Port City Colombo skyline with cranes, modern buildings, and Chinese flags fluttering beside construction signs.
Sri Lanka is set to cancel sweeping tax breaks offered to Chinese-developed Port City Colombo project as part of the country's economic recovery program, in line with conditions demanded by the International Monetary Fund (IMF).
The $1.4-billion undertaking, constructed by China Harbour Engineering Company (CHEC), which belongs to US-sanctioned China Communications Construction Company (CCCC), has now got an uncertain future ahead of it because of these reforms.
The move to revise fundamental legislation, the Strategic Development Projects (SDP) Act by August and the Port City Act by October comes on the heels of the fourth review of Sri Lanka's extended fund facility with the IMF.
The revisions are intended to implement 'transparent, rules-based, best-practice aligned eligibility criteria for time-bound' tax incentives and shorten the duration of tax holidays, the IMF staff report says.
Officials who are privy to the developments underscored the rampant abuse of tax holidays. "Uncharacteristically, tax-free wages are being given to senior officials of the Port City, while those outside the complex are paying income tax. Numerous companies nominally in Port City are actually located in Colombo and are taking tax exemptions with impunity," a source revealed on the condition of anonymity.
Apprehensions regarding the viability of Port City Colombo have been increasing steadily. Conceived on 269 hectares of reclaimed land under Beijing's Belt and Road Initiative (BRI), the project has faced backlash given the increasing Chinese footprint in Sri Lanka's infrastructure. Importantly, CHEC had also engineered the controversial Hambantota Port, leased to China for 99 years after Sri Lanka defaulted on paying back its loans, a story frequently used as an instance of 'debt trap diplomacy'.
The IMF has sounded alarm over tax revenue losses due to uncontrolled exemptions, calling them one of the principal causes for Sri Lanka's 2022 economic meltdown. Its most recent review emphasized, "Unchecked and too generous tax exemptions have been harmful to Sri Lanka by giving up too much tax revenue and were one of the causes of the [economic crisis of 2022]."
Notwithstanding previous commitments by the Sri Lankan government not to give tax breaks without consulting the IMF, 24 companies were said to have received these benefits from January to September 2024. The IMF report said that these exemptions were granted "without consulting IMF staff.
Adding to the concerns, yet another individual in the know cautioned, "These exceptions have caused concerns that mainland companies will move to the Port City and result in a tax leakage. The absence of clarity, as well as fears relating to money laundering and the presence of the Chinese, means that the Port City won't be sustainable for the foreseeable future."
The amendments, according to the IMF, will also ensure that investments into the Port City are restricted to new foreign direct investment, helping reinforce financial discipline in the country's ongoing economic restructuring.
