**34 |** P a g e

exports, and a full tax holiday for between three and seven years for new investments. In a nutshell, EPZs are more attractive than investments elsewhere in Sri Lanka because of much higher quality of economic governance and lower cost of doing business: firms’ export and imports are not subject to protectionist trade measures; firms enjoy tax-exempt status; and they have access to cheaper utilities and better infrastructure.<sup>35</sup> The EPZs are home to around 220 enterprises employing over 75 thousand persons mostly in the apparel sector not unlike in most other developing countries. EPZs created a favorable investment environment not only for foreign but also domestic investors. Before the expiration of the Multi Fiber Agreement (MFA) in 2005, trade liberalization in Sri Lanka together with unused MFA quotas immediately attracted foreign investors from East Asia, Hong Kong SAR, China in particular, who relocated their production to Sri Lanka.<sup>36</sup> Yet, despite a very strong growth, a so-called ‘EPZ intensity,’ measured as a share of employment in total employment of 1.67 percent was only a fraction of that of 17.74 percent in Mauritius. Leaving aside garments, manufacturing exports from SEZ firms and other firms operating under tutelage of the BOI accounted for 60 percent of total industrial exports excluding garments (data from http://www.investsrilanka.com/ accessed on 11/30/2011).

There are various schemes providing the entry into an SEZ and/or ensuring preferential treatment. Size of an investment or its destination qualifies a firm for temporary exit from the rules applying to most businesses. For some projects the only qualification is the amount invested while for others the sector invested and/or other performance criteria. As for the size as a criterion, the bottom line is an investment of $3 million automatically granting a five-year tax holiday; extra $2 million ‘buy’ a year more up to 7 years for $7 million (see Table 12).

**Table 12: Corporate income tax exemptions available under the Inland Revenue Act for companies investing in fixed assets**

|Amount of Investment*/|Period of exemption*/|
|---|---|
|Not Less than an amount equivalent to US$ 3 million|5 Years|
|Not Less than an amount equivalent to US$ 5 million|6 Years|
|Not Less than an amount equivalent to US$7 million|7 Years|

Note: */ Customs duty exemption on importation of capital goods and raw materials* (for export quantities), under the BOI Law No 4 of 1978. Hence this facility is available only for an enterprise having Agreement with the BOI. Source: http://www.investsrilanka.com/ accessed on 11/30/2011.

These investments are now governed by the Projects under Strategic Development Project Act. They are expected to generate significant positive externalities including transfer of technology and other positive spillovers associated with the development of backward and forward linkages. Tax exemptions up to a maximum of 25 years and other exemptions of other levies can be granted by the State depending upon the meeting the objectives referred above in the Act.

Investments in product lines determined by the Ministry of Finance qualify for preferential treatment (tax holidays) independently of the level of investment. The current list includes boats, pharmaceuticals,

> 35 Standard benefits offered include exemptions from: some or all export taxes; some or all duties on imports of raw materials or intermediate goods; direct taxes such as profits taxes, municipal and property taxes; indirect taxes such as VAT on domestic purchases; and national foreign exchange controls. 36 See Acevedo and Robertson (2011b, p. 119).