- New concessions declared by Govt. despite Sri Lanka’s commitment
under the ongoing IMF programme to stop this scheme
The Government has promised tax exemptions of seven to 25 years to any investor that sets up factories in the Board of Investment’s (BOI) dedicated textile manufacturing zone in Eravur, Batticaloa.
The March 28, 2024, gazette amends an earlier one issued in July 2021—both under the 2008 Strategic Development Projects (SDP) Act—which offered the same concessions but for different durations. The 400-acre zone was declared to be a strategic development project by the previous administration.
The new concessions were declared despite Sri Lanka’s commitment under the ongoing IMF programme to stop this scheme. The country is struggling to attract foreign investment and textile factories are being wooed with exemptions from corporate income tax, Value Added Tax (VAT), Ports and Airports Development Levy (PAL), Customs import duty and CESS.
The periods for which these waivers are valid are based on the size of each investment (the lowest required being US$ 10mn and the highest, US$ 200mn) and the minimum employment generated—150 jobs are expected from the smallest investor and 2,800 from the largest. These are to be reviewed every five years.
The exemptions are for companies identified as SDPs by the BOI and established within the zone, both gazettes say. However, the new gazette has removed the qualification that they will be “customised” for each based on parameters such as “size of investment, type of the product to be manufactured, market orientation, domestic value addition, etc.”
It also introduces a requirement for the name of the company; the date of commencement of operations; and the date of commencement and expiration of these exemptions to be published in the relevant gazette that will be submitted to Parliament.
This is the second time in four months that the government implemented the SDP Act. In December last year, the proposed Chinese-led logistics centre in the Colombo Port was granted generous 15-year exemptions on corporate income tax and tax on dividends.
The company—formed by China Merchants Port Holdings Company Limited partnering with the Sri Lanka Ports Authority and Access Engineering PLC—is also exempt from VAT, PAL, CESS and Customs duties on imports of any project-related goods for two years. It will not pay withholding tax for the entire project period of two years. And the corporate income tax waiver applies to profits and gains generated from the first year in which it makes taxable profits or after two years from the commencement of commercial operations (whichever occurs earlier).
The IMF has consistently held that the Act should be abolished or suspended until structures and processes are in place to evaluate the effectiveness of the offered incentives—that is, to determine whether incentives previously granted under the law have delivered the intended benefits to the country.
In a commitment to the multilateral financing agency, Sri Lanka pledged to estimate and publish by January this year the direct costs imposed by tax incentives granted under the SDP and BOI Acts. Up to now, the Finance Ministry has released a list which shows that 14 SDP projects were set up in the decade between February 2011 and December 2022. They most recent ones are HCL Technologies Lanka (Pvt) Ltd, the Colombo West International Terminal (Pvt) Ltd, and the Colombo International Container Terminals Ltd.
In 2016, the then-Wickremesinghe-led government even suspended the SDP Act under an IMF programme. But in December the following year, it granted 25-year corporate tax exemptions (among other waivers) to the Hambantota International Port Group (Pvt) Ltd and the Hambantota International Port Services (Pvt) Ltd.
In its most recent Governance Diagnostic Report on Sri Lanka, the IMF reiterated that the legislation “continues granting wide-ranging tax exemptions without scrutiny”—where projects are selected by the BOI and approved by the Investment Promotion Ministry in consultation with the Finance Ministry.
“There is no definition of what criteria need to be satisfied for a project to be of strategic relevance, and the revenue forgone from such projects is not systematically contrasted against their potential benefit in a transparent process,” the IMF report observes. “Crucially, the DoFP [Department of Fiscal Policy] is not involved in the selection or evaluation of projects, and any data that may exist is not shared with the department.”
“While the specific concessions given to companies benefitting from provisions of the SDP Act differ, the revenue consequences are likely significant,” it states.
Meanwhile, Finance Ministry data published in compliance with IMF fiscal transparency requirements also show that 21 other tax exemption certificates were issued to non-SDP companies between January and September last year. They include several power and apparel companies and hospitals. Fifteen tax concessions certificates, too, were granted.
Source: Sunday Times
