Restart Sri Lanka with Startup Sri Lanka: Leveraging tax benefits to foster innovation and growth

Most entrepreneurs are bold dreamers who start their businesses fuelled by belief

As the Government races towards their first Budget, it must look at Sri Lanka’s startup ecosystem as a way to restart the economy and as a way to create the exponential growth required to pay the debt. The startup ecosystem has grown tremendously in the last decade and it is showing results with successful exits and IPOs. We need not look any further than PickMe, which is now being valued at Rs. 28 billion. 

How do we support the startup ecosystem? We can catapult this growth in startups by taking inspiration from India’s highly successful Startup India initiative, which integrates tax benefits and structural support to empower budding entrepreneurs. By adopting a similar framework, Sri Lanka can foster innovation, create jobs, and position itself as a startup-friendly nation in South Asia. 

What is Startup India?

Launched in 2016, Startup India is a flagship initiative by the Government of India to promote entrepreneurship and innovation. It provides an enabling environment for startups through:

• Tax incentives: Startups are exempt from income tax for the first three years of operation under Section 80-IAC of the Income Tax Act.
• Capital gains tax exemptions: Investments in certain funds are exempt from capital gains tax to encourage venture funding.
• Simplified compliance: Startups enjoy simplified procedures for registration, labour laws, and intellectual property rights (IPRs).
• Access to funding: The Fund of Funds for Startups (FFS) provides direct and indirect funding support.

These measures have helped Indian startups grow rapidly, creating a thriving ecosystem valued at billions of dollars.

Potential policies for Startup Sri Lanka

Sri Lanka has the potential to replicate and localise such a framework but we have to consider factors such as limitations of IMF, smaller markets, inefficient infrastructure and problematic labour laws. Considering the above, here are some potential policies.

1.Tax exemptions for startups

n Income tax holiday: Sri Lanka could exempt eligible startups from income tax for their first three to five years. This would reduce the financial burden during the critical early stages of operations. The Tax Holiday could be capped to a particular size of revenue in addition to the number of years, so that it does not get abused by corporate restructuring and spinoffs. 

• R&D double deductions: Offering 200% or 300% enhanced allowance for research and development (R&D) can encourage innovation.
• Capital gains tax relief: Exempting or reducing capital gains tax on startup investments would attract more angel investors and venture capital funds to the ecosystem.

2.Simplified registration and compliance

• Single-window registration: A centralised online platform for startup registration and compliance, similar to India’s Startup India portal, would make the process quicker and less cumbersome.
• Supportive labour laws: Simplifying employment regulations for startups would encourage hiring without the fear of excessive costs when the recruitment is not successful. The Cost of hiring and the time it takes to let go of an employee, seriously disadvantage Sri Lankan startups. At least during the first five years labour laws should allow the letting go of staff purely on performance. 

3.Access to funding

• Government-backed venture funds: Sri Lanka could establish a Startup Growth Fund to provide seed capital and growth-stage funding. This would help bridge the funding gap many startups face. Organisations such as JICA, World Bank and ADB would surely support such a venture. The identification of potential startups can be spearheaded by the many successful entrepreneurs and business leaders who have taken positions in the new Government.
• Tax deductions for banks: Interest from loans given to startups could get a lower tax rates, which could encourage our bankers to take risks and support startups who have little to no collateral. Currently, there is little to no interest to support startups with no collateral, this tax rebate or deduction could create the economics needed to get banks to support the startup ecosystem companies at their foundational stage.

Benefits of such a policy for Sri Lanka (they are clearly obvious)

• Job creation: Startups have the potential to generate significant employment opportunities, especially for young graduates.
• Attracting foreign investments: A startup-friendly tax regime would attract foreign direct investments (FDIs) into Sri Lanka’s entrepreneurial ecosystem.
• Boosting innovation: Tax incentives and funding would encourage innovative solutions to local problems in sectors like health, education, and agriculture.
• Strengthening the economy: A vibrant startup ecosystem can contribute to GDP growth and help pay the enormous debt.

“Without execution, ‘vision’ is just another word for hallucination” (Johann Wolfgang von Goethe).

This policy may seem like an obvious choice, but:

• Without policy consistency, trust cannot be established.
• Without efficient infrastructure, sustainability remains unattainable.
• Without upskilling our workforce, equity in growth will remain a distant dream.

When we focus on all the ways things could fail, we risk never taking the first step to succeed. Most entrepreneurs are bold dreamers who start their businesses fuelled by belief and conviction. As a country, we too must dare to dream. And where better to begin than by supporting these visionary thinkers—the very ones who may lead us out of the challenges we have created for ourselves.