Government amends law to lure FDI via tax concessions

The Sri Lankan Cabinet of Ministers yesterday approved sweeping amendments to the Strategic Development Projects Act (SDP Act) originally passed during the Mahinda Rajapaksa era, paving the way for targeted tax incentives to attract foreign direct investment (FDI) into large-scale projects. The move is explicitly designed to circumvent the limitations on tax incentives imposed under the International Monetary Fund (IMF) programme, sparking concerns about the hidden agenda behind the reform.

In a statement, Cabinet spokesman Nalinda Jayatissa said that the draft amendments have cleared the Attorney General’s review, will be gazetted and tabled in Parliament shortly. The government stressed the revision is focused on “capital-intensive projects that are critical for the country’s economic recovery” while insisting fiscal discipline under the IMF programme will be upheld.

At the heart of the change lies the government’s bid to revive delayed megaprojects such as the $3.7 billion Hambantota Port & oil-refinery scheme and the Port City Colombo development — both long stalled because tax concessions were not permissible under existing law. Through the amendments, strategic projects will again be eligible for exemptions or holidays on corporate tax, VAT, import tariffs and other levies under the SDP framework. Historically the SDP Act has been criticised for offering 12-year VAT import exemptions and other tax breaks. 

But the IMF, under its 48-month Extended Fund Facility (EFF) approved in March 2023, has repeatedly stressed that Sri Lanka must avoid granting broad tax concessions, strengthen tax-exemption frameworks, and boost revenue mobilisation. In a March 2025 press briefing the IMF warned that “unsustainably low taxes and sizeable tax exemptions largely benefiting enterprises rather than people were an accident waiting to happen”. 

The same guidance emphasises that tax-exemption regimes must be transparent, justified, and aligned with broader fiscal reform. 

Analysts are already interpreting the amendment’s hidden purpose: to create a carve-out allowing flagship foreign-investment projects to operate outside the IMF-mandated discipline. The timing raises alarm, because Sri Lanka’s current IMF review cycle emphasises revenue recovery, trimming exemptions, and strengthening public-financial management. For example, the IMF’s July 2025 staff mission underscored that “the tax exemption framework should be well designed to reduce fiscal costs and corruption risks, while enabling growth.” 

Critics argue that the amendment may undermine the broader reform agenda. The World Bank and Human Rights Watch have warned that long tax holidays weaken public finances, distort fiscal equity and push people into poverty. Advocata Institute Chairman and JB Securities CEO Murtaza Jafferjee recently wrote: “There is no defensible justification for granting tax concessions in the Port City. The location is already uniquely advantaged… Layering tax concessions on top is both unjust to other taxpayers and corrosive to the broader economy.”

As Sri Lanka seeks to balance the twin imperatives of reviving investment flows and satisfying IMF reform conditions, the amendment signals a critical test. Will the government’s drive for mega-FDI projects override its commitment to revenue discipline and transparency? Or can this tailored tax incentive regime be designed in a way that aligns with the IMF’s framework for a sustainable recovery? The questions will matter not just for these flagship projects, but for the country’s broader fiscal future.