By a special correspondent
Sri Lanka’s revised Colombo Port City law is being promoted as a cleaner, criteria-based alternative to the discretionary tax holidays of the past. But beneath the reformist language lies a deeper concern: whether extended tax exemptions for foreign investors are compatible with a country struggling to rebuild its public finances after default.
Under the amended framework, billion-dollar investors can still receive up to 15 years of tax exemptions, while smaller projects receive shorter concessions. The government insists this approach balances competitiveness with accountability. Yet the broader economic context tells a more troubling story.
Sri Lanka is currently under an IMF program that emphasizes revenue mobilization, warning against incentives that erode the tax base without clear spillover benefits. Extended tax holidays are widely viewed by economists as blunt instruments encouraging profit shifting, rewarding capital-intensive projects with limited employment impact, and fostering inequality between favored zones and the domestic economy.
The Port City is effectively a dollarized special economic zone, insulated from some domestic risks. However, its success depends on the health of the wider economy. Persistent currency depreciation driven by aggressive rate cuts and flawed exchange-rate management—has historically triggered political instability as fuel, food, and electricity prices surge. No tax incentive can fully offset that macroeconomic risk.
Meanwhile, ordinary Sri Lankans are being asked to shoulder the adjustment. Income taxes have risen sharply, consumption taxes are expanding, and public services remain strained. Critics argue that granting long tax holidays to large investors while tightening the screws on citizens undermines the social legitimacy of reform.
There is also the question of job quality and revenue leakage. Previous laws, such as the Strategic Development Projects Act, even exempted personal income tax for senior foreign employees—limiting domestic skill transfer and fiscal gain. While the government now claims personal income tax rules will be uniform inside and outside the Port City, enforcement remains an open question.
International comparisons are instructive. East Asian economies with corporate tax rates around 20 percent rely on stable currencies and predictable policy, not prolonged exemptions. Dubai’s success stems from monetary stability and low inflation, not merely low taxes. Sri Lanka’s competitive disadvantage lies less in headline tax rates and more in volatility.
The deeper paradox is that Sri Lanka continues to oscillate between IMF-mandated tax hikes after crises and pre-crisis tax giveaways to stimulate growth. This cycle rooted in weak monetary governancehas repeated since the 1950s.
Unless Parliament addresses the structural drivers of currency instability and energy costs, the Port City risks becoming an isolated enclave of incentives surrounded by fiscal stress. In that scenario, the real cost of attracting global capital will not be borne by investors but by the public.