Sri Lanka’s ambitious drive to attract large-scale investments through Strategic Development Projects is confronting new constraints under its reform program with the International Monetary Fund. At the center of debate is the continued use of tax concessions granted under the Strategic Development Projects Act, No. 14 of 2008.
The Act empowers authorities to designate projects as “strategic” based on their anticipated economic and social contribution. Once approved, these ventures may receive extensive tax holidays, exemptions from value-added tax, customs duties, and other levies. The rationale has been clear: reduce upfront costs for investors to stimulate transformative projects in infrastructure, tourism, energy, and manufacturing.
But Sri Lanka’s fiscal landscape has dramatically changed since the economic collapse of 2022. With public debt levels elevated and tax revenue historically low as a share of GDP, the IMF-backed reform agenda prioritizes strengthening state income. Central to this approach is minimizing tax expenditures the revenue government forgoes through exemptions and special treatment.
The IMF has urged authorities to rationalize incentive schemes and ensure that any concessions are transparent, targeted, and time-bound. This reflects a broader policy shift toward rule-based taxation rather than negotiated exemptions. The objective is twofold: restore fiscal credibility and ensure equitable tax treatment across sectors.
Supporters of SDP concessions caution against abrupt policy reversals. Large investors often plan projects years in advance, and policy uncertainty can deter capital inflows. In a post-crisis economy striving to rebuild growth momentum, foreign direct investment remains a critical pillar.
However, fiscal experts argue that incentives must demonstrate clear cost-benefit outcomes. If revenue losses outweigh job creation, technology transfer, or export growth, the net economic impact could be negative. Moreover, overly generous exemptions may distort competition, disadvantaging domestic enterprises that do not qualify for SDP status.
There is also a governance dimension. Ensuring parliamentary scrutiny, public disclosure of projected revenue foregone, and post-implementation audits could strengthen accountability. Aligning the SDP framework with IMF benchmarks may require codifying stricter eligibility criteria and limiting discretionary approvals.
Ultimately, Sri Lanka’s recovery strategy hinges on reconciling two imperatives: sustaining investor confidence and restoring fiscal health. The future of tax concessions under the SDP regime will likely depend on how effectively policymakers can prove that strategic incentives yield measurable national returns without undermining revenue stability.
The IMF program has not eliminated investment incentives but it has placed them under a sharper fiscal microscope.
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