The Sri Lankan government is set to revise generous tax holidays and exemptions granted to mega and mixed development ventures under the Strategic Development Act (SDA) and the Colombo Port City Act, following strong recommendations from the International Monetary Fund (IMF).
In its 2023 Governance Diagnostic Assessment, the IMF warned that prolonged and broad tax concessions are undermining the country’s ability to generate revenue and repay debt sustainably. It specifically called for the phasing out of the SDA, suggesting it be replaced with a more targeted Priority Investment Project Act.
The IMF has urged Sri Lanka to reduce tax holiday periods — some of which extend up to 40 years — to more reasonable durations and remove exemptions for projects not deemed truly strategic.
Projects within the Colombo Port City, developed under significant Chinese investment, have been granted sweeping tax exemptions, including waivers on customs duty, VAT, and other levies. The Port City Commission currently determines which businesses qualify for tax concessions, in consultation with the President or relevant minister, under the label “Business of Strategic Importance” (BSI).
However, the IMF is pressing for stricter, rule-based criteria and greater transparency in awarding such incentives. Amendments to the Port City Act are planned for October 2025, while the SDA will be revised by August 2025, as part of the government’s structural reform agenda.
Despite earlier promises to halt new exemptions, 24 companies have already been gazetted as eligible for BSI status without IMF consultation. These approvals — including four primary, three duty-free, and 17 secondary businesses — will not be reversed due to legal concerns, the government admitted.
Concerns have also been raised about Chinese investors pushing for additional tax breaks in exchange for backing election campaigns of the JVP/NPP alliance, adding a political dimension to the economic debate.
Sri Lanka’s high corporate tax rate (30%) — in stark contrast to regional peers like Cambodia (20%), Vietnam (20%), Thailand (15%), and Singapore (17%) — has been blamed for driving businesses to set up in more stable, low-tax jurisdictions such as Dubai. Some fear that companies may now shift to the Port City enclave to benefit from its exemptions, potentially causing revenue leakage from the domestic tax base.
The IMF cautioned that such unchecked exemptions were a key contributor to Sri Lanka’s financial crisis. It emphasized that a sound investment environment cannot rely solely on tax breaks but must be supported by stable governance, legal reforms, and monetary credibility.
Sri Lanka has agreed to submit monthly reports to the IMF on all tax exemptions granted, as part of its commitment to restoring fiscal discipline. Regulations for registering Port City offshore companies and imposing new investor taxes were also submitted to Parliament this week.
As the country continues its recovery path under the IMF program, the government appears poised to tighten its tax incentive framework to ensure better revenue collection, reduce corruption risks, and promote sustainable foreign investment.
