Sri Lanka’s decision to grant up to 15 years of tax exemptions for billion-dollar investors in the Colombo Port City has reopened an old fault line in the country’s economic policy whether growth should be bought through fiscal concessions or earned through stability and reform. While the government insists the new framework is rule-based and more disciplined than before, critics argue it directly contradicts International Monetary Fund (IMF) guidance, which explicitly discourages extended tax holidays as inefficient, distortionary, and prone to abuse.
Deputy Finance Minister Anil Jayantha Fernando told Parliament that the amended Port City law replaces arbitrary concessions of up to 25 years with a structured system tied to investment size and job creation. Strategic investments are now classified from US$1 billion to US$25 million, with corresponding tax benefits scaled accordingly. On paper, this removes discretion—a long-standing source of corruption in Sri Lanka’s investment regime.
However the core issue is not transparency alone. The IMF program Sri Lanka entered after its sovereign default is built on broadening the tax base, increasing revenue predictability, and reducing carve-outs. A 15-year tax holiday for large investors especially in a dollarized enclave runs counter to that philosophy. It signals that while ordinary citizens face higher income taxes and consumption levies, elite investors continue to enjoy preferential treatment.
The government argues that Sri Lanka has rarely attracted billion-dollar investments and must compete aggressively with regional hubs such as Dubai and Singapore. But those jurisdictions rely less on tax holidays and more on monetary stability, regulatory certainty, and infrastructure efficiency. Sri Lanka, by contrast, has a history of currency crises triggered by expansionary monetary policy, forcing repeated IMF bailouts and post-crisis tax hikes.
This contradiction weakens the Port City’s appeal. Investors may welcome tax exemptions, but they price in exchange-rate risk, energy costs, and policy volatility. Sri Lanka’s high electricity tariffs, weak dollar inflows, and repeated currency depreciation undermine the very incentives the Port City seeks to offer.
There is also a fiscal opportunity cost. Corporate tax holidays reduce direct revenue, while personal income tax and VAT typically major revenue sources remain constrained. Sri Lanka still lacks VAT on electricity, unlike most East Asian economies, further narrowing the tax base. In effect, the burden of adjustment shifts to domestic taxpayers.
The Port City may yet attract interest, as officials report improved stability over the past two years. But without aligning investment incentives with IMF-backed structural reform particularly monetary discipline the 15-year tax holiday risks becoming another short-term fix in a long cycle of fiscal imbalance.
