses, and 17 Secondary Businesses, all gazetted without IMF staff consultation. The exemptions were made public via the Port City Public Register.

In addition, land lease payments and deposits were accepted from four other pending applications for Primary Businesses, creating binding financial arrangements. As a result, the government has acknowledged that exemptions for these four entities will proceed, subject to a detailed cost-benefit analysis.

To prevent further uncoordinated exemptions, Sri Lanka has committed to not granting any new BSI designations under the current Port City and SDP Acts. A continuous structural benchmark (SB) will be added to the IMF-supported program to monitor compliance. This benchmark will remain in place until successful legislative amendments are enacted and validated by IMF staff.

The government plans to submit amendments to the SDP Act by August 2025 and to the Port City Act by October 2025, both in line with IMF technical assistance. These reforms will introduce transparent, rules-based eligibility criteria, limit the duration of tax incentives, and ensure that only new foreign direct investments qualify for Port City-related benefits.

To reinforce transparency, Sri Lanka will begin monthly reporting to the IMF on all firms receiving new exemptions under both Acts. Additionally, the government will publish all required documentation on designated websites, on a semi-annual basis.

An improved annual tax expenditure statement, incorporating IMF recommendations, will be released by November 2025, providing a clearer picture of the fiscal impact of tax incentives.