By: Staff Writer
March 08, Colombo (LNW): Several companies granted investment incentives under Section 17 of Sri Lanka’s Board of Investment (BOI) Act are facing mounting allegations that they have quietly shifted from export-only operations to full-scale domestic market sales, placing intense pressure on local industries.
Industry leaders claim the practice undermines businesses that operate under normal tax regulations while benefiting from duty concessions meant strictly for export-oriented manufacturing.
Section 17 agreements under the BOI framework were originally designed to attract foreign direct investment by offering generous fiscal and administrative incentives. These include exemptions from customs duties on imported machinery and raw materials, relief from certain levies, enhanced capital allowances, and fast-tracked regulatory approvals.
However, heads of several local industrial sectors including aluminium fabrication, apparel, processed foods, and plastics say some companies registered under these agreements are now supplying their entire production to the local market without proper authorization.
They argue this practice has created a major competitive imbalance.
Local manufacturers say they have invested heavily using domestic capital and large-scale bank borrowings at commercial interest rates. In contrast, BOI-approved firms allegedly import machinery and raw materials duty-free and operate under bonded warehouse systems where taxes are deferred until goods are used in production.
“This creates a completely different cost structure,” one industry representative said, noting that companies enjoying BOI concessions can price their products far more aggressively than fully taxed domestic producers.
The result, industry stakeholders warn, is a growing strain on locally funded manufacturers who must comply with full customs duties, licensing requirements, and a range of indirect taxes including Value Added Tax (VAT) across their supply chains.
In addition, local companies must obtain import licenses and approvals from the Ministry of Industry and other regulatory agencies before bringing in certain raw materials.
According to business leaders, companies operating under BOI status are allegedly bypassing these procedures. They claim such firms obtain approval solely through the BOI while presenting imports to Sri Lanka Customs as inputs intended for export production.
Over time, critics say, these imports have been used to manufacture goods sold entirely in the domestic market.
The alleged practice also raises concerns about potential tax losses to the government. Large sums of customs duties that would normally apply to imported machinery and industrial equipment may have been avoided through the export-oriented status.
A senior official from the Finance Ministry acknowledged that the government has been reviewing the structure of investment incentives.
A cabinet decision in November 2023 allowed certain non-BOI companies to enter Section 17 agreements, enabling them to access investment protections and guarantees under the BOI framework.
However, analysts warn that the policy could widen loopholes if monitoring mechanisms remain weak.
To address concerns over tax incentives and exemptions, the government operationalized the Tax Policy Analysis Unit (TPAU) in early 2026. The unit is expected to ensure that future tax concessions are granted based on rigorous economic analysis rather than lobbying pressure.
Industry leaders say stricter oversight will be essential to restore a level playing field between export-oriented investors and domestic manufacturers.