Tax exemptions for residential real estate at Port City distort tax regime: Advocata Institute
Residential real estate developments in Colombo Port City currently benefit from a range of tax exemptions and incentives, which create a highly distortionary and unequal tax regime for real estate businesses operating elsewhere in Sri Lanka, the Advocata Institute warned.
Both previous regulations (Gazette No. 2343/60 of 4 August 2023) and recent regulations (Gazette No. 2454/62 of 20 September 2025) issued under the Colombo Port City framework provide a wide range of tax exemptions and incentives to qualifying businesses. All four companies currently registered with the Port City Commission as real estate developers are classified as Primary Businesses of Strategic Importance (PBSIs) and benefit from a variety of tax exemptions for varying durations.
For example, Prime Melwa Port City (Pvt) Ltd and Home Lands Port City (Pvt) Ltd receive 10-year exemptions from corporate income tax following the expiry of their respective project implementation periods, while Marina Hotel Holdings (Pvt) Ltd receives an 8-year exemption. ICC Port City (Pvt) Ltd receives a broader package, including exemptions from income, profit, dividend and withholding taxes for 25 years, followed by a 50% reduction in the prevailing corporate tax rate for a further 10 years. All four companies also receive exemptions from customs duty, the Ports and Airports Development Levy (PAL) and Cess on approved business-related imports during their project implementation periods, while ICC Port City receives these exemptions for 25 years. ICC Port City additionally receives a 25-year exemption from VAT on approved business-related imports and local purchases of goods and services.
Such preferential treatment creates a distortion between otherwise similar businesses based solely on location, allowing residential real estate developers within the Port City Zone to face a substantially lower tax burden than comparable developers elsewhere. This is particularly difficult to justify given Port City’s inherent locational and infrastructure advantages, including oceanfront properties, a planned urban environment and dedicated access from the Katunayake Expressway through the Port Access Elevated Highway (PAEH), which can independently attract investment. Rather than providing additional tax exemptions, the government should focus on addressing the governance and regulatory bottlenecks that Advocata has previously identified as constraints to investment.
More broadly, tax incentives should be justified by demonstrable economic benefits that would not otherwise arise in their absence. Such incentives may be warranted where an investment generates substantial positive externalities, with benefits extending beyond the investor to the wider economy or community, or where it produces significant catalytic effects such as knowledge spillovers, industrial development or other economy-wide benefits. Based on publicly available information, however, there appears to be limited evidence that the residential developments currently proposed in Port City generate such benefits on a scale that would justify preferential tax treatment.
The distributional impact of these tax exemptions also warrants concern. Given that typical projects are completed within three to five years, many of the concessions effectively cover the full development period. However, lower development costs do not necessarily translate into lower prices for buyers, particularly where the resulting properties are targeted towards higher-income purchasers. Residential developments currently being marketed in Port City are predominantly positioned as luxury housing, with apartments reportedly priced at around US 500 per square foot, translating to approximately LKR 160-165 million for a typical unit. More entry-level units are priced at approximately US 350 per square foot. These prices are substantially higher than housing aimed at middle- and lower-income households in Colombo, where prices are reportedly closer to US$100 or less per square foot, equivalent to approximately LKR 30–33 million for a typical unit. There is therefore limited justification for assuming that these tax concessions will improve housing affordability or generate significant broader benefits for consumers.
Tax exemptions provided during the construction and development process can reduce costs for these projects, even though the resulting properties are primarily targeted towards higher-income households, which account for just 0.1% of households in Sri Lanka, or approximately 6,000 families. At the same time, residential property developments outside the Port City that serve middle-income, upper-middle-income and lower-income households do not receive equivalent concessions. This raises questions about whether the resulting tax expenditure represents an efficient use of public resources.
If tax incentives are intended to encourage investment and support housing development, there is no clear justification for providing them to selected real estate developments based solely on their location within Port City, while comparable developments elsewhere face the ordinary tax regime.
A cornerstone of this government’s electoral mandate was its pledge to eradicate corruption and uphold high standards of governance. The continuation of tax concessions and exemptions like these that are difficult to justify on economic grounds risks raising serious questions about the integrity of the policymaking process and whether policy decisions are sufficiently aligned with the broader public interest. It could also heighten concerns about regulatory capture, particularly where institutions responsible for safeguarding the public interest are perceived to be unduly influenced by the interests they are meant to regulate. Such perceptions can erode public confidence and weaken the credibility of the government’s broader reform agenda.
The government should therefore review these tax expenditures based on their actual investment benefits, fiscal cost and distributional impact. Existing commitments under the Colombo Port City framework should not prevent the reassessment of incentives that are economically distortionary or fiscally unsustainable. No agreement should be regarded as untouchable, especially when it risks enabling unjust enrichment, particularly when the wider population has borne the burden of over 70% inflation and a sovereign default. Going forward, real estate development projects should not be granted PBSI status.