The Sri Lankan government is considering scaling back the generous tax holidays and exemptions offered to mega development projects under the Strategic Development Act (SDA), including those linked to the Colombo Port City. This move comes in response to recommendations by the International Monetary Fund (IMF), which has urged the country to revise its fiscal policies to enhance revenue collection and ensure sustainable debt repayment.
Currently, investments under the Colombo Port City enjoy sweeping tax concessions, such as exemptions from customs duties, VAT, and port and airport development levies. Additionally, the Port City Commission, empowered by the Port City Act, can grant tax exemptions for up to 40 years on a range of taxes, including income tax, entertainment tax, and the casino regulation levy, for businesses deemed to be of strategic national interest.
However, the IMF has flagged these wide-ranging concessions as a major hindrance to Sri Lanka’s fiscal recovery. The organization recommends shortening the duration of tax holidays, reducing them from the current 25-year period to a more moderate timeframe, and removing exemptions for projects not aligned with national strategic priorities. These suggestions are part of a broader governance reform framework aimed at streamlining investment incentives and strengthening economic resilience.
Meanwhile, political concerns have added complexity to the issue. Former Minister Patali Champika Ranawaka has alleged that Chinese companies, which supported President Anura Kumara Dissanayake’s recent visit to China, are lobbying for additional tax breaks. He claims this quid-pro-quo expectation is delaying the release of the next IMF funding tranche, as the IMF is reluctant to back tax relief that appears politically influenced.
Ranawaka also criticized the President’s recent travel to Vietnam, which included a return on a private jet, hinting that further undisclosed tax concessions might be linked to such trips. He warned that such political deals could impose long-term financial burdens on the country.
In line with the IMF’s 2023 Governance Diagnostic Assessment, which called for the repeal of the SDA, the Finance Ministry now plans to suspend the Act and replace it with a new Priority Investment Project Act. This legislation would introduce transparent and rules-based eligibility criteria to ensure tax incentives are effectively targeted and limited in duration.
Amendments to the SDA are expected to be presented in Parliament by August 2025. These will also impose new taxes on investors in the Colombo Port City and restrict the scope of exemptions. All investment proposals will be subject to clearer evaluation criteria, aiming to balance investor interest with national revenue goals.
The IMF has emphasized that such reforms are essential to prevent further revenue losses and to stabilize Sri Lanka’s economy amid its ongoing financial crisis. The government plans to fully implement the revised framework, including new rules for Port City investment eligibility, by the end of September 2025.
