Port City Perks Curtailed in Push for Economic Recovery
- CNL Reporter
- May 20, 2025
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- Port City
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In a move that could significantly reshape its investment climate, the Sri Lankan government is planning to curtail generous tax concessions granted to mega development ventures — including those within the Colombo Port City — in a bid to boost state revenue and meet International Monetary Fund (IMF) requirements.
The strategic policy shift reflects growing concern over the long-term fiscal impact of tax holidays granted under the Strategic Development Act (SDA) and the Colombo Port City framework, which have been criticized for undermining the country’s ability to repay debt and stabilize public finances.
The proposed changes come as part of a broader effort by the government to align with IMF recommendations aimed at improving Sri Lanka’s fiscal management and reducing its public debt burden.
The IMF has repeatedly expressed concern over the scale and duration of tax incentives granted to investors, warning that such concessions severely constrain the state’s capacity to generate adequate revenue, particularly during its ongoing economic crisis.
The Colombo Port City, a high-profile initiative intended to transform Sri Lanka into a regional financial hub, has been at the center of this debate. The project currently enjoys sweeping tax exemptions, including waivers on customs duties, the Ports and Airports Development Levy, VAT, and various other levies.
Under the existing Port City Act, the Colombo Port City Commission has the authority to grant tax holidays of up to 40 years to businesses deemed of “strategic importance.” Such businesses are recognized by the Commission in consultation with the President or relevant minister, based on their potential economic or social contribution.
However, the IMF argues that many of these tax incentives lack transparency and fail to deliver tangible benefits to the broader economy.
Its 2023 Governance Diagnostic Assessment report recommended the suspension of the SDA and related tax breaks, urging the government to introduce a new, more targeted framework under a proposed Priority Investment Project Act.
This would replace existing legislation and introduce clearer, rule-based criteria for determining eligible investments.
In line with this recommendation, the Finance Ministry now plans to introduce amendments to the SDA by August this year. These amendments will limit the length of tax holidays and may introduce new taxes specifically targeting Port City investors. Until these criteria are formalized, all actions under the SDA will be suspended.
Officials say the revised approach will focus on ensuring that tax incentives are strategically allocated and time-bound, with a view to maximizing net economic benefits. A senior finance ministry official confirmed that the government aims to implement a rules-based system with transparent eligibility criteria by the end of September 2025.
The new direction marks a shift from past practices, where overly generous and prolonged tax holidays were awarded with minimal oversight. While the move may dampen enthusiasm among some investors, authorities hope the reform will ultimately promote more responsible, sustainable investment — aligned with the country’s economic recovery goals and in compliance with IMF-led fiscal reforms.
