The Colombo Port City project was designed to position Sri Lanka as a regional investment and financial-services hub. But a growing dispute over taxation is raising an uncomfortable question: what happens when the incentives promised to investors become unclear after they commit?
Technology entrepreneur Shavini Fernando o, founder of a virtual reality and web development company, said her decision to establish a physical operation in Port City was based on tax assurances given during the registration process.
According to her account, she applied last year after being told that companies and employees would receive three years of zero-tax treatment. Instead of continuing to employ people as consultants, she established a local office because she believed Port City offered a superior fiscal environment.
Her application was later held alongside others while legal amendments were awaited.
Then came a new set of terms.
At a meeting with Port City officials last December, Fernando said she was informed that employees would pay 15% tax and the company 7%. She accepted those conditions and completed registration.
But the tax position subsequently appeared to shift again, according to Fernando. She said employees were now facing taxation at up to 36%, effectively putting them on the same footing as workers associated with mainland operations.
The issue is not simply whether a particular tax rate is 15% or 36%. The deeper concern is whether investors can rely on the conditions presented to them when making investment decisions.
Deputy Minister Abeysinghe said nearly 90 applications had been held pending amendments to the law and maintained that investors had been briefed about the changes by the Port City Commission.
He also stressed that individuals are governed by the Inland Revenue Act and that there should be no tax arbitrage between Port City and mainland Sri Lanka.
Hitherto his subsequent apology for confusion highlighted how difficult the rules appear to be even for those explaining them.
Abeysinghe said his general understanding was that individuals earning foreign income were taxed at 15%, while promising clarification concerning Port City Approved Persons.
That distinction became the centre of the controversy.
Corporate finance professional Rasanja Perera explained that foreign income received into a Sri Lankan bank account in foreign currency can be taxed at 15%, while income classified as local can attract the 36% rate. Fernando argued that this classification was directly affecting her business because payments routed through the company’s US-dollar account were being treated as local income.
For international investors, such ambiguity can be more damaging than a high tax rate itself.
Businesses can calculate a 15%, 25% or even 36% tax burden when the rules are stable. What they cannot easily price into investment decisions is the possibility that the interpretation of those rules will change after they establish operations.
She also expressed concerns about Port City’s competitiveness against rival free zones. Dubai’s DIFC was cited as an example of a jurisdiction where investors are offered greater tax clarity and certainty.
If Port City wants to compete for international capital, it cannot rely solely on infrastructure, geography or promotional promises.Its greatest investment incentive must ultimately be trust in the rules.
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