by a special correspondent
Sri Lanka’s investment promotion framework is facing fresh scrutiny after allegations that companies registered as export-oriented investors have shifted their operations to supply the domestic market while retaining generous fiscal incentives.
Under Section 17 agreements with the Board of Investment of Sri Lanka, foreign investors receive a range of concessions designed to encourage export manufacturing.
These incentives include duty-free imports of machinery and raw materials, relief from certain taxes, and simplified regulatory approvals.
However, industry sources claim that several firms have gradually transitioned from export manufacturing to domestic market supply without obtaining formal approval from the Ministry of Finance.
“They were approved as export manufacturers but are now selling nearly all their production locally,” said a senior executive in the processed foods sector.
The issue has raised concerns among local businesses that operate outside the BOI framework.
Unlike BOI-approved investors, domestic companies must pay full customs duties on imported capital equipment and raw materials while complying with licensing systems administered by the Ministry of Industry and Entrepreneurship Development and other regulators.
They also bear the burden of VAT and indirect taxes throughout their supply chains.The cost difference can be substantial.
When BOI firms import materials through bonded warehouse facilities where taxes are deferred until production their operating costs can be significantly lower than those of local producers.
This advantage, industry leaders argue, allows such companies to undercut competitors in sectors including aluminium fabrication, apparel, plastics, and food processing.
A senior Finance Ministry official noted that policy reforms have attempted to broaden investment access.
A cabinet decision on November 20, 2023 enabled existing non-BOI companies to enter Section 17 agreements with the BOI, allowing them to benefit from investment protections and incentives previously reserved mainly for foreign investors.
Local firms may also qualify by restructuring ownership such as transferring shares to foreign investorsprovided they meet certain investment thresholds.
“Investors often seek BOI status because it provides strong legal protections and investment guarantees,” the official said.
Still, the growing number of BOI firms reportedly operating in the domestic market has triggered calls for stronger oversight.
To address concerns about tax concessions and fiscal policy, the government established the Tax Policy Analysis Unit (TPAU) in early 2026.
The unit is tasked with ensuring that tax incentives and exemptions are granted based on economic impact rather than lobbying.
For many local manufacturers, however, the issue has already had serious consequences.Several industry leaders say domestic companies that financed their factories through bank loans are now struggling to compete against duty-free imports used by BOI firms.
As pressure mounts from affected sectors, policymakers may soon face a critical decision: whether to tighten enforcement of export obligations—or risk further distortion in Sri Lanka’s industrial landscape.