Seeking investments beyond tax holidays

The latest Treasury circular once again turns to a familiar policy lever, the tax holiday. Under the new scheme, investors in tourism, manufacturing, agriculture and educational technologies are offered generous tax breaks ranging from six to ten years. The minimum investment thresholds are substantial  from $ 50 million to $ 300 million,  with job creation requirements between 100 and 250 positions. Tourism and leisure projects must bring in at least $ 300 million to qualify for up to a decade of tax relief.

On paper, this sounds bold and ambitious. In practice, it risks repeating an old mistake. Tax holidays have long been Sri Lanka’s preferred instrument for attracting foreign direct investment. They are politically attractive. They allow governments to announce large headline figures, promising mega projects and thousands of jobs. But the fundamental question remains whether these tax holidays are the best way to attract serious, long-term, high-quality investments?

The country’s challenge lies not in a lack of incentives, but in weaknesses within its investment environment. On ease of doing business indicators, Sri Lanka has consistently ranked below many regional competitors. Setting up a business, securing approvals, clearing land titles, navigating environmental clearances, obtaining utility connections and many other steps often involves layers of bureaucracy that can be opaque, inconsistent and time-consuming.

Unnecessary and cumbersome procedures create red tape that even the most patient investor finds difficult to navigate. In such an environment, a parallel ecosystem emerges of so-called “facilitators” who promise to expedite approvals through political connections. Whether or not corruption is involved, the perception alone is damaging. Serious, transparent investors,  particularly institutional investors bound by strict compliance frameworks, will not risk their global reputations in murky administrative waters.

The result is counterproductive. Tax holidays may attract opportunistic investors seeking short-term gains. They may entice those who are willing to tolerate inefficiency because the immediate fiscal advantage outweighs the risks. But they can simultaneously deter the very investors Sri Lanka needs, those long-term, technology-driven, environmentally responsible enterprises that generate sustainable employment and integrate the country into global value chains.

Moreover, tax holidays come at a fiscal cost. At a time when Sri Lanka is striving to stabilise public finances, foregone tax revenue must be carefully justified. Incentives should be strategic and targeted, linked to measurable performance benchmarks, technology transfer, export earnings or regional development, rather than broadly applied across sectors.

Instead of blanket tax holidays, Sri Lanka needs to first streamline approvals. Establish a genuinely empowered single-window mechanism that delivers time-bound decisions. Digitise processes to minimise human discretion and reduce opportunities for delay. Transparency should be the norm, not the exception. Second, it must strengthen legal safeguards. Investors must have confidence in property rights, dispute resolution mechanisms and policy consistency. An efficient, independent judiciary and credible arbitration frameworks are as valuable as any tax concession. Thirdly it must ensure macroeconomic stability. Exchange rate volatility, sudden import restrictions, and abrupt regulatory changes create uncertainty that no tax holiday can offset. Stability lowers risk premiums and attracts patient capital. Fourthly, Sri Lanka must  invest in infrastructure and human capital. Reliable energy, efficient ports, modern logistics and a skilled workforce are decisive factors in investment decisions. These are long-term enablers that outlast any temporary tax incentive.

The global competition for capital is intense. Countries that succeed are those that build institutions, reduce friction and foster trust. Tax holidays may provide a short-term signal, but they are not a substitute for deep reform.