Differential tax treatment to businesses in Colombo Port City based on vague and subjective criteria could create labour market distortions, free-market think tank Advocata said.
A lack of clarity in what constitutes a ‘strategic development project’ in the Strategic Development Projects Act and the discretion given to the minister in charge led to tax holidays and incentives granted to projects whose strategic value was questionable, Advocata said in a statement on Tuesday, October 24.
Elaborating on this, the organisation recalled that the Colombo Port City Economic Commission Act No 11 of 2021 was given the authority to grant tax incentives within the Chinese-built Colombo Port City.
The CPC Act grants incentives to businesses that are identified as strategically important. Extraordinary Gazette 2343/60 lists several industries as strategically important. Even though the Act provides a descriptive definition of a business of strategic importance, the rationalisation for these industries to be selected for special incentives is unclear, said Advocata, especially as some of these industries already exist in Sri Lanka, which puts them at a disadvantage.
Further, under section (4) sub regulation (3) of the Extraordinary gazette 2343/60, the think tank said, one of the criteria for granting incentives is the ability of the business to demonstrate to the Port City Commission the potential contribution to Sri Lanka’s economy and social development by fostering innovation, knowledge transfer, technology transfer, research and development.
“This criteria is vague and subjective, thus allowing the Commission to grant incentives at its discretion,” the statement said.
“Granting incentives often leads to differential tax treatment creating an unlevel playing field. While an entity in an already established industry within the country located within the CPC is provided generous tax incentives, the firm located outside is subject to the normal taxes operating in the rest of the country. Such differential treatment could create labour market distortions, as the employees in the Port City benefit from tax exemptions.”
Source: Economynext
