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The decision means ship owners with ships registered under the Sri Lanka flag would not be liable for the three percent PAL.
It meets a long standing demand by Sri Lankan ship owners who have been agitating for clarity on the tax.
"As a small island nation the international market for our products could be expanded by increasing the number of ships owned by local ship merchants," Rajapakse told parliament.
"Further to the incentives in the last budget to expand this business, I propose that the purchase of a ship to be registered under the Sri Lankan flag will be exempted from the Port and Airport Development Levy."
In the last budget the government removed import duty previously levied on ships owned by Sri Lankan firms in order to promote ship owning.
Rajapakse also said that ships being registered under the Sri Lankan flag will not be considered as an import.
Members of the Lanka Association of Ship Owners (LASO) had been agitating for the move to not consider ships as imported goods as it raised costs.
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