By a special correspondent
Sri Lanka’s investment incentive regime is coming under scrutiny as local manufacturers accuse some Board of Investment (BOI) companies of exploiting export-oriented privileges to dominate the domestic market.
Industrialists say the alleged practice threatens the survival of businesses that operate without the generous concessions offered under Section 17 agreements of the BOI Act.
The scheme was originally introduced to attract large-scale foreign direct investment and boost exports. Companies approved under Section 17 were expected to produce primarily for international markets while benefiting from significant fiscal incentives.
These incentives include exemptions from customs duties on imported machinery and raw materials, tax concessions, and streamlined regulatory processes designed to reduce bureaucratic barriers for investors.
However, local industry leaders claim that some companies registered under these agreements have quietly transitioned into domestic market operations without obtaining approval from the Ministry of Finance.
According to several manufacturers in the aluminium fabrication, apparel, plastics, and processed foods sectors, some BOI-registered firms are now selling their entire production locally.
Industry representatives argue this shift has distorted competition.
Unlike BOI companies, domestic manufacturers must pay full customs duties on imported machinery and production inputs. They are also required to comply with licensing systems managed by the Ministry of Industry and various regulatory agencies.
These procedures often involve multiple approvals and recommendations from government institutions before raw materials can be imported.
Domestic companies must also absorb Value Added Tax (VAT) and other indirect taxes throughout their supply chains, significantly increasing production costs.
By contrast, BOI companies operate with duty exemptions and bonded warehouse facilities that allow taxes to be deferred until imported materials are used in production.
Industry observers say this cost advantage gives BOI companies greater pricing flexibility, enabling them to undercut domestic manufacturers in the local market.
Local business leaders also allege that some companies importing raw materials under BOI status present them to customs authorities as inputs intended for export production.
However, they claim the materials are ultimately used to manufacture goods sold entirely within Sri Lanka.
If proven, such practices could result in substantial losses in customs revenue and undermine the original purpose of export-oriented investment incentives.
Meanwhile, government officials point to recent policy changes aimed at strengthening the investment framework.
A cabinet decision in November 2023 introduced provisions allowing certain existing companies outside the BOI system to enter Section 17 agreements. The move was intended to provide investors with legal protection and investment guarantees that standard local companies do not enjoy.
Companies may also transition into BOI status by transferring shares to foreign investors, provided they meet specific investment thresholds.
Nevertheless, policy analysts warn that expanding access to BOI privileges without tighter oversight could increase the risk of misuse.
In response to concerns about tax concessions and incentive structures, the government launched the Tax Policy Analysis Unit (TPAU) in early 2026. The unit has been tasked with ensuring future tax policies and exemptions are based on rigorous economic analysis rather than lobbying influence.
For many local manufacturers, the outcome of these reforms may determine whether Sri Lanka can maintain a fair competitive environment while continuing to attract foreign investment