Sri Lanka’s investment incentive regime is facing a major accountability test, with an International Monetary Fund (IMF) investigation exposing serious weaknesses in the monitoring of duty-free imports entering the country through Board of Investment (BOI) enterprises.
At stake is an estimated Rs. 800 billion to Rs. 1 trillion in annual revenue foregone through tax exemptions and incentives in recent years. Yet the Government has struggled to establish an effective system to ensure that goods imported under these concessions are actually used for their approved investment and export purposes.
The IMF’s Revenue Administration Diagnostic raises an uncomfortable question: how can a country struggling to expand its tax revenue afford to provide enormous exemptions without adequately monitoring the beneficiaries?
The report reveals that customs responsibilities covering approximately 1,700 BOI enterprises have effectively been handled by the BOI rather than Sri Lanka Customs (SLC). These include around 200 enterprises operating within special economic zones and 1,500 outside them.
The problem is not simply inadequate staffing. It concerns the fundamental design of the oversight system.
According to the IMF, the BOI has not performed a complete customs function. Inspections have generally not been conducted, submitted documents have largely been accepted without independent verification, and the movement of goods and enterprise inventories have not been closely monitored.
Such weaknesses create opportunities for duty-exempt raw materials, machinery and other imported inputs to be diverted into the domestic market without payment of the taxes applicable to ordinary importers.
The report does not establish that individual BOI enterprises have engaged in illegal diversion. However, the absence of effective verification creates a serious vulnerability that demands investigation.
The Government’s 2025 Memorandum of Understanding between the BOI and Customs was intended to close this regulatory loophole. Initially, 83 companies were selected for Customs supervision.
But implementation has encountered resistance from companies concerned about increased scrutiny. Customs has also sought additional personnel, while its initial intervention remains limited largely to import checks.
This raises another question: why should companies receiving substantial public revenue concessions resist transparent and independent verification of their operations?
The proposed GPS tracking system, being procured with Asian Development Bank assistance, could strengthen monitoring. However, technology alone cannot compensate for weak enforcement, inadequate inventory reconciliation and insufficient inspections.
The IMF has made clear that Customs must assume responsibility for import and export controls across all 12 BOI-administered special economic zones under Sri Lanka’s IMF programme.
The consequences extend beyond government revenue. Local manufacturers and compliant importers face unfair competition if tax-exempt inputs are allowed to enter the domestic market without the applicable duties and taxes.
The effectiveness of Customs itself is also questionable. Although physical examinations have declined from 53% in 2021 to around 38%, the success rate varies sharply. Inspections at Grayline Yards 1 and 2 produced findings in 58.5% of cases in 2026, compared with just 8.5% at Rank Container Terminal and 7.3% for less-than-container-load cargo.
Meanwhile, post-clearance audits generated Rs. 2.75 billion in the first five months of 2026, but only four teams examined 304 blue-channel shipments during January–March.
Sri Lanka urgently needs an independent assessment of the BOI exemption system, including reconciliation of imported inputs against production, exports, inventories and domestic sales.
The Government should also disclose the value of exemptions granted to individual sectors, the compliance records of beneficiaries, and the additional revenue recovered through enforcement.
The wider danger is that investment incentives designed to attract foreign capital could become an uncontrolled fiscal privilege.
With taxpayers carrying the burden of government revenue shortfalls, the public deserves evidence that every rupee of tax concession produces genuine investment, employment, exports and economic benefits.
Investment promotion cannot become a substitute for accountability.
The post BOI Tax Exemptions Become A Potential Revenue Leakage Highway appeared first on LNW Lanka News Web.
