Dr. Sharmini Coorey responds to Port City Economic Commission

Dr. Sharmini Coorey

Advisor to President and former IMF Director Dr. Sharmini Coorey sent the following statement in response to the Port City Economic Commission clarification (https://www.ft.lk/front-page/Port-City-Economic-Commission-issues-clarification-over-remarks-made-by-Dr-Sharmini-Coorey/44-755106) on her comments made at the Central Bank 78th Anniversary Oration recently. 

I thank the Port City Economic Commission for the response published in 11 November Daily FT to my speech at the 73rd Anniversary of the Central Bank of Sri Lanka (https://www.ft.lk/opinion/The-Way-Forward-Price-stability-and-prosperity-need-good-governance-Part-1/14-754861 and https://www.ft.lk/opinion/CBSL-73rd-Anniversary-Oration-The-Way-Forward-Price-stability-and-prosperity-need-good-governance-Part-2/14-754919). 

I respectfully submit that the information provided by the Commission does not ‘clarify and correct’ the issues I raised, but rather validates my concerns. 

Dr. Sharmini...

First, my fundamental point was that the tax provisions of the Port City Act is an example of extensive tax exemptions based on vague criteria that violate the principles of good governance in taxation. As the Commission acknowledges, according to the Extraordinary Gazette of August 4, 2023, Primary Businesses of Strategic Importance (BSI) are offered exemptions and concessions lasting 35 years while Secondary BSI are offered exemptions of 25 years from 13 different tax acts, including corporate taxes, VAT, import duties, and betting and gaming levies. (The Act itself allows tax exemptions for a maximum of 40 years). Section 35 of the Act mandates that all employees in Port City, resident and foreign, shall be paid in foreign currency and be exempt from personal income taxes, with no time limits specified. In my view, as a matter of tax policy, all corporations including those operating in Port City should be subject to the internationally agreed Global Minimum Tax rate of 15% to avoid the home country of an international corporation collecting the tax revenues that the Sri Lankan government could otherwise have collected. (Sri Lanka is one of a handful of countries that have not signed the OECD-led 2021 agreement among over 130 countries).

Second, I raised a question about the constitutionality of these exemptions. The basis of my question was both the Extraordinary Gazette and Section 53 (4) of the Port City Act which states that a Gazetted order (by the President or relevant Minister following Cabinet approval) designating an individual business as a BSI and granting it tax exemptions and incentives “shall be placed before Parliament for information” (italics mine), not approval. The Extraordinary Gazette of August 4 states that an authorised business can be designated as (i) a Primary BSI if it leases or develops a plot of land in Port City investing a minimum of $ 100 million or a minimum of $ 25 million in the Marina or for Social Infrastructure; or (ii) a Secondary BSI if it (a) “encourages and promotes” any one of 14 types of business activities, including ‘innovation’, ‘entrepreneurship’, ‘generation of employment opportunities’, ‘sustainable development’ and (b) meets any one of four criteria, including being a start up with a valuation of at least $ 500,000 within 5 years (it is unclear whether the exemption would be rescinded if the criterion were not met in 5 years) or ‘demonstrates to the satisfaction of the Commission’ that it will ‘contribute to the economic and social development of Sri Lanka.’

In other words, the regulations contained in the Extraordinary Gazette, even though approved by Parliament, are so broad that practically any business can be designated as a BSI without parliamentary approval and given extensive tax exemptions. To an economist, such tax exemptions are also known as ‘tax expenditures’ because they are the equivalent of a subsidy. In the case of Port City, we don’t even know the extent of the projected multi-decade loss to the Treasury from such tax expenditures. The question then is whether such a broad definition of a BSI, which is essentially a non-definition, is consistent with Article 148 of the Constitution which states that ‘Parliament shall have full control over public finance’. Can Parliament be deemed to have ‘full control over public finance’ when Port City regulations permit the granting of broadly defined and unquantified tax expenditures and when, according to section 53 (4) of the Port City Act, tax expenditures granted to an individual BSI, also unquantified, need to be submitted to Parliament only for information? I raised the question as food for thought to constitutional scholars and legal experts who would be better placed to answer it.

Quite independent of the constitutionality question, the fact remains that Sri Lanka cannot afford the large and too broadly-defined tax exemptions permitted under the Port City Act as the country strives for fiscal sustainability amidst revenue shortfalls. My recommendation remains to suspend, in the immediate term, the granting of tax concessions under the Port City Act and bring any proposals for new tax concessions for approval under the Ministry of Finance while amending the Port City Act to make this a permanent feature. The Ministry of Finance can then impartially evaluate the cost-benefit of any proposed tax concession based on clearly defined criteria and Sri Lanka’s fiscal priorities, such as the alternative of using such revenue to fund social needs (health, education), debt repayments, or infrastructure, including related to the Port City project itself.